UBC Theses and Dissertations

UBC Theses Logo

UBC Theses and Dissertations

The Canadian corporation and the money market Pascal, David Arnold 1964

Your browser doesn't seem to have a PDF viewer, please download the PDF to view this item.

Item Metadata

Download

Media
831-UBC_1964_A4_5 P3.pdf [ 8.06MB ]
Metadata
JSON: 831-1.0102418.json
JSON-LD: 831-1.0102418-ld.json
RDF/XML (Pretty): 831-1.0102418-rdf.xml
RDF/JSON: 831-1.0102418-rdf.json
Turtle: 831-1.0102418-turtle.txt
N-Triples: 831-1.0102418-rdf-ntriples.txt
Original Record: 831-1.0102418-source.json
Full Text
831-1.0102418-fulltext.txt
Citation
831-1.0102418.ris

Full Text

THE CANADIAN CORPORATION AND THE MONEY MARKET by DAVID .ARNOLD PASCAL B.A., Bishop's U n i v e r s i t y ,  1963  A t h e s i s submitted as p a r t i a l f u l f i l m e n t o f the requirements f o r the degree o f MASTER OF BUSINESS ADMINISTRATION i n the F a c u l t y o f COMMERCE AND BUSINESS ADMINISTRATION  We accept t h i s t h e s i s as conforming t o the required  standard  THE UNIVERSITY OF BRITISH COLUMBIA J u l y 196H-  In presenting this thesis i n p a r t i a l fulfilment of the requirements for an advanced degree at the University of B r i t i s h Columbia, I agree that the Library shall make i t available for reference and study.  freely  I further agree that per-  mission for extensive copying of this thesis for scholarly purposes may be granted by the Head of my Department or by his representatives.  It i s understood that copying or publi-  cation of this thesis for financial gain shall not be allowed without my written permissions.  Department of The University of B r i t i s h Columbia, Vancouver 8, Canada  ii  ABSTRACT  The Canadian money market dates back t o 1935 ment o f Canada t r e a s u r y b i l l s were f i r s t impetus t o i t s present  when Govern-  s o l d and the main  s t a t u s came w i t h the i n t r o d u c t i o n o f  day-to-day loans i n 195*+.  U n t i l 195^,  the money market was  used p r i n c i p a l l y by the c h a r t e r e d banks and the F e d e r a l Government, and the main f u n c t i o n s were t o provide the former w i t h l i q u i d a s s e t s and the l a t t e r w i t h a r e l a t i v e l y method o f f i n a n c i n g i t s a c t i v i t i e s .  inexpensive  In the. l a s t decade many  other i n s t i t u t i o n s have s t a r t e d t o p a r t i c i p a t e i n the market. On the borrowing s i d e , p r o v i n c i a l and m u n i c i p a l  governments,  and f i n a n c i a l i n s t i t u t i o n s i n c l u d i n g t r u s t companies, f i n a n c e companies, investment d e a l e r s and commercial banks have j o i n e d the F e d e r a l Government,  and f i n a l l y i n 1958 n o n - f i n a n c i a l c o r -  p o r a t i o n s began t o i s s u e s u b s t a n t i a l sums o f short-term On the l e n d i n g side are f i n a n c i a l i n s t i t u t i o n s wishing  notes. t o keep  a c e r t a i n p o r t i o n o f t h e i r funds l i q u i d and n o n - f i n a n c i a l c o r p o r a t i o n s w i t h temporary excess cash.  The l a s t o f these  borrowers and l e n d e r s mentioned, the n o n - f i n a n c i a l c o r p o r a t i o n , i s the concern o f t h i s t h e s i s which examines p o t e n t i a l i t y and use o f s e c u r i t i e s w i t h m a t u r i t y from one day t o three  years.  To a p p r e c i a t e the p o t e n t i a l i t y o f the money market, the bond market, o f which i t i s p a r t , i s f i r s t  d e s c r i b e d and  p e r t i n e n t c h a r a c t e r i s t i c s o f bonds i n g e n e r a l are d i s c u s s e d .  iii The  s p e c i f i c instruments  the f o l l o w i n g :  p e r t a i n i n g t o the money market are  Government of Canada t r e a s u r y b i l l s  short term bonds; short term p r o v i n c i a l and  and  municipal issues;  f i n a n c e company paper; c h a r t e r e d bank d e p o s i t r e c e i p t s , swaps and  acceptances;  t r u s t company guaranteed investment  c e r t i f i c a t e s ; investment d e a l e r loans and buy backs; i n t e r n a t i o n a l instruments Euro-dollars.  The  U.S.  and  i n c l u d i n g l e t t e r s of c r e d i t  and  p o t e n t i a l i t y of the money market f o r the  n o n - f i n a n c i a l c o r p o r a t i o n i s f u r t h e r enhanced when such a c t i v i t y i s i n t e g r a t e d w i t h the cash flow of the company. The  cash flow i t s e l f i s a f f e c t e d by p e c u l i a r i t i e s of the i n -  d u s t r y such as seasonal peaks and  troughs,  and  by f a c t o r s r e -  l a t e d t o i n d i v i d u a l f i r m s , such as c a p i t a l s t r u c t u r e . From p u b l i s h e d  s t a t i s t i c a l data and  q u e s t i o n n a i r e s c i r c u l a t e d by the author,  298  responses t o the  the most p e r t i n e n t  f i n d i n g s were the predominance of F e d e r a l Government, bank, and  t r u s t company paper, the  s m a l l d i f f e r e n c e i n y i e l d s between  d i f f e r e n t q u a l i t i e s of paper, and t h a t r a t h e r than f o r m a l i z e d r u l e s f o r money market a c t i v i t y , corporate d e a l i n g s were i n f l u e n c e d mainly by i n t a n g i b l e f a c t o r s i n c l u d i n g a t t i t u d e s of the t r e a s u r e r r e g a r d i n g  s a f e t y and  b a r g a i n i n g between buyers and boards of d i r e c t o r s and  y i e l d s o f the  instruments,  s e l l e r s , l i m i t a t i o n s imposed  by  banker r e l a t i o n s h i p s .  While the f a c t o r s mentioned above must continue  to affect  money market d e c i s i o n s a f o r m a l i z e d approach i s recommended and d i s c u s s e d .  T h i s approach can be geared t o the  limitations  iv established  by the  p e c u l i a r i t i e s , and alternatives.  i n t a n g i b l e f a c t o r s and  i n d u s t r y and  i t o b j e c t i v e l y examines the  firm  remaining  V  TABLE OF CONTENTS  CHAPTER I,  II.  PAGE 1  INTRODUCTION Statement o f the Problem  2  Scope and Methodalogy o f t h e Study  2  Plan of Thesis  3  THE CANADIAN BOND MARKET General C o n s i d e r a t i o n s  . .  5  , . . .  5  . . .^ o f Bond Buying  R i s k s i n F i x e d Income S e c u r i t i e s  5  Types o f Instruments  8  The Secondary Bond Market  12  Y i e l d s , P r i c e s , and M a t u r i t y  15  R e l a t i o n s h i p o f P r i c e and Y i e l d  15  Causes o f Bond P r i c e F l u c t u a t i o n s  16  The Y i e l d Curve  19  Y i e l d s and Taxes  22  I n f l u e n c e o f the Government and the Bank o f Canada  23  Tne Bank o f Canada  23  Government Debt Management P o l i c y III.  THE CANADIAN MONEY MARKET  26 28  H i s t o r y o f the Canadian Money Market  28  Canadian Money Market Instruments  35  Government o f Canada t r e a s u r y B i l l s  . . . . 36  vi PAGE Short Term Government o f Canada 4-0  D i r e c t and Guaranteed Bonds Provincial Finance  and M u n i c i p a l Issues  hi 4-3  Company Paper  Commercial Paper  h7 51  Chartered Bank Paper Receipts  51  United States Bank Swaps  52  Banker's Acceptance  52  Deposit  . . . . . . . . . . . . .  53  T r u s t Company Paper Instruments Created  by t h e Dealer  55  Buy Backs and Dealer Loans  55  Back t o Back  56  I n t e r n a t i o n a l Money Market Instruments  56  . . . .  56  The F o r e i g n Exchange  Market  I n t e r n a t i o n a l Money Market  Investment  and Borrowing  57  Summary and C o n c l u s i o n  59  IV.." . TECHNIQUES OF MONEY MARKET INVESTMENT AND BORROWING  64-  Changes i n Monetary C o n d i t i o n s  64-  The Y i e l d Curve and Trading P r o f i t s  68  Long Term Rates and Short Term Investment Cash Management  . . . 71 73  vii PAGE Cash Forecasting  73  Cash Economizing  81  Empirical Observations  86  Cash Forecasting  86  Banker Relationships  88  Investment P o l i c i e s  90  . . .  Company A  91  Company B Company C  V.  . . . . . . .  91 92  •  Company D  92  Company E  93  INFLUENCES UPON MONEY MARKET ACTIVITY  98  . . . .  98  The Individual Firm Use of Trade Credit  99  Lump Sum Payments  100  Size of Firm  102  Debt versus Surplus Positions  102  Intercorporate Relations  105  Other Restrictions  • 106  Industry Characteristics Mining  107 • •  1  0  7  Manufacturing  113  Constructions  117  Transportation  118  Utilities  .120  Merchandising  121  Summary and Conclusions  126  viii  PAGE VI  CONCLUSION  129  BIBLIOGRAPHY  135  APPENDIX  139  ix  LIST OF TABLES  TABLE I. II. III. IV.  