midterm study notes

11 Pages

Rotman Commerce
Course Code
Laurence Booth

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Money Market < 1 year term to maturity The overnight rate is important as it affects all short term interest rates Almost all money market securities are discount notes Most are marketable and highly liquid which means they can be converted to money (cash) at full value very quickly: (ie they have high moneyness) Examples of MM securities: Treasury Bills, Corporate Promissory Notes: Bankers acceptance & Commercial Paper US: 360 days or a 30360 day count basis Canada: 365 days or an actualactual (normally 365) day count basis Bank of Canada data shows US rates on a Canadian yield basis; This is called the money market yield convention A basis point is 1100 of a percentage point so the Canadian yield is 6% plus 11.39 basis points or 6.1139% (Calculate price) (calculate effective yield) Types of Issuer: Treasury bills (T-bills) - short term securities issued by the treasury of a government. - most liquid securities in the money market multiples of $1,000 - NO DEFAULT RISK The most liquid securities in the market actively traded OTC Issued at auction held through sealed bids from registered securities distributors or dealers Canada Treasury Bills are issued by the Department of Finance through an auction process conducted by the Bank of Canada which is the governments fiscal agent. Competitive bids - each authorized dealer can submit up to 7 bids for a minimum of $100,000 in multiples of $1,000 Dealers who bid the highest price (lowest yield) win Treasury Bills at the auction www.notesolution.com Non-Competitive bids are accepted in full or pro-rated up to dealer and customer limits at the average price. Treasury bills yields are influenced by inflation (positively) ? CDS(Canadian Depository for Securities): Since Nov 1995, T-bills are issued in global certificate form for the full amount registered in the name of CDS; All payments go through CDS; Transfers are made as book entries on CDS computer system. Issued by Banks - Certificates of Deposits (CDs) and Bearer Deposit Notes (BDNs) - Large-denomination deposits of $100,000 or more issued by Chartered banks, for a specified term Bankers acceptances (BAs) Nothing to do with trade as in the US market Simply a bank guaranteed CP Bank charges a stamping or guarantee fee of 0.50-1.0% for guaranteeing the note Issued By Corporations - Commercial paper (CP) Short-term, unsecured debt issued by the largest corporations. DEFAULT RISK -Risk is reflected in higher interest rates Variable terms to maturity Large size ie $100,000+ minimum denomination - Wholesale market, largely institutional investors You can buy CP direct from the issuing corporation or through an investment dealer Not very liquid Traditionally CP could not be sold to uninformed retail investors; the minimum investment was at least $50,000-$97,000, depending on the province. In 2005 this limit was removed and instead CP could be sold to anyone as long as it had the highest credit rating (ie R-1 high) Securitizations - ie Asset Backed Securities paper (ABCP) Variable www.notesolution.com
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