Financial System

Question 1

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

Answer 1

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

Question 2

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

Answer 2

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

Question 3

Assets and liabilities of a bank

Answer 3

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

Question 4

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

Answer 4

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

Question 5

Describe the balance sheet of a trust

Answer 5

Assets: Mortgages
Liabilities: DD, TD

Question 6

3 classifications of canadian banks

Answer 6

Schedule 1, 2 and 3

Question 7

Describe the schedule 1 classification of CA banks

Answer 7

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

Question 8

Describe schedule 2

Answer 8

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

Question 9

Describe schedule 3 banks

Answer 9

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

Question 10

name depository institutions

Answer 10

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

Question 11

Name the contractual savings institutions and how they raise money

Answer 11

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

Question 12

Balance sheet of public pension fund

Answer 12

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

Question 13

Private pension fund balance sheet and difference with public

Answer 13

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

Question 14

Life insurance balance sheet

Answer 14

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

Question 15

Property and casualty balance sheet

Answer 15

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

Question 16

last classification: other financial institutions

Answer 16

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

Question 17

Finance balance sheet

Answer 17

Assets: loans
L: CP, Bonds

Question 18

VC balance sh.

Answer 18

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

Question 19

Dealers balance sh.

Answer 19

A: govt sec, CP
L: loans, Repo

Question 20

Mutual fund balance sh

Answer 20

A: bond, stock
L: shares

Question 21

money mkt funds balance sh.

Answer 21

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

Question 22

Describe money MKT

Answer 22

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

Question 23

Describe Tbills

Answer 23

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

Question 24

Who buys Tbills and why?

Answer 24

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

Question 25

Describe the auction process of TBills when they are issued.

Answer 25

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

Question 26

Describe Commercial Paper

Answer 26

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

Question 27

What are federal funds

Answer 27

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

Question 28

Describe repo

Answer 28

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

Question 29

What is CD

Answer 29

Receipt for a bank deposit with specified maturity/interest CDs with minimum face value of $100,000 are negotiable  Insured Different from T-bill? pay interest at maturity

Question 30

Describe banker acceptance

Answer 30

A postdated check (time draft) on which a bank has guaranteed payment. ► BAs are used extensively in international 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

Question 31

Describe eurodollars

Answer 31

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

Question 33

Yield convention for tbills and commercial paper

Answer 33

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

Question 34

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

Answer 34

Bid pric= par*(1 - discount yield*t/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

Question 35

Federal funds and repurchase agreement yield

Answer 35

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)

Question 36

Certificate deposit yield

Answer 36

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

Question 37

Banker acceptance yield

Answer 37

B= par *(1-yd*t/360) Bank discount yield yd refers to the quoted interest rate Eay= (par/price) ^(365/t) -1