Tài chính doanh nghiệp - Chapter 12: Government debt, monetary policy, the payments system and interest rates

Chapter 12Government Debt, Monetary Policy, the Payments System and Interest ratesWebsites:  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye WatsonLearning ObjectivesOutline reasons why governments borrowDescribe features of the main debt instruments and market participantsShow how government securities are pricedDiscuss monetary policy, interest rates and the payments systemCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye WatsonChapter Organisation12.1 Introduction12.2 Commonwealth Govt Borrowing12.3 Types of Commonwealth Govt Securities12.4 State Govt Securities12.5 Monetary Policy12.6 The Payments System12.7 SummaryCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye Watson12.1 IntroductionGovts need to fund capital and recurrent expendituresThis is achieved by issuing debt securities in the money and capital marketsFiscal policy relates to the annual incomes and expenditures of a govtMonetary policy affects the level of short-term interest rates by adjusting the level of financial system liquidityCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye WatsonChapter Organisation12.1 Introduction12.2 Commonwealth Govt Borrowing12.3 Types of Commonwealth Govt Securities12.4 State Govt Securities12.5 Monetary Policy12.6 The Payments System12.7 SummaryCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye Watson12.2 Commonwealth Govt BorrowingFull financial yearBorrow to finance budget deficitsRollover existing bonds which matureRetire debt at/prior to maturity when budget is in surplusWithin financial yearBorrow to finance short-term mismatches between receipts and paymentsRollover existing debtCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye WatsonChapter Organisation12.1 Introduction12.2 Commonwealth Govt Borrowing12.3 Types of Commonwealth Govt Securities12.4 State Govt Securities12.5 Monetary Policy12.6 The Payments System12.7 SummaryCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye Watson12.3 Types of Cwlth Govt SecuritiesLike the private sector, the Cwlth govt issues both coupon and discount securitiesTreasury bonds (or T-bonds) for full financial year financingTreasury notes (or T-notes) for within year financingCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye WatsonT-bondsCoupon instrument (coupons paid each 6 months)Coupon payment = coupon rate x face value of bondFace value of bond redeemed at maturity date or may be sold in secondary market for early redemptionCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye WatsonT-bonds (cont.)Until 1984 either bearer bond or inscribed stockInscribed stock since 1984Copyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye WatsonT-bonds (cont.)Primary market transactionsIssued by Commonwealth Treasury through RBAUp to 1980: take-it-or-leave-it system1980–82: tap systemSeries of bonds continuously offered to the public; as one series closed another was openedCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye WatsonT-bonds (cont.)Primary market transactions (cont.)1982–present: tender systemRemoves rate setting from political arenaBids submitted through RITS (Reserve Bank Information and Transfer System)Minimum $100,000, thereafter multiples of $1000Bids accepted in ascending order of yield, i.e. lowest-yield bid (highest price) first, until issue fully subscribedMaturity varies but commonly 10–20 yearsCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye WatsonT-bonds (cont.)Who buys T-bonds?As at June 2001 RBA held 15%Commonwealth held 6%Banks held 14%General and life insurance offices held 8%Other holders 48%Banks’ holdings have fallen due to changes in regulations on holding T-bondsCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye WatsonT-bonds (cont.)Secondary market transactionsOn-exchangeAll T-bonds listed on ASXLow trading volumes due to lack of trading facilities/mechanisms to match buyers and sellersOff-exchangeBuyers and sellers may deal direct through a broker or financial institutionCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye WatsonT-bonds (cont.)Secondary market transactions by individuals and institutions may be prompted by the following reasonsFunding requirementsLiquidity needsReserve requirementsInterest rate expectationsMaintaining maturity profile of a portfolioCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye WatsonT-bonds (cont.)PricingCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye WatsonT-bonds (cont.)Pricing (cont.)(12.1)Copyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye WatsonT-bonds (cont.)Pricing (cont.)Example 1: The bond shown in Table 12.5 has a face value of $1000, pays7 per cent per annum with half-yearly coupons and matures 15 November 2006. Assume that the bond is sold on 15 July 2003. Current yields for similar Treasury bonds are 8 per cent per annum. Calculate the price of the bond in the secondary market.Copyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye WatsonT-bonds (cont.)Pricing (cont.)Example 1 (cont.: The number of elapsed days for the period 6 May to 15 July 2003 inclusive. The adjustment for the elapsed period has in fact increased the price of the bond received by the original holder. At the next coupon payment date on 15 November 2003 the purchaser will receive the full coupon payment of $35.Copyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye WatsonT-bonds (cont.)Indexed T-bondsCompensate holder for loss of purchasing powerCapital indexed bondsThe periodic fixed coupon relates to the inflation-adjusted principal amount of the bondCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye WatsonT-bonds (cont.)Capital-indexed T-bondsCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye WatsonT-notesT-notes are short-term discount securities issued by the cwlth govt through the AOFMT-notes issues have a variable term-to-maturity in order to coincide with the govt’s revenue receipt datesT-notes may be redeemed at maturity date or by sale in the secondary marketCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye WatsonT-notes (cont.)Tendering processTenders held periodically on a competitive basis to meet funding needsMinimum parcel of $100,000 face value, thereafter multiples of $5000 by RITSBids accepted in ascending order of yield, i.e. lowest-yield bid (highest price) first, until issue is fully subscribedCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye WatsonT-notes (cont.)PricingT-notes are a discount security and