PAGE Bonds Outstanding, December 3 1 , Secondary Market S a l e s  VI. VII. VIII.  11  . . . .  1439  D i s t r i b u t i o n o f T r e a s u r y B i l l Holdings P r o v i n c i a l D i r e c t Debt - S e l e c t e d Issues Outstanding, March 31>  V.  1962  1962  Finance Company Rates, December 31»  4-2 1963  •  46  Corporate Paper  kS  Amount Outstanding o f S e l e c t e d Short Term Paper . . .  60  Y i e l d s of S e l e c t e d Money Market Instruments, January 30, 1964-  62  IX.  Proceeds from Investment P o l i c y A  76  X.  Proceeds from Investment P o l i c y B  77  XI.  Proceeds from Investment P o l i c y C  79  XII.  S a l e s and Cash of Canadian N o n - F i n a n c i a l  Corporations XIII. XIV. XV. XVI.  S a l e s and Cash of Canadian Manufacturing C o r p o r a t i o n s . 84Investment P o r t f o l i o s o f S e l e c t e d Companies Cash and S e c u r i t y Holdings o f Canadian Companies. .  96 .103  Computation o f Day's R e c e i v a b l e s Outstanding, Year 1961  XVII.  . . . . . 8 3  108  Computation o f Day's Payables Outstanding, Year. 1961  109  X  TABLE XVIII. XIX.  PAGE 110  Sales Growth Percentage o f T o t a l L i a b i l i t i e s  i n Mortgage  and Other Funded Debt XX. XXI. XXII. XXIII,: XXIV. XXV. XXVI. XXVII.  I l l 112  Mining P r o d u c t i o n Manufacturing Shipments  l  XXIX.  k  Value o f R e t a i l Trade  122  R e t a i l Credit  125  Outstanding  Value o f Wholesale  127  Trade  1^0  Response t o Q u e s t i o n n a i r e Corporate Holdings o f Money Market  Securities.  . . 1^2  Number o f R e p o r t i n g Firms I n v e s t i n g i n 1^2  Instruments XXVIII.  l  I s s u e r s o f Corporate Paper Reasons f o r Money Market  . . . . .  Activity  Ihh 1^5  xi  LIST OF FIGURES  FIGURE  PAGE  1.  Y i e l d Curves  20  2.  S e l e c t e d A f t e r - T a x Y i e l d Curves  70  CHAPTER I  INTRODUCTION The chief f i n a n c i a l o f f i c e r of the non-financial corporat i o n has always been confronted with the problem of l i q u i d i t y ; he has wanted to know that his working c a p i t a l position was a safe one as were those of firms with which he d e a l t .  The prime  prerequisite of a safe working c a p i t a l p o s i t i o n i s enough cash on hand or available by borrowing to cover any and a l l payments as they come due. Cash i n the current account of the bank, l i k e  receivables,  does not earn anything for the business and i s thus a necessary e v i l for the purpose of ensuring l i q u i d i t y .  In recent years,  however, a mechanism known as the money market has developed i n Canada to the point where the corporate treasurer has been able to remain l i q u i d and s t i l l ameliorate his company's p r o f i t s by investing surplus cash for short periods or borrowing at a lower rate than that charged by the chartered banks. This mechanism has only come of age i n the country within the l a s t decade.  Even as recently as 1958 i t was estimated  that fewer than one hundred Canadians f u l l y understood the workings of the money market.^-  People are reluctant to enter  a venture they do not comprehend and lack of knowledge also hides the possible  opportunities.  •••Brian Land, "How Canada*s Money Market Keeps Idle Cash at Work," Canadian Business. XXXI (February, 1958), 26.  2 Statement o f the Problem.  In l i g h t o f the above  considerations  the author's primary purpose i s t o examine the Canadian money market from the point o f view o f the n o n - f i n a n c i a l  corporation.  More s p e c i f i c a l l y the o b j e c t i v e s o f the t h e s i s a r e : (1) To note the workings o f the Canadian money market w i t h i n the broader context o f the Canadian bond market; (2) To examine how and why funds a r e i n v e s t e d borrowed  i n t o , and  from, the money market;  (3) To i l l u s t r a t e those f a c t o r s which conduce a p a r t i c u l a r f i r m t o money market a c t i v i t y ; and 0+) To i l l u s t r a t e by example how some Canadian f i r m s a r e t a k i n g advantage o f t h i s media and thus s e t t i n g examples  f o r others t o follow.  Scone and Methodology o f the Study.  There has been  l i t t l e w r i t t e n on the Canadian money market.  relatively  Even l e s s has  been w r i t t e n on the o p p o r t u n i t i e s f o r the c o r p o r a t e i n v e s t o r o r borrower, and the few a r t i c l e s the author has found have been of a cursory nature.  Therefore,  the Canadian l i t e r a t u r e i s used  here mainly t o d i s c u s s the bond market and the h i s t o r y and i n struments o f the Canadian money market. Techniques f o r investment and borrowing a r e taken p r i n c i p a l l y from United scene.  States  sources and a p p l i e d t o the Canadian  Where s u b s t a n t i a l d i f f e r e n c e s e x i s t they a r e noted i n  the t e x t .  To examine the o p p o r t u n i t i e s t h a t the t e c h n i q u e s  p r e s e n t , h y p o t h e t i c a l examples  are devised.  The f i g u r e s used  i n the examples w i l l not l i k e l y f i t i n t o any p a r t i c u l a r com-  3  pany's s i t u a t i o n , but the emphasis i s on the method and model established,  to which most companies can orientate.  The author did some primary research by use of questionnaires to a wide v a r i e t y of sizes and types of firms, and by interviews.  Many responses are noted i n the text to show  attitudes concerning various aspects of the money market, how c e r t a i n factors affect a c t i v i t y i n the market, and the comp o s i t i o n of several security p o r t f o l i o s .  The questionnaire  and tabulations of r e p l i e s are presented In the Appendix. A f i n a l method used i n the analysis i s the c o l l e c t i o n of s t a t i s t i c a l information, mainly from Taxation S t a t i s t i c s and the Dominion Bureau of S t a t i s t i c s .  Other sources, such as  the Investment Dealers Association of Canada, were tapped f o r estimates. Plan of Thesis.  This thesis i s divided into six chapters  including an introductory and a concluding chapter, and an Appendix. Chapter II discusses the Canadian bond market as a background and broader context for subsequent discussion of the money market.  Since money market securities  are bonds i t  is  necessary to know the general considerations of prudent bond buying and s e l l i n g , and the workings of, and influences upon, the bond market. Chapter III discusses the Canadian money market and the opportunities i t presents for the non-financial corporation. The h i s t o r y i s b r i e f l y outlined and emphasis i s upon the Instruments .  The international money market i s also review-  ed because any exporter or importer has constant dealings with i t s instruments i n his normal course of business. Techniques of money market investment and borrowing are the topics of Chapter IV.  Methods of increasing p r o f i t s  through money market dealings are outlined and a procedure for analysis i s recommended.  Some examples of current p o l i c i e s  and the reasoning behind them are presented at the conclusion of the chapter. Chapter V examines c h a r a c t e r i s t i c s of i n d i v i d u a l firms and industries to determine which factors may possibly contribute to large peaks and troughs i n the cash account, and thus enhance the opportunity for money market a c t i v i t y . F i n a l l y , Chapter VI summarizes the findings and states the conclusions of the study, and the Appendix tabulates relevant data from responses to the questionnaire.  the  5  CHAPTER I I THE The  CANADIAN BOND MARKET  money market i s but one segment o f the broader bond  market and t o understand the workings o f the former one must first  g a i n an a p p r e c i a t i o n o f the nature and scope o f the  latter. The  bond market, i n t u r n , i s a p a r t o f the s t i l l broader  market f o r f i n a n c i a l a s s e t s , i n c l u d i n g e q u i t i e s , and a l l must compete w i t h each other f o r i n v e s t o r f a v o r .  T h i s chapter i s  b a s i c a l l y concerned w i t h f i x e d income s e c u r i t i e s and, i n part i c u l a r , w i t h the f a c t o r s which w i l l form the background f o r r e l a t i v e i n v e s t o r preferences issues.  Included  between l o n g - and short-term  are c o n s i d e r a t i o n s o f r i s k s , i n t e r e s t and  y i e l d s , t h e i n f l u e n c e o f the Bank o f Canada and t h e secondary bond market. I.  GENERAL CONSIDERATIONS OF BOND BUYING  Risks i n Fixed  Income S e c u r i t i e s .  