Quiz 1 Flashcards
Fiscal policy is conducted under:
Minister of Finance
Monetary Policy is conducted under:
Bank of Canada
Fiscal policy is:
federal government uses taxation and government spending to achieve economic objectives
Monetary policy is:
BOC attempts to control money supply and credit conditions (interest rates) to acheive economic objectives
If there is high money supply, interest rates are:
Low
If there is low money supply, interest rates are:
high
Who is a lender of last resort?
BOC
BOC can adjust:
money supply and bank rate
If bank rate is 1.5% , chartered banks need to make ______ than 1.5%
more (to pay back loan)
Interest rates affect bond value T/F
T
When was BOC founded, when did it become a crown corporation
1934, 1938
When was ultimate monetary authority given to government
1967
Roles of BOC
- conduct monetary policy
- supply quality bank notes
- promote safety and efficiency of Canada’s financial system
- provide efficient and effective funds management services
- communicate our objectives openly and effectively and stand accountable for actions
Prime rate is:
What banks charge customers
Yield curve def:
relationship between yields and time for a specific security eg. GOC bonds
Normal Yield Curve (slope)
yields increase over time, slope upward
In a normal yield curve, long term investments have _____ yields than short term investments
higher
Inverted Yield Curve (slope0
Yields decrease over time, slope downward
In an inverted yield curve, long term investments have _____ yields than short term investments
lower
Flat Yield Curve
yields constant over time
Negative bank rates vs positive bank rates
-ve = you have to pay to keep money in the bank \+ve = bank pays you to keep money there (interest)
Overnight rate
interest rate that one chartered bank charges another, when it loans money overnight
The overnight rate is targeted in a range of:
0.5% (50 basis points)
The upper end of the overnight rate range is:
bank rate
Money market instruments basic def
short term debt instruments issued by governments and corporations
Gov. money market instruments
treasury bills
Length options of treasury bills
3 mo, 6 mo, 1 yr
Corporation money market instruments (3)
Commercial Paper
Acceptance (finance) paper
Banker’s Acceptance (BA)
Corporation money market instruments have up to ____ maturity
1 yr
Commercial paper def
short term unsecured debt instrument issued by corporation
Acceptance (finance) paper def
secured debt instrument issued by a finance or acceptance company (non-deposit taking financial institution)
Banker’s Acceptance (BA) def
short term debt instrument issued by corporation with a bank guarantee for its repayment eg. GM issues paper, and TD Bank guarantees repayment. This is a TD Bank BA
Money market instruments are sold at a ____ and mature at _____
discount, par
Money market yield calc: Bought at 98.50
1.5% interest
90 day t-bill
what is yield?
6.18%
calc:
(((100-98.5)/98.5)*365)/90
365/90 to annualize it
Banker’s Acceptance is guaranteed by:
bank
Acceptance paper is issued by:
finance company
Par (Face Value, FV) is always:
$100
Bonds and Debentures are ____ term debt instruments
longer
Bonds and Debentures have a maturity date of:
1 yr or longer
Bonds and Debentures are issued by
governments and corporations
bonds are secured by
specific assets (collateral)
Debentures are (secured/unsecured)
unsecured, secured by company credit
Ask price
seller wants to sell to you at this price
bid price
max price a buyer is willing to pay for a security (max you want to pay)
ask price
min. price seller is willing to receive (min they want to sell to you)
spread is
diff. between ask and bid
bond market and treasury market is a _____ market
dealer, aka over the counter
Simple current yield calc GM 8% May 28 bid = 101.50 Ask = 102.00 what is interest
$8/yr interest
Paid 102
8/102*100 = 7.84%
we paid 102, not 100 so yield is less
Yield increases, bond price ______
decreases
Yield decreases, bond price _________
increases
2 categories of GOC bonds
redeemable bonds and marketable bonds
redeemable bonds
can be cashed in by holder with issuer at face value, before maturity date
non-transferable and no secondary market exists
redeemable bonds include:
Canada savings bonds
canada premium bonds
marketable bonds
issued and backed by the GOC
outstanding market price fluctuates
GOC marketable bonds and guaranteed bonds have a ____ interest rate based on the face value of the bond
fixed
Real return bonds
pay interest on a regular basis (semi-annually)
have a fixed real coupon rate eg. 2%
at each coupon date the real coupon rate is applied to a par value that has been adjusted for the cumulative level of inflation since the issue date
Marketable Bonds are offered on a _____ basis through auctions
demand
Solve YTM, what components are there
PV FV I/YR N PMT
If a bond is at par value then
coupon ___ Current yield ___ YTM
=,=
If a bond is at a discount then
coupon ___ Current yield ___ YTM
If a bond is at a premium then
coupon ___ Current yield ___ YTM
> ,>
YTM takes into account
capital gain and loss
Current yield = ____/____
income/price
Mortgage bonds
real property pledged
Collateral Trust Bonds
securities pledged (stocks or bonds)
Equipment Trust Certificates
issued by transportation companies and rolling stock (vehicles) are pledged as collateral
Debentures
no specific collateral pledged
Subordinated Debentures
rank last among lenders
Protective Covenants (clauses) (might be found in a coporate trust deed) list
Negative Pledge Provision (debentures)
After Acquired Clause (mortgage bonds)
Negative Pledge Provision (debentures)
If the company issues more debt and pledges assets, these assets would also back the debentures
After Acquired Clause (mortgage bonds)
If the company purchases more assets, these assets will also be pledged as collateral for existing mortgage bonds
Retractable Bond/Debenture
option of holder to cash in bond/debenture at face value with the issuer, at a predetermined early date before maturity
Decode
Enbridge 8%, 1 October / 20 / 14
Enbridge = company issuing bond
8% coupon rate
/ 20 is maturity date (2020)
/ 14 means you can cash in at 2014
Why would you want to exercise option on retractable bond?
if interest rates are higher, you want to cash in and put your money in higher rate investments
Extendable bond
can extend maturity rate of bond
why extendable bond
want to keep higher rate if rates go down
exercise cut off date
last day investor can retract/extend
election period
investor may elect to exercise their option, may commence starting several days to months prior to retraction or maturity date
terms of retraction or extension are listed in
trust deed and bond prospectus
retractable and extendable bonds/debentures are sometimes called
dual maturity bonds
convertible bond/debenture
option to convert to shares
foreign PAY bonds
issued by domestic issuer but interest and principal is paid in a foreign currency
Foreign bonds
issuer is foreign, but interest and principal are payed in the currency of the country where the bonds are issued
Eurobonds
issuer is canadian, bonds are issued in another country
currenty is NOT the currency in the foreign country
Province of BC issues bonds in England in $CAN
Euro-Canadian bonds
BCE issues bonds in Germany in US dollars
Euro-dollar bonds
Callable bonds
issuer can force holder to cash in bonds at a specified price on or after a specified date
Canada yield Calls
call price is greater of:
par (100) or the price based on the yield of an equivalent term GOC bond plus a yield spread (eg. current yields +200 basis points)
100 basis points is
1%
