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MGAC01H3 Lecture Notes - Eurocurrency, Interbank, Certified Check

Financial Accounting
Course Code
Jack Parkinson

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The Money Market the most important securities and features
1. Treasury Bills
a) Short-term debt instruments (i.e. usually mature in 91-365 days)
b) Issued (sold) by the Federal Government (& others)
c) Primary Market: Canadian Government sells new issues by auction (every two
d) Secondary market: for Canada’s large/liquid
e) Sold at a discount to its face value
f) A higher price translates into a lower yield
g) Yield fluctuations correlated to interest rate conditions/developments in the
overnight market
h) A useful indicator of monetary policy stance
2. Commercial Paper
a) Unsecured promissory note with a fixed maturity of 1 to 270 days (i.e. up to 9
b) Issued (sold) by large banks and corporations to obtain funds to meet current ST
expenses (such as payroll, inventories, receivables, to make loans)
c) Only backed by the issuing firm’s promise to pay the face value on the maturity.
Since it is not backed by collateral its price (& hence yield) will depend on the credit
worthiness (rating) of the issuing firm.
d) Sold at a discount to its face value (a higher price translates into a lower yield)
e) Usually has higher interest rate than bonds (lower than banks’ rates)
f) Can be asset backed Can be issued by banks or others
g) Primary Market: Issuer can sell directly to investors OR to a dealer (who sells them
in the market Indirect finance).
h) Secondary Market: where commercial paper notes can be resold
3. Certificates of Deposit
a) A certificate of deposit (CD) is a term (time) deposit issued (sold) by a
deposit taking institution (i.e. a bank)
b) The money deposited in a CD is locked-in for the duration of the specific term (i.e.
until the maturity date anywhere between 1 to 60 months into the future).
c) Usually these accounts grant the holder higher interest rates than accounts that
are more liquid (demand deps)
d) Once the term ends the holder is paid the principle plus any accrued interest (the
rate could be fixed or variable)
e) Could make interest payments over time OR accumulate interest in the locked-in
f) Negotiable & bearer CDs (bearer deposit notes) can be resold (usual terms
are 30 to 365 days)
g) Non-negotiable CDs (term notes) cannot be resold or redeemed prior to
maturity (usually gives a higher rate)
4. Canadian Payments Association
a) CPA is the Canadian Payments Association
b) The (non-profit) CPA operates the national system for the clearing & settlement of
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c) Facilitates the flow of funds & mitigates risk
d) Handles settling cheques, bill payments, debits - Runs electronic wire transfers
i. The Large Value Transfer System (LVTS)
1. An electronic wire transfer system created & run by the CPA - Assists in the
operations of the clearing system (the LVTS is not an instrument)
2. Attempting to reduce Systemic risk: The risk that a disruption (at a firm,
in a market segment, to a settlement system, etc) causes widespread
difficulties at other firms, in other market segments, or in the financial
system as a whole.
a) In this definition, systemic risk is based on a shock or
disruption originating either within or outside the financial
system that triggers disruptions to other market participants
and mechanisms. Such a risk thereby substantially impairs
credit allocation, payments, or the pricing or financial assets.
b) Interest rates, recession and wars all represent sources of systematic
risk because they affect the entire market and cannot be avoided
through diversification. Systematic risk can be mitigated only by being
c) Whereas this type of risk affects a broad range of
securities, unsystematic risk affects a very specific group of securities
or an individual security.
d) Even a well-diversified portfolio of assets cannot escape all risk.
e) There is systemic financial risk when contingency plans that
are developed individually are collectively incompatible.
e) Membership: All Cdn banks (63) & the BOC must be members, other
financial institutions (such as trust companies, credit unions, life insurance
companies & securities dealers) are eligible to be members
5. Bank of Canada Advances
a) “Lender of last resort” loan (from the BOC)
b) Accessible only to CPA members
c) Actively discouraged source of borrowing
d) Borrowers charged the Bank Rate
e) Loans are very short-term in nature (overnight loan - but term is negotiable)
6. The (BOC) Operating Band for the Overnight Market
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