view i s t h a t o f an insurance  Whether the p o i n t o f  company, bank, i n d i v i d u a l , o r a  n o n - f i n a n c i a l c o r p o r a t i o n , c o n s i d e r a t i o n s f o r investment i n bonds d i f f e r s u b s t a n t i a l l y from those o f e q u i t i e s .  Capital  gains are o f t e n the major c o n s i d e r a t i o n when one buys e q u i t i e s , e s p e c i a l l y because o f growth p o s s i b i l i t i e s , t h e c u r r e n t i n f l a t i o n a r y t r e n d , and t h e low y e a r l y y i e l d on many r e g u l a r l y traded  common s t o c k s .  Investment i n bonds f o r  6 e i t h e r temporary or long term purposes, however, i s mainly for  the purpose of a guaranteed r e g u l a r y i e l d .  the s p e c u l a t i v e f a c t o r f a l l s  Therefore  f a r behind t h a t of r i s k when  making the investment d e c i s i o n . In view o f the paramount importance o f the r i s k f a c t o r it  i s worthwhile t o a p p l y f o u r b a s i c p r i n c i p l e s o f f i x e d  income s e c u r i t y investment.^  The  first  states that  safety  i s measured not by s p e c i f i c l i e n or other c o n t r a c t u a l r i g h t s , but  by the a b i l i t y o f the i s s u e r t o meet a l l i t s o b l i g a t i o n s .  E s p e c i a l l y from the p o i n t o f view o f a c o r p o r a t i o n i n v e s t i n g temporarily one  i d l e funds as a marginal aspect  does not want the worry o r f r u s t r a t i o n o f bankruptcy p r o -  ceedings i n which d e l a y s i n the d e t e r m i n a t i o n  i n p a r t i a l recovery  that Is established i t s highest maturity The  and  Thus the  c o n s i d e r a t i o n , and  y i e l d i n g bond o f the  i s the most a t t r a c t i v e , r e g a r d l e s s o f  once desired  lien.  second p r i n c i p l e i s a c t u a l l y an e x t e n s i o n  o f the  i t d i c t a t e s t h a t the a b i l i t y o f the i s s u e r t o pay  measured on r e c e s s i o n or d e p r e s s i o n those o f p r o s p e r i t y . proof but jewellry.  first  should  conditions rather than  No i n d u s t r y i s completely  depression  some, such as f o o d , are moreso t h a n o t h e r s , such as A u s e f u l standard  t o apply i s the margin o f  which i s the r a t i o o f e a r n i n g s t o i n t e r e s t due. the  difficulties  o f l e g a l r i g h t s are common.  q u a l i t y o f the i s s u e r i s the f i r s t  and  o f cash management,  The  safety  higher  s t a b i l i t y o f the i n d u s t r y the lower the margin o f s a f e t y  ^-Benjamin Graham, David L. Dodd, and Sidney C o t t l e , S e c u r i t y A n a l y s i s (New York: McGraw-Hill Book Company, Inc., 1962), Chapters 22, 23, 2h and 25).  be  7  required.  I t should be noted t h a t t h i s p r i n c i p l e i s not  important i n the more f o r e s e e a b l e would take a r a t h e r severe and  short-term  as  market and i t  sudden downturn to p l a c e  an  otherwise s a f e t h i r t y - d a y note i n jeopardy. The  t h i r d p r i n c i p l e , a l s o an e x t e n s i o n  t h a t s a f e t y should dards should  not be  o f the f i r s t , i s  sacrificed for yield.  be e s t a b l i s h e d and  Minimum s t a n -  no y i e l d concessions  should  a l l o w the i n v e s t o r t o v i o l a t e these s t a n d a r d s . The  f o u r t h p r i n c i p l e states that s e l e c t i o n of a l l senior  s e c u r i t i e s f o r investment should c l u s i o n and nature and  be  subject t o r u l e s o f  specific quantitative tests. l o c a t i o n o f the b u s i n e s s ,  p r o v i s i o n s o f the i s s u e .  The  ex-  These t e s t s i n c l u d e  s i z e o f the i s s u e and  the  l a t t e r mainly concerns s e c u r i t y ,  i n t e r e s t payments and m a t u r i t y date where the short s i d e o f the market i s c o n s i d e r e d .  Furthermore, one  r e c o r d o f i n t e r e s t and d i v i d e n d the t o t a l e a r n i n g s p i c t u r e . but  The  l o o k s at the  payments o f the i s s u e r c u r r e n t e a r n i n g s are  even moreso are the trends and f l u c t u a t i o n s .  l o s e some s i g n i f i c a n c e i n the  past  and important  These f a c t o r s  s h o r t e r i s s u e s w i t h which t h i s  t h e s i s s h a l l be concerned, but q u i t e o f t e n a f i r m w i l l make a short-term  investment i n a long-term i s s u e w i t h the hope o f  s e l l i n g i t on the market i n the near f u t u r e . A n  o f the p r i n c i p l e s s t a t e d above r e l a t e t o s a f e t y o f  p r i n c i p a l and  c o n t i n u i t y o f y i e l d , but most gains and  losses  i n the bond market occur as a r e s u l t o f changes i n market y i e l d s and  prices.  The  precise r e l a t i o n s h i p of y i e l d  p r i c e s h a l l be d i s c u s s e d it  and  subsequently, but f o r the moment  s h a l l be accepted t h a t f o r a p a r t i c u l a r i s s u e , they v a r y  i n v e r s e l y t o one  another.  8 The movement of the business cycle and deliberate p o l i c i e s of the Bank of Canada can greatly affect bond p r i c e s . If the s e c u r i t i e s are held to maturity, of course, no loss or gain w i l l occur, but buying s e c u r i t i e s - even government - for the purpose of sale before maturity can involve substantial risks.  In an expansionary phase of the c y c l e , where t i g h t  money p o l i c i e s are l i k e l y to be enforced, short term prices should show a substantial decrease as increased working c a p i t a l needs of business push the interest rate up.  Holders of e x i s t -  ing securities therefore would only be able to s e l l at a loss i n the face of t h i s increased competition.  If the expansion i s  expected to continue the same pattern w i l l follow with long term issues.  With the great v a r i e t y of money market i n s t r u -  ments, however, the temporary investor can diminish t h i s r i s k by purchasing a security which w i l l mature at the exact time he requires the funds. Types of Instruments.  There i s an extremely wide choice  of fixed income securities which d i f f e r i n r i s k , as well as y i e l d and maturity.  Governments at a l l l e v e l s issue bonds of  varying yields and maturities.  Federal government bonds are  regarded as r l s k l e s s from the point of view of safety of p r i n c i p a l at maturity, although the interest rate r i s k i s as important as i n a l l others.  P r o v i n c i a l issues are next i n  safety with the larger provinces able to offer the lowest y i e l d , r e f l e c t i n g t h e i r greater safety.  For example, Ontario's  usually s e l l at the lowest y i e l d while Newfoundland^ s e l l at the highest.  However, when a "better quality" province s e l l s  9 a large issue i t may lose ground and be forced to offer a higher y i e l d than some others.  For example, between 1955  abd 1959? Quebec bonds were sometimes s e l l i n g at a lower y i e l d than those of Ontario.  Then, i n I960 and 1961, Quebec  borrowing increased sharply and caused i t s bonds to become relatively unattractive.  2  P r o v i n c i a l issues are usually long maturity bonds with the shortest generally i n the five-year range.  They also  guarantee bonds of crown corporations and one province, B r i t i s h Columbia, does a l l i t s borrowing by guaranteed issues. The short-term investor may be interested i n p a r i t y issues which can be redeemed any time at par.  The safety of these  has been doubted, however, e s p e c i a l l y i n the June 1962 f i n a n c i a l c r i s i s when interest rates penetrated the 5% y i e l d of the B . C . E l e c t r i c p a r i t y issue.  A run developed and there was some  concern as to the province's a b i l i t y to meet payment.3  Several  provinces also issue treasury b i l l s . Municipal issues rank below those of provinces although p r o v i n c i a l l e g i s l a t i o n and scrutiny do prevent the marketing of excessive amounts i n r e l a t i o n to a b i l i t y to meet payments. Corporate issues vary widely i n maturity, l i e n and safety. Examples are f i r s t mortgage bonds, second mortgage bonds, c o l l a t e r a l trust bonds, debentures and subordinate debentures.  Douglas H. F u l l e r t o n , The Bond Market i n Canada (Toronto: The Carswell Company Limited, 1962), p.68. 2  3 I b i d . . p.l80.  10 The f i r s t three have some form of security while the  latter  two are bought on the basis of the general q u a l i t y of the corporation.  