Financial System Flashcards
Describe the classical flow from supplier of fund to demander of fund that goes through a bank.
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
Describe depositary inst.: a canadian ex, how they raise money, what are their assets and, liabilities
Ex: bank of Canada
Raise money by takin in deposits
Assets: Govt securities, Loans
Liabilities: Currency(coins, bills) in circulation, Reserves
Assets and liabilities of a bank
Assets:
- cash
- loans
- mortgages
Liabilities:
- DD (direct deposit)
- Savings
- TD(term deposit)
Does a caisse populaire have the same balance sheet as bank?
Yes, same assets and liabilities, the difference is that a deposit is like buying into, depositors are shareholders
Describe the balance sheet of a trust
Assets: Mortgages
Liabilities: DD, TD
3 classifications of canadian banks
Schedule 1, 2 and 3
Describe the schedule 1 classification of CA banks
-Big 6 and others
- offer full range of financial services
- deposits insured by CDIC–»canadian deposit insurance corp
Describe schedule 2
Foreign bank subsidiaries
- take retail deposits and service mostly ethnic groups
- deposits also insured by CDIC
Describe schedule 3 banks
Foreign branches
- Don’t accept deposits of less than 150K
name depository institutions
BOC, Banks, caisse populaire, trust(thrift? jpas sur)
Name the contractual savings institutions and how they raise money
they raise money by taking regular savings under specific contracts.
Public or private pension funds, life insurance, property and casualty insurance
Balance sheet of public pension fund
assets: bond, stock
liabilities: pension fund reserves (PFR)
Private pension fund balance sheet and difference with public
assets: stock, bond
liabilities: PFR
difference: more aggressive asset allocation
Life insurance balance sheet
assets: mortgages, bonds, stock
liabilities: life policies, health policies, annuities
Property and casualty balance sheet
assets: bond, stock
liabilities: general policies
–» shorter maturity then life insurance
last classification: other financial institutions
Finance, venture capital, dealers, mutual funds, money market funds
Finance balance sheet
Assets: loans
L: CP, Bonds
VC balance sh.
A: bond, stock of startup
L: shares–»owned by bank, private investors
Dealers balance sh.
A: govt sec, CP
L: loans, Repo
Mutual fund balance sh
A: bond, stock
L: shares
money mkt funds balance sh.
A: certificate deposit(CD), Tbills, CP, etc
L: shgares
Describe money MKT
Debt obligations with maturity ≤ 1 year
Principal is generally secure
Very liquid
Issued in high denomination
Dealer’s market
Describe Tbills
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
Who buys Tbills and why?
BOC–»monetary policy
Dealers–» market makers
Banks–» reserves
Investors–»inv strat
Foreigners–» safety of currency
Describe the auction process of TBills when they are issued.
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
Describe Commercial Paper
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
What are federal funds
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
Describe repo
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
What is CD
Receipt for a bank deposit with specified maturity/interest
CDswith minimumfacevalueof $100,000 are negotiable
Insured
Different from T-bill? pay interest at maturity
Describe banker acceptance
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
Describe eurodollars
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
Yield convention for tbills and commercial paper
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
How do we calculate the bid and ask of a tbills quote
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
Federal funds and repurchase agreement yield
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)
Certificate deposit yield
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
Banker acceptance yield
B= par (1-ydt/360)
Bank discount yield yd refers to the quoted interest rate
Eay= (par/price) ^(365/t) -1
