Tổng hợp lý thuyết môn tài chính tiền tệ theo hệ AEP
- Financial markets: markets in which funds are transferred from people who have an excess of available funds to people who have a shortage – bond/stock markets crucial to promote greater economic efficiency by channeling funds – well-functioning financial markets are key in producing high economic growth
- The bond market and interest rates
+ Security: claim on issuer’s future income or assets; any financial claim or piece of property that is subject to ownership. Bond: debt security that promises to make payments periodically for a specified period of time
+ Bond: debt security that promises to make payments periodically for a specified period of time – bond market enables corporation/governments to borrow to finance activities and it determines interest rates.
+ Interest rate: cost of borrowing or the price paid for the rental of funds
On a general level, interest rates affect consumers’ willingness to spend or save and businesses’ investment decisions
Example: high interest rates may cause a corporation to postpone building a new plant that would ensure more jobs
Because different interest rates tend to move in unison, economists lump them together and refer to “the” interest rate
However, interest rates on different bonds can differ substantially
Example: interest rate on 3-month treasury bills fluctuates more than other rates and is lower, on average
Example: interest rate on long-term corporate bonds is higher on average than the other interest rates
- The stock market
+ common stock: represents a share of ownership in a corporation – is a security that’s a claim on earnings/assets of a corporation – issuing stocks is a way to raise funds to finance activities – stock market globally most followed financial market – fluctuates a lot. Important factor in business investment decisions since price of share affects amount of funds that can be raised
Banks and other financial institutions are what make financial markets work.
- Structure of Financial System: Comprised of many different types of private sector financial institutions, all heavily regulated by the government
Examples: banks, insurance companies, mutual funds, finance companies, and investment banks
- Financial Crises -> major disruptions in financial markets that are characterized by sharp declines in asset prices and failures of many financial and nonfinancial firms
+ Have been a characteristic of capitalistic economies for hundreds of years and are typically followed by bad business-cycle downturns
+ August 2007 -> the United States economy was hit by the worst financial disruption since the Great Depression when defaults in subprime residential mortgages led to major losses in financial institutions, producing numerous bank failures and the demise of Bear Sterns, the largest investment bank in the US
- Financial innovation: development of new financial products and services – make the financial system more efficient
E-finance: to deliver financial services electronically
- Money/ Money supply: Anything that is generally accepted as payment for goods or services or in the repayment of debts. Money plays an important role in generating business cycles, which are upward and downward movement of aggregate output produced in the economy.
Besides the role that money plays in the business cycle and the price level, money plays an important role in the interest-rate fluctuations.
- Monetary theory: theory that relates quantity of money and monetary policy to changes in aggregate economic activity and inflation.
+ Aggregate price level: average price of goods/services in an economy
+ Note: rate of money supply is low before recessions. Money can decrease or increase in value, which is measured by the inflation rate, which is the rate at which the price level continual increased.
Friedman: “inflation is always and everywhere a monetary phenomenon.’’
- Fiscal Policy: deals with government spending and taxation
Budget deficit is the excess of expenditures over revenues for a particular year
Budget surplus is the excess of revenues over expenditures for a particular year
Any deficit must be financed by borrowing
- Monetary policy: is a set of tools that a nation's central bank has available to promote sustainable economic growth by controlling the overall supply of money that is available to the nation's banks, its consumers, and its businesses.
Conducted in the United States by the Federal Reserve System (Fed)
- Financial markets have become increasingly integrated throughout the world.
- The foreign exchange market: where funds are converted from one currency into another
The foreign exchange rate is the price of one currency in terms of another currency.
The foreign exchange market determines the foreign exchange rate.
1. Is everybody worse off when interest rates rise? Why?
2. What are the basic activities of a commercial bank? Clarify these activities.
3. What effect might a rise in stock price have on consumers’ decisions to spend?
4. How does a fall in the value of the pound sterling affect British consumers?
5. Why do managers of financial institutions care so much about the activities of the Federal Reserve System?
Solution
1. My answer is no. For me, there will be lenders or savers who will benefit and borrowers will not benefit. The borrowers cost more to pay their loan ; however, lenders or savers can earn higher with loan or savings.
2. There are: providing transaction accounts; acceptance of deposits of savings ( people bring money to deposit bank and based on interest rate will get profit) ; provision of short term credit or financing (a commercial bank provides short-term financing to the borrower or businessman and, thus, helps the business development.) and so on.
3. High stock prices mean people have more money in their hands, which are more likely to increase their spending.
4. Foreign goods are now relatively more expensive; British consumers are hurt
5. Because the Federal Reserve affects interest rates, inflation, and business cycles, all of which have an important impact on the profitability of financial institutions.
- perform essential economic function of channeling funds from households/firms/governments that have surpluses to those that have a shortage; lender-savers to borrower-spenders.