The shortest term issue of the non-financial  corporation i s the promissory note, commonly referred to as "corporate paper," and i t Is of the debenture type with usual maturities of t h i r t y or ninety days. To indicate the r e l a t i v e importance of each of these classes of i s s u e r s , Table I presents the amounts outstanding as of December 31> 1962.  These include d i r e c t and guaranteed  issues and those issues held outside as well as within the country. Bonds are marketed by investment dealers and banks, although d i r e c t placements are becoming more common.  Dealers  may either undertake to s e l l the issue for the government or f i r m , or underwrite i t themselvesj that i s , buy up the issue and thus take f u l l r e s p o n s i b i l i t y for i t s marketing.  Often  syndicates are formed when a large amount i s involved and the ultimate i n t h i s type of arrangement was the Conversion Loan of 1958, i n which every investment dealer i n the country except one (whose partners indicated l i t t l e f a i t h i n the Loan*s success) was brought i n . * The interested buyer would thus con1  tact these sources to examine what they have to offer i n terms of his needs. A disadvantage to the buyer i s the speed with which a new issue i s disbursed once i t comes out on the market.  Some po-  t e n t i a l purchasers never hear of a new issue or must make t h e i r decision within hours and often without even the benefit of a  ^ I b i d . . p.2hk  TABLE I BONDS OUTSTANDING, DECEMBER 3 1 , 1 9 6 2 (Dollar figures l n m i l l i o n s )  Amount Government of Canada  j|  $19W3  Provincial  8983  22.3  Municipal  hlOO  1 0 . 2  Corporate  772*+  1 9 . 2  100.0  Source:  Bank of Canada, S t a t i s t i c a l Summary, F i n a n c i a l Supplement. 1 9 6 2 .  12 prospectus.  The Royal Commission on Banking and Finance r e -  commended t h e p r a c t i c e o f the. "red h e r r i n g " prospectus which i s used i n t h e U n i t e d S t a t e s .  T h i s i s a d r a f t prospectus  g i v i n g a l l i n f o r m a t i o n o f t h e o r d i n a r y prospectus except m a t u r i t y and y i e l d , and i s c i r c u l a t e d i n advance o f t h e i s s u ing date.  Even t h e "red h e r r i n g " , however, would be i m p r a c t i c a l  where short term o b l i g a t i o n s a r e concerned.  Al c o r p o r a t i o n  i s s u i n g notes every t h i r t y o r s i x t y days would f i n d i t n e i t h e r f e a s i b l e nor n e c e s s a r y t o p u b l i s h a prospectus each time.  The  i n v e s t o r can examine the company's c r e d i t worthiness from a recent prospectus and c u r r e n t r e p o r t s by such agencies as Dun and B r a d s t r e e t . II.  THE SECONDARY BOND MARKET  Bond d e a l i n g i s not c o n f i n e d t o simply buying at date o f i s s u e and s e l l i n g at m a t u r i t y .  Much t r a d i n g i s done between  these two dates i n t h e secondary market which performs 6 useful functions. (1) I t improves  several  the m o b i l i t y o f funds by g i v i n g bonds  l i q u i d i t y , t h e r e b y making them more a t t r a c t i v e t o savers and r e d u c i n g borrowing  costs.  (2) I t e s t a b l i s h e s r e l a t i v e p r i c e and y i e l d  levels,  which provide the y a r d s t i c k s f o r s e t t i n g the terms of new i s s u e s . (3)  I t f a c i l i t a t e s the monetary o p e r a t i o n o f the Bank o f Canada and the o p e r a t i o n s o f s i n k i n g and purchase  ^Canada, Report o f The Royal Commission on Banking and Finance (Ottawa: Q u e e n ' T T r i n b e r , 196MO, p p . 3 1 3 C C -  6  F u l l e r t o n , o p . c i t . , p.163  funds.  13 N o n - f i n a n c i a l c o r p o r a t i o n s have a keen i n t e r e s t i n the secondary market e s p e c i a l l y because they are o f t e n not p o s i t i v e when they w i l l w i s h t o s e l l the bonds t o redeem the c a s h needed f o r other c o r p o r a t e  purposes.  The  treasurer i s  t h e r e f o r e concerned w i t h s e v e r a l f a c t o r s determining  the  m a r k e t a b i l i t y o f a bond.^ F i r s t , l a r g e i s s u e s w i t h a widespread d i s t r i b u t i o n are more l i k e l y t o have a good and issues.  c o n t i n u i n g market than s m a l l  Second, the e x i s t e n c e of a s i n k i n g fund a i d s market-  a b i l i t y not o n l y t h r o u g h i t s own  operations  but a l s o because  others w i l l be more w i l l i n g t o trade i n the b e l i e f t h a t w i l l always be ingness  some support  f o r the i s s u e .  there  T h i r d l y , the  o f the d e a l e r s to c a r r y i n v e n t o r i e s and  will-  take short  p o s i t i o n s enables them t o meet c l i e n t o r d e r s when t h e r e i s a temporary imbalance o f supply and demand.  F i n a l l y , perhaps  the most important determinants are the a t t i t u d e s and o f the h o l d e r s .  Besides  f a c t that holders regard  motives  the low r i s k o f c a p i t a l l o s s , short-term  bonds as l i q u i d  the  investments  causes them t o be t r a d e d more a c t i v e l y . These c o n s i d e r a t i o n s i n d i c a t e t h a t t h e r e i s an r e l a t i o n s h i p between the l e n g t h o f term t o m a t u r i t y a c t i v i t y i n the secondary market and  f e d e r a l government t o be t r a d e d most a c t i v e l y . showing secondary market s a l e s as estimated  secu-  Furthermore,  one would expect the l a r g e r i s s u e s o f the v i r t u a l l y  317.  and  t h a t money market  r i t i e s would t h e r e f o r e be traded most a c t i v e l y .  ^Canada, o p . c i t . pp.315 -  inverse  riskless  Table  by the  II,  Investment  TABLE I I  SECONDARY MARKET SALES Amount outstanding"  Secondarymarket sales  $ millions  $ millions  Government o f Canada Treasury B i l l s 3 years and under 3 years t o 10 years  Over 10 years  P r o v i n c i a l Bonds M u n i c i p a l Bonds C o r p o r a t e & Other Bonds Finance Company and Commercial Paper  $2165 1+176 32^-9  1+856 7156  3096 5958 1510°  a  Relationship of market s a l e s t o bonds outstanding  Distribution of secondary market s a l e s  $6507 5532 7M-2 1212 1225 388 1663  301 132 23 25 17 13 20  36.3 30.9  651+  h3  3.6  $17923  h.l  6.8 6.8 2.2 9.3  100#  ^ a b l e based on secondary s a l e s made o n l y by members o f I.D.A. d u r i n g t h e i r f i s c a l years. ^Gross amounts outstanding as o f December 31> i s s u e s payable i n Canadian d o l l a r s . c  1962,  d i r e c t and guaranteed  1962  market  I n c l u d e s b o t h s h o r t - and long-term f i n a n c e company paper.  Sources;  Submission o f the I.D.A., Bank o f Canada S t a t i s t i c a l Summary and Corporate Paper Survey o f the Royal Commission on Banking and F i n a n c e .  D e a l e r s A s s o c i a t i o n , demonstrates t h a t such i s , i n f a c t , case.  E i g h t y percent  o f t o t a l t r a n s a c t i o n s were i n Government  o f Canada o b l i g a t i o n s and III.  seventy percent  YIELDS, PRICES, AND  or premium.  p r i c e at which i t i s t o be redeemed, and s e l l s i t at m a t u r i t y ,  with price fluctuations.  were i n t r e a s u r y  i f one  Par i s the  buys a bond a t  he need not be  concerned  However, i f he i n t e n d s t o trade  the secondary market, the p r i c e at which he w i l l buy w i l l not l i k e l y be the  same as the  be the y i e l d , because one  compensation f o r the use  the  should  an  inves-  be aware o f the v a r i o u s r e l a t i o n s h i p s i n v o l v e d .  t r u e i f the p r i c e d e c r e a s e s .  Yield.  The  The  As the p r i c e o f a bond  converse, o f course, i s  r e l a t i o n s h i p i s a mathematical  can b e s t be i l l u s t r a t e d by an example.^  t e n years ago  a c o r p o r a t i o n s o l d a t par v a l u e  year bond w i t h a h% coupon. now  One  would o r d i n a r i l y d e s i r e more  increases, i t s y i e l d decreases.  and  sell  of funds f o r a l o n g e r p e r i o d o f t i m e .  R e l a t i o n s h i p o f P r i c e and  one  in  larger  Other f a c t o r s a f f e c t the p r i c e o f the bond and tor  or  s t a t e d par v a l u e .  reason i s t h a t the longer the term t o m a t u r i t y , should  bills.  