the calculations are the same as in Chapter 9(12.2)Copyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye Watson12.3 Types of Cwlth Govt Securities: T-notes (cont.)Pricing (cont.)Example 2: A bank is to bid at tender for $100,000 of 182-day T-notes at a yield of 5.5 per cent per annum. What price will the bank pay if the tender is successful?Copyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye WatsonT-notes (cont.)Calculating yield(12.3)Copyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye WatsonT-notes (cont.)Calculating yield (cont.)Example 4: A 182-day T-note with a face value of $100,000 and selling currently at $97,540, with the full 182 days to run to maturity, is yielding:Copyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye WatsonChapter Organisation12.1 Introduction12.2 Commonwealth Govt Borrowing12.3 Types of Commonwealth Govt Securities12.4 State Govt Securities12.5 Monetary Policy12.6 The Payments System12.7 SummaryCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye Watson12.4 State Govt SecuritiesSimilar finance needs as cwlthEach state has formed a central borrowing authority to assist state govts to facilitate debt management programs e.g. VicFinBenefits includeEconomies of scaleControl of the timing of issuesEncourages a secondary marketCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye Watson12.4 State Govt Securities (cont.)Issue similar securities as the cwlth i.e. medium-term notes and longer-term bonds (referred to as semi-government securities) and discount securities Cost of debt (determined by credit rating agencies) is higher than cwlthDebt issues may be public or private, underwritten or non-underwrittenCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye WatsonChapter Organisation12.1 Introduction12.2 Commonwealth Govt Borrowing12.3 Types of Commonwealth Govt Securities12.4 State Govt Securities12.5 Monetary Policy12.6 The Payments System12.7 SummaryCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye Watson12.5 Monetary PolicyMonetary policyActions of the RBA that influence interest rates in order to achieve the following economic objectivesStability of the currencyMaintenance of full employmentEconomic prosperity and welfare of the Australian peopleCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye Watson12.5 Monetary Policy (cont.)By impacting on the cash rate (overnight interbank rate), the RBA can affect rates of longer-term securities e.g.RBA tightens monetary policy by selling cwlth govt securities (CGS) and reducing the money supplyThis causes investment and household spending to decreaseCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye Watson12.5 Monetary Policy (cont.)Market operationsConducted primarily in CGSSale of CGS or repurchase agreements reduce the supply of cash to the money marketPurchases of CGS inject additional cashThe RBA holds and manages a portfolio of CGS to maintain system liquidity and affect monetary policyThe RBA achieves this by purchasing CGS in the secondary market and occasionally taking an allotment at tender in a primary issueCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye Watson12.5 Monetary Policy (cont.)Impacts on system liquidityFactors impacting the liquidity of the financial system (or money base) areCwlth govt budget deficits or surplusesTaxation receiptsGovernment securitiesBudget recurrent expendituresBudget capital expendituresOfficial (RBA) FX transactionsSales/purchases of FX reduce/increase financial system liquidityNet sales of cwlth govt securitiesCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye WatsonChapter Organisation12.1 Introduction12.2 Commonwealth Govt Borrowing12.3 Types of Commonwealth Govt Securities12.4 State Govt Securities12.5 Monetary Policy12.6 The Payments System12.7 SummaryCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye Watson12.6 The Payments SystemThe payments system facilitates the transfer of value of a financial instrument, used in transactions for goods and services, from one party to anotherThe RBA classifies payments as either high-value or low-valuePayments systems are classified as either a credit or debit payment systemCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye Watson12.6 The Payments System (cont.)Copyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye Watson12.6 The Payments System (cont.)Exchange settlement accountsA special account held with the RBA to facilitate the settlement of value transactions within the payments systemHeld by banks, building societies, credit unions and other providers of payments servicesExchange settlement account transactions use same day funds i.e. funds not requiring clearing through the payments systemCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye Watson12.6 The Payments System (cont.)Real-time gross settlement (RTGS)Australia operates a system of RTGSThis requires that each high-value payment transaction be settled immediately before it is completedCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye Watson12.6 The Payments System (cont.)Real-time gross settlement (RTGS) (cont.)The Payments System Board recognises two RTGS systemsRITS—facilitates interbank RTGS paymentsAustraclear—electronic settlement system for wholesale debt security transaction settlementsCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye Watson12.6 The Payments System (cont.)Repurchase agreements (repos) and rediscount facilitiesA repo is the sale of CGS to the RBA on condition the seller will buy them back by day’s endIt provides intra-day liquidity for same day funds to exchange settlement account-holdersA rediscount facility is an arrangement where the RBA repurchases T-notes to increase system liquidityCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye WatsonChapter Organisation12.1 Introduction12.2 Commonwealth Govt Borrowing12.3 Types of Commonwealth Govt Securities12.4 State Govt Securities12.5 Monetary Policy12.6 The Payments System12.7 SummaryCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye Watson12.7 SummaryThe RBAIssues T-bonds for long-term cwlth funding and T-notes for short-term cwlth fundingImplements monetary policy consistent with economic objectives by impacting on the overnight cash rateHolds and manages a portfolio of CGS to maintain system liquidity and affect monetary policyExchange settlement accounts facilitate the operation of the payments systemThe RBA provides intra-day liquidity by offering repos and rediscount facilitiesCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye Watson