- People who save are frequently not the same people who have profitable investment opportunities
- Thus, financial markets are essential to promoting economic efficiency
- Financial markets are critical for producing an efficient allocation of capital
- Money market: financial market in which only short-term instruments (maturity terms of less than one year) are traded
- Capital market: market in which longer-term debt instruments (maturity terms of one year or greater) and equity instruments are traded
· Money market securities are more widely traded than longer-term securities -> more liquid
· Short-term securities have smaller fluctuations in prices than long-term securities, making them safer investments
· Corporations and banks use the money market to earn interest on surplus funds that they expect to have only temporarily
· Capital market securities (ie. Stocks, long-term bonds) are held by financial intermediates (ie. as insurance companies, pension funds) which have little uncertainty about the amount of funds they will have available in the future
- Firm or individual can obtain funds in a financial market in 2 ways:
· 1. Issuance of a debt instrument (ie. Bond, mortgage) -> contractual agreement by the borrower to pay the holder of the instrument fixed dollar amounts at regular intervals until a specified date, when a final payment is made
+ Maturity Date: number of years until that instrument’s expiration date
+ Short-Term: less than 1 year
+ Long-Term : 10 years+
+Intermediate-Term: 1 to 10 years
· 2. Raising funds through the issuance of equities (e.g. Stock) -> claims to the net income (income after expenses and taxes) and the assets of a business
+ Equities often make periodic payments (dividends) to their holders and are considered long-term securities because they have no maturity date
+ Owning stock means that you own a portion of the firm & have the right to vote on issues and elects its directors
+ Main Disadvantage of equity vs. debt: residual claimant -> a corporation must pay all of its debt holder before it pays its equity holders
+ Main Advantage: equity holders benefit directly from any increases in the corporation’s profitability of asset value
Debt holders do not share this advantage because their dollar payments are fixed
- Primary Market: a financial market in which new issues of a security (ie. Bond, stock) are sold to initial buyers by the corporation or government agency. Not well known because this sale often takes place behind closed doors
+ Investment Bank: important financial institution that assists in the initial sale
+ Underwriting: purchasing securities from a corporation at a predetermined price and then reselling them in the market
- Secondary Market: a financial market in which securities that have been previously issued can be resold
+ Examples: Toronto Stock Exchange (TSX), TSX Venture Exchange
+ Securities brokers and dealers are crucial to a well-functioning secondary market
+ Brokers: agents of investors who match buyers with sellers of securities
+ Dealers: link buyers and sellers be buying and selling securities at stated prices
+When securities are sold in the secondary market, the corporation does not acquire new funds
+ Secondary markets serve two purposes:
· Make it easier and quicker to sell these financial instruments to raise cash; makes the financial instruments more liquid -> in turn, makes them more desirable and easier to sell in the primary market
· Secondary markets determine the price of the security that the issuing firm sells in the primary market
The investors who buy securities in the primary market will pay the issuing corporation no more than the price they think the secondary market will set
- Exchanges and over-the-counter markets
Secondary Market are organized in two ways:
1. Exchanges -> secondary markets in which buyers and sellers pf securities (or their agents/brokers) meet in one central location to conduct trades
Examples: TSX, ICE Futures Canada, the Montreal Exchange (ME)
2. Over-the-Counter (OTC) Market -> dealers at difference location who have an inventory of securities stand ready to buy and sell securities “over the counter” to anyone who comes to them and is willing to accept their prices
+ Very competitive and not very different from a market with an organized exchange
+ Many common stocks are traded over-the-counter, although a majority of the largest corporation have their shares traded at organized stock exchanges
+ Other over-the-counter market include those of other financial instruments
+ Examples: federal funds, certificates of deposit
- Money Market Rates
+ The 4 money market interest rates discussed most frequently in the media:
· Prime Rate -> the base interest rate on corporate bank loans, an indicator of the cost to businesses borrowing from banks
· Overnight Interest Rate -> the interest rate charged on overnight loans in the overnight funds market, a sensitive indictor of the cost to banks of borrowing funds from other banks and the stance of monetary policy
· Treasury Bill Rate -> the interest rate on Government of Canada Treasury bills, an indicator of general interest rate movements
· Libor Rate -> the British Bankers’ Association average of interbank rates for dollar deposits in the London market
- Money market instruments
+ Debt instruments traded in the money market: short-term, least price fluctuations, least risky
+ Government of Canada Treasury Bills
· Short-term debt instruments of Canadian government issues in 1, 3, 6, and 12 month maturities to finance federal government
· Pay a set amount at maturity with no additional interest payments
· But they effectively pay interest by initially selling at a discount
For example: you might
· Most liquid of all money market instruments because they are the most actively traded
· Safest money market instrument because there is a low probably of default -> a situation in which the party issuing the debt instrument is unable to make interest payments or pay off the amount owed when the instrument matures