MATURITY  Bonds are s o l d a t par, d i s c o u n t ,  t h a t p r i c e and  the  o f $100  a twenty-  Suppose f u r t h e r t h a t t h i s company  wishes t o f l o a t a ten-year i s s u e but t h a t the  l e v e l o f i n t e r e s t r a t e s has  Suppose t h a t  increased  and  general  they must pay  6%,  °A.N. Mcleod, "What Management Should Know About I n t e r e s t Rates," The Business Q u a r t e r l y . XXV ( S p r i n g , I 9 6 0 ) , 19.  16 I f someone h o l d i n g a $100  u n i t o f the o l d i s s u e wishes t o  sell  he c o u l d o n l y o b t a i n $85.12, which i s the sum t h a t , w i t h  i t now  a h% coupon, w i l l give the buyer a net y i e l d t o m a t u r i t y o f He would not pay more because t h i s would decrease  h i s net  6%,  yield  to m a t u r i t y below the 6% he c o u l d o b t a i n i f he buys a u n i t o f the new for  issue.9  The  r e l a t i o n s h i p s between the y i e l d s and p r i c e s  the v a r i o u s terms t o m a t u r i t y are set f o r t h i n bond v a l u e  t a b l e s and the computations are based upon the f o l l o w i n g f o r m u l a :  P.V.  1  = i+  + i l  2  1  C i  1  Where: P.V.  =  Present Value o f p r i n c i p a l at m a t u r i t y compounded on a h a l f - y e a r l y b a s i s , p l u s Present Value o f i n t e r e s t i n s t a l m e n t s p a i d through the l i f e o f the issue.  C i n  • -  Coupon r a t e , payable semi-annually, Yield. Number o f years t o m a t u r i t y .  a  Causes o f Bond P r i c e F l u c t u a t i o n s .  There are a number of  f a c t o r s which a f f e c t the p r i c e of long-term bonds.*° i s the l e v e l o f c a p i t a l expenditures and new  The  borrowing.  first When  i n c r e a s e d s u b s t a n t i a l l y more bonds w i l l be p l a c e d on the market and, as i n any supply and demand s i t u a t i o n , a g r e a t e r p r i c e i n the form o f h i g h e r i n t e r e s t r a t e s must be p a i d .  However, t h e r e  9when market r a t e s change, the l o n g e r an o u t s t a n d i n g i s s u e has t o go t o m a t u r i t y , the g r e a t e r w i l l be the e f f e c t on the p r i c e at which i t w i l l be bought. T h i s i s because the y i e l d d i f f e r e n c e a f f e c t s the r e t u r n t o the h o l d e r f o r a longer p e r i o d of time. 1 0  F u l l e r t o n , o p . c i t . . Chapter  12.  17 i s the myriad o f a l t e r n a t i v e sources o f funds f o r p o t e n t i a l borrowers.  These i n c l u d e e q u i t y o f f e r i n g s , short-term i s s u e s ,  depreciation reserves, trade  l e a s i n g arrangements, r e t a i n e d  c r e d i t , and bank borrowing.  earnings,  These sources act as a  s a f e t y v a l v e f o r the Canadian long-term market and  i n the  have set a c e i l i n g on bond i n t e r e s t r a t e s i n p e r i o d s  past  of heavy  investment. A second i n f l u e n c e i s the debt management p o l i c y of f e d e r a l government. i n f l u e n c e can be  the  A v i v i d example o f the extent of t h i s  seen i n the C o n v e r s i o n Loan of 1 9 5 8 , where,  i n s p i t e o f Bank o f Canada e f f o r t s t o support the market, y i e l d s rose s u b s t a n t i a l l y . The  general  l e v e l o f economic a c t i v i t y i s probably the  most important i n f l u e n c e , not o n l y i n i t s own s i g n i f i c a n t l y , because o f the e x p e c t a t i o n a l b u s i n e s s expands and  r i g h t , but more  factor.  demands f o r i n v e s t o r savings  i n t e r e s t r a t e s w i l l r i s e , as e x p l a i n e d  above.  When  increase,  Expectations  o f a c o n t i n u i t y o f the expansion w i l l cause i n v e s t o r s t o p o s t pone long-term s e c u r i t y purchases as they can l a t e r them at a h i g h e r y i e l d . term o b l i g a t i o n s .  The  Thus they w i l l s h i f t i n t o decreasing  obtain shorter  demand f o r long-term secu-  r i t i e s w i l l I n i t s e l f be a cause of i n c r e a s i n g i n t e r e s t r a t e s . Monetary p o l i c i e s of the Bank of Canada can a c c e l e r a t e r e t a r d these i n f l u e n c e s and  i t s a c t i v i t i e s w i l l be  or  discussed  more f u l l y below. A f i n a l i n f l u e n c e i s the the United  States.  s u b s t a n t i a l source o f funds from  To the extent t h a t American i n v e s t o r s  can  18 be induced to place t h e i r funds i n Canadian bonds, interest rate increases w i l l be retarded.  In t h i s sense, Canadian out-  l e t s for investment are i n competition with American, so the general l e v e l of United States interest rates affects  the  Canadian. There are many factors to examine when attempting to predict the movement of long-term interest r a t e s .  The follow-  ing conditions generally indicate a f a l l i n long-term y i e l d s :  1 1  (1) The economy i s not expanding and credit conditions are easing so the demand for bonds should increase while the supply decreases. (2) Bank loans are stable or decreasing. (3') Construction and c a p i t a l expenditures are decreasing. C *) Corporate cash flow i s strong so less borrowing i s 1  required. (5) Bank of Canada monetary p o l i c y i s one of ease. (6) The federal budget i s close to balance. (7) Interest rates i n the United States and elsewhere are d e c l i n i n g . ( 8 ) The Canadian d o l l a r exchange rate i s f a l l i n g .  This  may, however, cause lack of confidence and retard the flow of i n v e s t i b l e funds to Canada because of fears of a further decline. (9) Dealer bond Inventories are low.  1 1  I b i d . . Chapter 12.  19  (10) There i s a general bearish tone In the market; that i s , expectations are dim for the foreseeable future. It should be noted that r a r e l y w i l l these economic trends a l l be i n the same d i r e c t i o n , so t h e i r r e l a t i v e importance must be weighed. The Yield Curve.  The r e l a t i o n s h i p between price and  maturity may be expressed graphically by the y i e l d c u r v e . ^ Figure I presents examples of a r i s i n g , f l a t , and a d e c l i n i n g y i e l d curve. The r i s i n g y i e l d curve r e f l e c t s an investor  preference  for cash or near-cash s e c u r i t i e s and they are only w i l l i n g to accept longer term issues at a higher y i e l d .  This s i t u a t i o n  i s common with generally low y i e l d s and expectations of the same; that i s ,  situations r e f l e c t i n g the conditions l i s t e d at  the end of the previous  section.  The f l a t y i e l d curve indicates an even d i s t r i b u t i o n i n investor preference between money and investments and there  is  no d i s c e r n i b l e d i r e c t i o n to business a c t i v i t y . The d e c l i n i n g y i e l d curve r e f l e c t s  an investor  preference  for investments and the supply of funds f o r longer term issues exceeds the demand. rities.  The opposite i s true for short-term secu-  The market thus indicates the expectation of d e c l i n i n g  bond yields and that these y i e l d s have reached t h e i r peaks.  12R ger A . Lyon, Investment P o r t f o l i o Management i n the Commercial Bank (New Brunswick, New Jersey, Rutgers University Press, I960), pp. 66-79. 0  Flat Yield •  •  Curve  /.  'Rising Y i e l d  Curve  FIGURE 1 YIELD CURVES  21 When d e c i d i n g u p o n t h e r e l a t i v e  merits of various  m a t u r i t i e s a n d y i e l d s t h e i n v e s t o r s h o u l d he aware o f two prime c o n s i d e r a t i o n s .  The f i r s t  i s that the longer the  m a t u r i t y , t h e g r e a t e r t h e p r i c e v o l a t i l i t y f o r a g i v e n change in  yield.  F o r example, i f i n t e r e s t  h o l d e r o f a hond must a c c e p t full to  time  to maturity.  the lower  cal  I t may be r e d e e m e d .  section of this  r e l a t i o n s h i p between p r i c e  price  yield  f o r the  t o a much l e s s e r e x t e n t t h a n a  bond w i t h f i f t e e n y e a r s b e f o r e i n a previous  relative  T h u s a n o u t s t a n d i n g hond w i t h one y e a r  m a t u r i t y w i l l be a f f e c t e d  plained  rates generally r i s e , the  As e x -  c h a p t e r , t h e mathemati-  and y i e l d w i l l  cause t h e market  o f t h e l a t t e r t o f a l l much more s t e e p l y . The  tion,  second  c o n s i d e r a t i o n , working i n the opposite  direc-  i s t h a t s h o r t - t e r m r a t e s a r e g e n e r a l l y much more v o l a t i l e  than long-term  rates.  Expectations extending  the f u t u r e a r e l e s s e r r a t i c t h i s tends rates.  than  t o dampen t h e r e l a t i v e  Furthermore,  issues, which allows  fest  themselves  f l u c t u a t i o n s o f long-term market e x i s t s f o r n e a r -  s u p p l y and demand c o n d i t i o n s t o m a n i -  sooner.  