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Capital Markets > Financial System > Flashcards

Financial System Flashcards

1
Q

Describe the classical flow from supplier of fund to demander of fund that goes through a bank.

A

money goes into the bank from depositors, then bank loans that money in exchange for a security, which they give back profits to depositors.
Indirect finance

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2
Q

Describe depositary inst.: a canadian ex, how they raise money, what are their assets and, liabilities

A

Ex: bank of Canada
Raise money by takin in deposits
Assets: Govt securities, Loans
Liabilities: Currency(coins, bills) in circulation, Reserves

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3
Q

Assets and liabilities of a bank

A

Assets:
- cash
- loans
- mortgages
Liabilities:
- DD (direct deposit)
- Savings
- TD(term deposit)

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4
Q

Does a caisse populaire have the same balance sheet as bank?

A

Yes, same assets and liabilities, the difference is that a deposit is like buying into, depositors are shareholders

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5
Q

Describe the balance sheet of a trust

A

Assets: Mortgages
Liabilities: DD, TD

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6
Q

3 classifications of canadian banks

A

Schedule 1, 2 and 3

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7
Q

Describe the schedule 1 classification of CA banks

A

-Big 6 and others
- offer full range of financial services
- deposits insured by CDIC–»canadian deposit insurance corp

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8
Q

Describe schedule 2

A

Foreign bank subsidiaries
- take retail deposits and service mostly ethnic groups
- deposits also insured by CDIC

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9
Q

Describe schedule 3 banks

A

Foreign branches
- Don’t accept deposits of less than 150K

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10
Q

name depository institutions

A

BOC, Banks, caisse populaire, trust(thrift? jpas sur)

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11
Q

Name the contractual savings institutions and how they raise money

A

they raise money by taking regular savings under specific contracts.
Public or private pension funds, life insurance, property and casualty insurance

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12
Q

Balance sheet of public pension fund

A

assets: bond, stock
liabilities: pension fund reserves (PFR)

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13
Q

Private pension fund balance sheet and difference with public

A

assets: stock, bond
liabilities: PFR
difference: more aggressive asset allocation

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14
Q

Life insurance balance sheet

A

assets: mortgages, bonds, stock
liabilities: life policies, health policies, annuities

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15
Q

Property and casualty balance sheet

A

assets: bond, stock
liabilities: general policies
–» shorter maturity then life insurance

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16
Q

last classification: other financial institutions

A

Finance, venture capital, dealers, mutual funds, money market funds

17
Q

Finance balance sheet

A

Assets: loans
L: CP, Bonds

18
Q

VC balance sh.

A

A: bond, stock of startup
L: shares–»owned by bank, private investors

19
Q

Dealers balance sh.

A

A: govt sec, CP
L: loans, Repo

20
Q

Mutual fund balance sh

A

A: bond, stock
L: shares

21
Q

money mkt funds balance sh.

A

A: certificate deposit(CD), Tbills, CP, etc
L: shgares

22
Q

Describe money MKT

A

Debt obligations with maturity ≤ 1 year
Principal is generally secure
Very liquid
Issued in high denomination
Dealer’s market

23
Q

Describe Tbills

A

Zero coupon, issued at discount
Obligation of the govt to pay fixed amount (Par)
Sold for the first time in an auction with Central Bank handling the sale on behalf of the govt

24
Q

Who buys Tbills and why?

A

BOC–»monetary policy
Dealers–» market makers
Banks–» reserves
Investors–»inv strat
Foreigners–» safety of currency

25
Q

Describe the auction process of TBills when they are issued.

A

Multiple price auction with 2 types of bid
Competitive bid: they submit a Yd
non competitive:
- submit purchases up to 5$ million per auction
- guaranteed to receive securities
- no guarantee on price
- Yield received is the average of the competitive bids

26
Q

Describe Commercial Paper

A

Short term unsecured debt issued by corporations/financial Institutions
Issuer has good credit rating
Maturities range from few days to 270 days
like Tbill, issued at discount and redeemed at par
Differences: default, liquidity
Same Yield convention as tbills

27
Q

What are federal funds

A

Bank’s excess reserves at Central bank that can be lent out to another bank
Mainly overnight loans
Loans are not negotiable
Yield convention: Ymm to find Yeay

28
Q

Describe repo

A

Sale of securities with an agreement to buy back at a specified price
Used primarily to finance dealer’s inventory
Can be used as a monetary tool
same yield convention as FF

29
Q

What is CD

A

Receipt for a bank deposit with specified maturity/interest
CDswith minimumfacevalueof $100,000 are negotiable
Insured
Different from T-bill? pay interest at maturity

30
Q

Describe banker acceptance

A

A postdated check (time draft) on which a bank has guaranteed payment. ► BAs are used extensively ininternational trade.
If the buyer does not have an established relationship with or otherwise cannot obtain credit from the seller,
the buyer can issue a BA to the seller before the shipment of goods.
Quoted at bank discount basis

31
Q

Describe eurodollars

A

US dollars denominated deposits held by Banks outside USA
The principal rate is LIBOR (London Inter-Bank Offered Rate)

Generally, FF rate is smaller than LIBOR

32
Q
A
33
Q

Yield convention for tbills and commercial paper

A

Discount yield= par-B/par *360/T

Bond equivalent yield (ytm)= par - b/b *365/t

Effective annual yield (this is the correct ytm)= (par/B)^(365/t) -1

34
Q

How do we calculate the bid and ask of a tbills quote

A

Bid pric= par(1 - discount yieldt/360)

Ask price = par *(1 - yd *t/360)
So its the same thing, what might differ is Yd, since bid and ask price depend on the quoted Yd, yield of ask should be higher–» this would mean price would be lower, so buy side, you want to submit a lower ask then what the bid price is, if not you’re fkn dumb

35
Q

Federal funds and repurchase agreement yield

A

Money market yield Ymm= interest/loan *360/t (approx to YTM)

Y eay= (RV/loan)^(365/t) -1

Redemption value (RV) = loan * (1+ Ymm * t/360)

36
Q

Certificate deposit yield

A

Redemption value= principal *(1+Ymm * maturity/360)

Price= RV /(1+r*t/360), t is time left and r i opportunity cost out there

Yeay = (RV/price) ^(365/t) -1

37
Q

Banker acceptance yield

A

B= par (1-ydt/360)

Bank discount yield yd refers to the quoted interest rate

Eay= (par/price) ^(365/t) -1

Capital Markets (5 decks)

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