· Treasury bills are held mainly by banks but some are held by households, corporations, and other financial intermediaries
+ Certificates of Deposit
Debt instrument sold by a bank to depositors that pays annual interest of a given amount and at maturity pays back the original purchase price
1. Bearer Deposit Notes: the buyer’s name is not recorded in either the issuer’s books or on the security itself
· CDs are negotiable, can be traded, can be in bearer form (called bearer deposit notes)
· Issued in multiples of $100,000 with maturities of 30 to 365 days
· Can be resold in a secondary market, offering the purchaser both yield and liquidity
2. Term Deposit Receipts or Term Notes: nonnegotiable CDS
· Issued by chartered banks
· Cannot be sold to someone else and cannot be redeemed from the bank before maturity without paying a substantial penalty
· Issued in denominations ranging from 5000 to 100,000 with maturities of 1 day to 5 years
+ Important source of funds for trust and loan companies
- Commercial Paper
+ Short-term debt instrument issues in either Canadian dollars or other currencies by large banks and well-known corporations
+ Commercial paper is unsecured therefore only the most creditworthy corporations issue it
+ Interest rate the corporation is charged reflects the firm’s level of risk
· Low relative to those on other corporate fixed-income securities and slightly higher than GofC Treasury bills
+ Finance Paper -> short-term promissory notes issues by finance companies
+ Issued as a minimum of $50,000 with maturities of 30 to 365 days (finance paper) or 1 to 365 days (commercial paper)
+ Usually issued on a discounted basis
- Repurchase Agreements
+ Short-term loans (usually with maturity < 2 weeks)
+ Treasury bills serve as collateral -> an asset that the lender receives if the borrower does not pay back the loan
+ Most important lenders in this market are large corporations
- Overnight Funds
+ Overnight loans between banks within the Bank of Canada
· Made by banks to other banks
+ Banks borrow in the overnight funds market because it may not have enough settlement balances in its deposit accounts at the Bank of Canada
· Can then borrow from another bank with excess settlement balances
+ This market is very sensitive to the credit needs of the banks, so the interest rate (overnight interest rate) is a closely watched barometer of the tightness of credit market condition & the stance of monetary policy
· When it is high, banks are strapped for funds
· When it is low, banks’ credit needs are low
- Capital Market Instruments
+ Debt and equity instruments with maturities of greater than one year
+ Wider price fluctuations than money market instruments and are considered to be fairly risky
+ The 4 capital market interest rates discussed most frequently in the media
1. 10-Year Canada Rate -> interest rate on GofC bonds maturing in 10 years
2. 5-Year Variable-Rate Mortgage Rate -> interest rate on 5-year, variable rate residential mortgage
3. Year Fixed-Rate Mortgage Rate -> interest rate on 5-year, fixed rate residential mortgage
4. 4. New-Car Loan Rate -> interest rate on a 4-year, fixed-rate new-car loan
+ Types of Capital Market Instruments
1. Stocks
· equity claims on the net income and assets of a corporation
· low amount of new stocks issued
· individuals hold half of the value, rest are held by pension funds, mutual funds.
2. Mortgage and mortgage-backed securities
· Mortgages -> loans to households or firms to purchase housing, land or other real structures, where the structure or land serves as collateral
+ Mortgage market is the largest debt market in Canada, with the amount of residential mortgages outstanding more than tenfold the amount of commercial and farm mortgage
+ Provided by financial institutions such as chartered banks, trust and loan companies, and credit unions
· Mortgage-Backed Securities -> bond-like debt instruments backed by a bundle of individual mortgages, who interest and principal payments are collectively paid to the holders of the security
+ Played a key role in promoting the recent global financial crisis
· Canada Mortgage and Housing Corporation (CMHC) -> provides funds to the mortgage market by selling bonds and using the proceeds to buy mortgages
+ Federal government agency
- Corporate bonds
+ Long-term bonds issued by corporations with very strong credit ratings
+ Typical bond sends the holder an interest payment twice a year and pays off the face value when the bond matures
+ Convertible bonds have the additional feature of allowing the holder to convert them into a specified number of shares of stock at any time up to the maturity date
+ Makes them more desirable, allows corporation to reduce interest payments because these bonds can increase in value if the price of the stock appreciates sufficiently
+ Outstanding bonds of a single corporation are not nearly as liquid as US government bonds. Although size of corporate bond market is substantially smaller than stock market, volume of new corporate bonds issued each year is substantially greater than volume of new stocks issues
+ Thus behavior of bond market probably more important to a firm’s financing decisions than is the behavior of the stock market.
+ The principal buyers are life insurance companies, pension funds and householders
- US government securities
+ issued by the US Treasury to finance their deficits of the federal government
+ most widely traded bonds, most liquid security traded in the capital market.
- Government Agency Securities
+ Long-term bonds issued by various government agencies such as the Ontario Municipal Improvement Corporation and the Alberta Municipal Financing Corporation to assist municipalities to finance such items as mortgages, farm loans, or power-generating equipment
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