One may c o n c l u d e ,  t h e r e f o r e , t h a t s h o r t - and  long-term  r a t e s g e n e r a l l y move i n t h e same d i r e c t i o n b u t c h a n g i n g e c o n o m i c c o n d i t i o n s o r government p o l i c i e s q u i c k l y i n t h e short-term market. adverse  into  s h o r t - t e r m e x p e c t a t i o n s and  a b e t t e r secondary  term  a l o n g time  It  takes  are f e l t  more  a much  larger  change i n t h e s h o r t - t e r m m a r k e t , however, t o c a u s e  equal l o s s e s as i n the long-term  market.  22  The  y i e l d curve may be an extremely u s e f u l t o o l f o r an  I n v e s t o r who c a n d e r i v e the c y c l i c a l f l u c t u a t i o n s i n bond p r i c e s and p r o f i t a b l y v a r y the m a t u r i t y o f h i s p o r t f o l i o . F o r example, when long-term r a t e s a r e low, one should t r y t o i n v e s t i n s h o r t - t e r m bonds u n t i l the t r e n d changes.  Others  w i l l t r y t o do the same, however, and t h e i n c r e a s e i n demand f o r s h o r t - t e r m bonds w i l l decrease ness.  their relative  attractive-  N e v e r t h e l e s s , t h e r e i s s t i l l much room f o r s u b s t a n t i a l  p r o f i t s i f good judgment i s e x e r c i s e d : . . . I f the C o n v e r s i o n Loan bonds o f September, 1983, are taken as a bench-mark, any one who c a l l e d the main t u r n s c o u l d have s o l d t h i s bond at par o r c l o s e t o i t i n September, 1958, j u s t a f t e r the i s s u e came out (or s o l d i t s h o r t ) , bought a t 83 a year l a t e r , s o l d a t 95 i n September, I960, bought back a t 89 i n December, s o l d a g a i n a t 9h i n August, 1961, and bought back i n J u l y , 1962, at 88, a t o t a l movement o f h6 p o i n t s i n four years. ^ 1  F u r t h e r i m p l i c a t i o n s o f the y i e l d curve s h a l l be d i s c u s s e d i n Chapter IV. Y i e l d s and Taxes. r o l e and investment  Tax c o n s i d e r a t i o n s p l a y an Important  i n lower coupon d i s c o u n t bonds can sub-  s t a n t i a l l y Increase the net r e t u r n t o t h e c o r p o r a t e l e n d e r . In fche words o f one t r e a s u r e r who responded t o a q u e s t i o n n a i r e c i r c u l a t e d by the w r i t e r : ...A matter o f some g e n e r a l i n t e r e s t i s the c h o i c e by the c o r p o r a t e i n v e s t o r o f " d i s c o u n t " versus "non-discount" s e c u r i t i e s o f e q u i v a l e n t quality. U s u a l l y , the c h o i c e o f the tax-paying c o r p o r a t e buyer i s elementary - he seeks the h i g h e s t a f t e r - t a x y i e l d , o t h e r market f a c t o r s  ^ F u l l e r t o n , o p . c i t . . p.216.  23 being i n balance. However, under the existing Federal Income Tax arrangements, which provide higher incentive-type C a p i t a l Cost Allowance aimed at inducing the rapid expansion of Capital Expenditures, there may be times when a company has very large deductions and i t s taxable income i s greatly reduced, over the short term. In such circumstances, the company could maximize i t s cash flow by concentrating on "discount" securities. Practice indicates that a c a p i t a l gain i n "discount" s e c u r i t i e s i s free of tax when the s e c u r i t i e s are issued by Governmental bodies and when the gross y i e l d , including c a p i t a l gain, does not exceed the coupon rate by more than onethird. If the discount i s not so high as to make the f u l l y i e l d taxable there are further implications for dealing i n the secondary market.  The tax i s based on the coupon rate rather  than the y i e l d , so when interest rates r i s e causing outstanding bonds to be bought at a discount, the market w i l l act to diminish t h i s discount because of the tax advantage so gained. IV.  INFLUENCE OF THE GOVERNMENT AND THE BANK OF CANADA  The Bank of Canada.  In general, monetary p o l i c y r e i n -  forces the natural tendencies that produce c y c l i c a l swings i n Interest r a t e s .  The Bank of Canada w i l l normally promote low  y i e l d s i n recession to stimulate new investment and higher rates i f an expansionary tendency appears to be too great. On the other hand, monetary p o l i c y may be used to offset rather than reinforce normal market forces i f i t appears to the authorities that the market i s acting inappropriately. The most important techniques of monetary p o l i c y are the Bank of Canada's open market operations.  For example, i f the  authorities wish to ease c r e d i t and lower interest  rates,  they w i l l buy s e c u r i t i e s and thus place more cash i n the hands of the chartered banks.  Because the l a t t e r have an  8% cash reserve, there w i l l be a multiple expansion of the money supply by 12.5 times i f a l l the new cash i s and no hoarding occurs.  The increased amount of  spent investible  funds i n the hands of the public w i l l have the effect of increasing demand and thus lowering y i e l d s ; the same effect w i l l , of course, be augmented by the Bank's own o r i g i n a l purchases.  F i n a n c i a l intermediaries also play a large r o l e  i n t h i s process, and as a portion of the increased cash i s invested i n them, they w i l l increase t h e i r own loans and investments. If. the market seems to be acting i n an inappropriate manner, the Bank of Canada's judicious use of open market operations can have a s t a b i l i z i n g f o r c e . ^  For example, a  buyer's "strike" appeared to develop i n September, 1961, and long-term rates rose.  The Bank thus bought a large  number of bonds and the tendency to hold prices firm gave confidence to the market and induced buying. The Bank's reserve b i d on the weekly treasury b i l l auction can substantially influence the short-term market. If tight money i s the object, the Bank w i l l bid high, thus forcing short-term rates up.  l l f  I b i d . . pp. 108-9  25 Another form of control i s the Bank Rate at which the Bank of Canada w i l l lend to chartered hanks or enter sale and repurchase contracts with money market dealers, i n i t s function as lender of l a s t r e s o r t .  By a l t e r i n g the Rate i t  becomes more or less expensive for banks and dealers to obtain funds from the Bank of Canada and t h i s cost can be transmitted throughout the market.  Of greater significance regarding the  Bank Rate i s i t s use as a transmission of the a u t h o r i t i e s ' intentions regarding p o l i c y .  The Bank' Rate l o s t much s i g n i -  ficance i n t h i s respect between 1956 and 1962, when i t was fixed at l A of 1% above the average weekly treasury b i l l tender, although the l a t t e r may also be influenced by the Bank's open market operations.  Since June, 1962, the Bank  Rate has once again been fixed although dealers can obtain funds at the lower of the p r e v a i l i n g rate or l A of 1% above the average weekly treasury b i l l tender. A t h i r d method of Bank of Canada influence i s moral suasion.  For example, by "gentlemen's agreement" the char-  tered banks hold 7% of t h e i r assets i n the form of l i q u i d investments  (treasury b i l l s and day-to-day loans) i n addition  to t h e i r statutory eight percent cash reserve r a t i o .  Finally,  the Bank i s empowered to a l t e r the Chartered Banks' statutory reserve r a t i o from 8% to 12$ by the amount of 1% per month, although t h i s authority has,yet to be exercised. A group working for the Royal Commission on Banking and Finance made a study of the effects of monetary p o l i c y on the corporation.  One of t h e i r conclusions was the follbwing:  26  . . . I n short, changes i n short-term interest rates do not pass unnoticed even though firms may r i g h t l y judge on the basis of past experience that not too much significance should be read into every week-to-week change i n the treasury b i l l r a t e . ... If the change i n short-term rates p e r s i s t s , or i f the i n i t i a l change i s a decisive one, the effect w i l l be f e l t i n the market f o r longterm s e c u r i t i e s . Corporations planning new issues are quickly made aware of any development i n the bond market which w i l l r a i s e the price they must pay i n order to obtain accommodation. S i m i l a r l y , i f rates f a l l , even firms which do not have an immediate need for funds may have the favourable conditions drawn to t h e i r attention.15 Government Debt Management P o l i c y .  There are several  opposing views regarding the federal government's debt management p o l i c i e s . ^ counter c y c l i c a l .  The f i r s t i s that the debt p o l i c y should be For example, when the monetary conditions  indicate a need for r e s t r a i n t , a large long-term Issue should be f l o a t e d .  An opposing view i s that the debt service  should be kept as low as possible, on shorter term issues.  charges  so emphasis should be more  A t h i r d argument Is that the flows of  government debts should be regular i n amounts and dates of issuance, and of a v a r i e t y of maturities, so as not to cause violent disturbances i n the bond market. Because the actual p o l i c y should l o g i c a l l y follow the theory the Minister of Finance and/or the Governor of the  15J.M. Young, J . F . H e l l i w e l l , and W.A. McKay, "The Response of Corporations to Monetary P o l i c y , " A Study Prepared f o r the Royal Commission on Banking and Finance, December, 1962. (Unnumbered r e p r i n t ) , p . I V - 7 . i^canada, o p . P i t . . p.^50.  27 Bank of Canada may hold at the time, one can perceive a great deal of confusion i n the minds of participants i n the bond market, which i s greatly influenced by government issues.  No  one clear p o l i c y has predominated i n recent years and the disastrous effects of the 1958 Conversion Loan are witness to the implications of such a confusion of p o l i c i e s .  When the  issue was floated the Minister had announced a large government d e f i c i t three months previously, i n view of recessionary conditions.  This would indicate the need for monetary expan-  sion and short, as opposed to longer, term borrowing.  The  Loan, however, extended the term of the Government's debt. Interest rates soon penetrated the  on the the $2152  m i l l i o n of 1983's and when the Bank of Canada withdrew i t s support i n November, t h e i r prices f e l l sharply.  Such an  event greatly reduced confidence i n the bond market and showed lack of sophistication even at the l e v e l of the Minister of Finance and the Governor of the Bank of Canada. ^ 1  1 7 F o r a f u l l discussion on the Conversion Loan of 1958, see F u l l e r t o n , o p . c i t . . Chapter 15.  28  CHAPTER III THE CANADIAN MONEY MARKET  The section of the hond market which includes i n s t r u ments from maturity of one day to three years, i s known as the money market.  This chapter s h a l l concern i t s e l f  with  the money market as a vehicle for investment and borrowing by the non-financial corporation.  Its h i s t o r y s h a l l f i r s t  be considered, followed by a d e s c r i p t i o n of the and i n s t i t u t i o n s I.  instruments  involved.  HISTORY OF THE CANADIAN MONEY MARKET  The b i r t h of the Canadian money market a c t u a l l y took place as e a r l y as March, 1934-, when Government of Canada 9 1 day treasury b i l l s were f i r s t  sold.  Some foresight at that  time could have predicted the evolution of the Canadian money market of today, as within these treasury b i l l s lay a major aspect of money market philosophy: The Government benefited by " r o l l i n g over" a portion of i t s debt i n short-term secur i t i e s , thus paying a lower Interest r a t e , and the buyers gained a safe, l i q u i d investment.  These b i l l s were sold  almost exclusively to the chartered banks.  There was no need  to trade amongst themselves as the Bank of Canada maintained a very narrow spread between i t s buying and s e l l i n g  prices.  Thus the chartered banks could deal d i r e c t l y with the Sank: with assurance of l i q u i d i t y and l i t t l e  r i s k of l o s s .  A major  29  benefit t h i s brought to the banks, then, was an a b i l i t y to adjust t h e i r cash positions e a s i l y .  By 1937 tenders were  called every two weeks and i n 1953 a weekly tender was started. Toward the end of World War II some investment  dealers  began to show interest i n b i l l s , and on rare occasion, bought them on behalf of c l i e n t s .  They were discouraged from c a r r y -  ing an inventory, however, when the Bank of Canada increased i t s spread between buying and s e l l i n g p r i c e s , so as much as l A  of 1% i n y i e l d per annum could be l o s t by s e l l i n g to the  Bank before maturity.  The market for treasury b i l l s was s t i l l  extremely t h i n and the returns were not worth the r i s k of loss when the need for cash arose.  Another development i n the same  period was the entrance into the market of installment  finance  companies, which followed the Government's lead by carrying some debt i n short maturities, but at the start t h i s was on a very minor scale. In 1953 "the authorities i n the Bank of Canada saw the advantages of widening the market by f a c i l i t a t i n g the a b i l i t y of investment dealers to carry inventories of treasury b i l l s . Therefore, they i n s t i t u t e d purchase and resale agreements with bond dealers who would take a jobbing position i n the short-term Government of Canada market. ments a dealer could, within established,  Under these arrangenegotiable  limits,  s e l l treasury b i l l s and short-term Government of Canada bonds to the Bank of Canada with the promise to repurchase after a short period - usually t h i r t y days - at a predetermined y i e l d  30 to the hank. Mr. Coyne as  The objectives  of t h i s r u l i n g were related by  follows: These arrangements offer jobbers an alternative method of financing invent o r i e s of such s e c u r i t i e s so that they are at a l l times able to meet the r e quirements of t h e i r customers, including other bond dealers who only occasionally have transactions i n short-term securities. A further effect of t h i s arrangement i s the r e l i e v i n g of the market from excessive pressure i n the event of a temporary shortage of cash on the part of the chartered banks. Development of a broader market i n treasury b i l l s and short bonds i s of value to chartered banks wishing to adjust t h e i r cash positions either , by increasing or reducing t h e i r p o r t f o l i o s .  In A p r i l 195^- a development took place which many regard as the major stimulus to a t r u l y effective money market.  As  an item In the r e v i s i o n of the Bank Act, the chartered banks were i n v i t e d to make day-to-day loans to the jobbers.  The  reasoning behind t h i s action and the workings of the day-today loan market were outlined by the Governor of the Bank of Canada i n his 1954- Annual Report: The introduction i n mid-June of what are known as day-to-day loans was an important development affecting both banking practices and the short-term securities market or "money market". These loans are made by chartered banks against the pledge of treasury b i l l s and Government of Canada bonds maturing within three years. The borrowers are those bond dealers who are prepared to act as jobbers i n the short-term market and who have entered into purchase and re-sale agreements with the Bank of Canada. Day-to-day loans may be c a l l e d f o r payment at any time and the willingness of the Bank of Canada .  Bank of Canada, Annual Report. 1 9 5 3 . P«8  31 to purchase securities under resale agreements provides an underlying assurance of l i q u i d i t y . From January 1953 to June 195 * the Bank of Canada had made a considerable amount of funds available for the financing of dealers' inventories of treasury b i l l s and short-term Government bonds through purchase and r e sale agreements. The t o t a l provided i n t h i s way reached a maximum of $73 m i l l i o n i n June. Subsequently, dayto-day loans from the chartered banks provided the financing i n amounts which, as at the close of business on Wednesdays, varied between a low of $hh m i l l i o n and a high of $135 m i l l i o n , and Bank of Canada f a c i l i t i e s were infrequently used.2 1  The introduction of day-to-day loans has had the further advantage of f a c i l i t a t i n g adjustment of cash reserve of the chartered banks.  positions  Under t h i s arrangement, when t h e i r  minimum cash reserve r a t i o s were strained, they could c a l l some of these loans before noon and the dealers were obliged to r e pay on the same day.^  When a loan was c a l l e d , the dealer  would t r y other banks before entering the more expensive purchase-and-resale  contract with the Bank of Canada.  It was  a c t u a l l y quite l i k e l y that the dealer could find accommodation at another bank as the bank which c a l l e d f o r repayment of the loan probably l o s t i n the Clearing House.  Those which had  gained would presumably have t h i s surplus cash on hand for the dealer.  2Bank of Canada, Annual Report. 195*+. p. 11. 3when adjusting l i q u i d i t y positions with the Bank of Canada there was between one and four-days' delay. See I b i d . , p.12.  32 One of the main advantages to the introduction of dayto-day loans was the broadening of the market for. treasury bills.  This led to a closer trading on prices and tended to  narrow the spread between buying and s e l l i n g r a t e s .  In  e f f e c t , i t increased the l i q u i d i t y of treasury b i l l s by r e ducing the loss on s e l l i n g them before maturity, and indeed, gave the needed confidence to corporations to invest tempo-  4r a r i l y i d l e cash.  This widening of the market i s evidenced  by the fact that the treasury b i l l holdings of the general public increased from $24- m i l l i o n i n 1953 to $208 m i l l i o n i n  1954-.  5  To start the market i n an orderly manner, the dayto-day loan rate was agreed at 1 1/2% and thereafter determined competitively i n response to monetary conditions.  It has  usually been s l i g h t l y below the tender rate on 91-day treasury b i l l s , but has, e s p e c i a l l y i n conditions of extreme credit stringency, r i s e n above the treasury b i l l r a t e .  Under normal  conditions, when the day-loan rate has been lower, dealers could make a small p r o f i t just by using these loans to finance t h e i r treasury b i l l inventory.  To give further  assurance to the jobbers the Bank lowered i t s y i e l d on sale and repurchase contracts to equal the Bank Rate.  This penalty  charge had previously been approximately 1/4- of 1% above the Bank Rate. ^R .N. Macintosh, "Broadening the Money Market," The Canadian Banker. LXI (Autumn, 1954-), 67. -'Bank of Canada, S t a t i s t i c a l Summary, F i n a n c i a l Supplement. 1962, p.51.  33 Another item of the Bank Act r e v i s i o n of 195 * increased 1  the cash reserve requirements of the chartered banks from 5% to 8%.  Previously, however, the 5% had to be maintained  throughout the month so, to allow themselves the necessary leeway, the banks generally maintained a reserve of about 10%. The r e v i s i o n demanded only that the 8% minimum was a monthly average.  Thus there was less r i s k i n reducing to an amount  very close to t h i s minimum and, i n f a c t , by December, 195*+> the average reserve for the banks was 8.7% with several much closer to the 8% minimum.^ The net effect was to add further l i q u i d i t y to the system and thus add to the success of dayloans i n t h e i r function of increasing short-term security dealing.  A further stimulus to the same end was given by  generally declining interest rates at the time day-loans were introduced• In 1955 an agreement took place between the Bank of Canada and the chartered banks whereby the l a t t e r would thereafter maintain an average monthly 7% r a t i o of l i q u i d reserves to t o t a l deposits i n addition to the 8% statutory cash r e serve.  The stated purpose of the agreement was to "...make  for a f i n a n c i a l system which w i l l respond more quickly, smoothly and predictably to measures of monetary r e s t r a i n t 7  when these are r e q u i r e d . . . " , but because the reserve  consisted  of day-to-day loans and treasury b i l l s , a further advantage was  Bank of Canada, Annual Report. 195*> p . 1 1 . l  ?Bank of Canada, Annual Report. 1955> p . 1 7 .  3>f an expansion of t h e i r markets.  Thus, with greater day-to-day-  loans the dealers could carry larger t r e a s u r y - b i l l inventories. When a jobber received an order for a security not i n stock and had to purchase i t , he usually did not have the cash available.  He therefore had to obtain a c e r t i f i e d cheque from  his bank on the understanding that he would cover i t l y upon sale of the security.  immediate-  He might also need a c e r t i f i e d  cheque to repay a bank loan i n order to release a security (used as c o l l a t e r a l for the loan) for s a l e , or to employ i t as security for a loan from another bank.  In 195^-, the charge  for the "over-certification" service was 1 / 1 0 0 of 1% per diem. This was burdensome so the banks reduced the charge to 1/250 of 1% per diem, but even the reduced rate was regarded as excessive and impeded the free flow of funds i n the money market. In 1957» the banks agreed to eliminate the charge for bona fide money market transactions; that i s , movement of inventory from one bank to another or to the Bank of Canada on a repurchase agreement.  The "over-certification" charge  s t i l l had to be paid when the loan was for the purposes of withdrawing securities for sale, buying s e c u r i t i e s ,  or  g  borrowing money outside the banking system.  The result of  the p a r t i a l elimination of the onerous charge was a further stimulus to quick and active dealer operations. J . S . G . Wilson, "The Canadian Money Market Experiment," Banca Nazionale d e l Lavoro Quarterly Review, Rome, No. * *, March, 1958, V>3^ 1  1  35  A f i n a l milestone i n the development of the Canadian money market took place i n 1957 when the Bank of Canada decided to make better use of i t s own f a c i l i t i e s .  Since  then, any investment firm could deposit securities at any Bank of Canada agency across the country and have them r e leased at any other. In summary, the Canadian money market has b a s i c a l l y been the product of the l a s t ten years.  Its major accom-  plishments have been better monetary control by the Bank of Canada and increased use of otherwise i d l e funds.  The former  resulted from quicker reactions by the chartered banks, e s p e c i a l l y regarding t h e i r l i q u i d asset reserves, while the l a t t e r has been the effect of the creation of near-cash s e c u r i t i e s i n place of cash.  Their mobility and trading  p o s s i b i l i t i e s have greatly increased as has the general confidence i n t h e i r l i q u i d i t y . The above discussion related mainly to treasury b i l l s and day-loans but the benefits of the money market were not limited to those s e c u r i t i e s .  Many other instruments have  become well known to the investor of short-term funds since 1954- and within these instruments l i e s the key to nonf i n a n c i a l corporation p a r t i c i p a t i o n . II.  CANADIAN MONEY MARKET INSTRUMENTS  The c r i t e r i o n commonly used to delineate a money market instrument Is maturity from date of issue of one day to three years.  These s e c u r i t i e s have varying c h a r a c t e r i s t i c s and  those deserving emphasis for investment decisions are maturity,  36 y i e l d , l i q u i d i t y and r i s k . Government of Canada Treasury B i l l The treasury h i l l i s the shortest term obligation of the federal government.  Rather than carry Interest coupons, they  are sold at a discount.  The y i e l d , however, may not be treated  as a c a p i t a l gain, and i s f u l l y taxable.  The chartered banks  and investment dealers submit bids at an auction every Thursday, either on t h e i r own behalf or on a customer^ order. are allocated the next day on the basis of the highest u n t i l the weekly allotment i s bought.  The b i l l s offers  Quite often banks and  dealers w i l l submit several bids at different prices to ensure that they at least obtain some b i l l s , but at the same time do not pay an excessive price for a large amount.  Maturities from  date of issue are generally 91 and 182 days and denominations range from $1000 to $1,000,000. The chartered banks and the investment dealers must also compete with the Bank of Canada, which holds a sizable amount of treasury b i l l s maturing each week.  Through i t s own offered  price the Bank can have a substantial influence on the amount of b i l l s held within and outside i t s own accounts and, i n t h i s way, help mitigate i t s monetary p o l i c y .  Furthermore, the Bank  submits a reserve bid for the f u l l amount of the issue to prevent a boycott by other participants from unreasonably i n c r e a s ing the y i e l d . ^  The Bank of Canada also deals i n treasury  ^Bank of Canada, Annual Report. 1956, p.**8.  37 b i l l s on the open market, and w i l l do so e s p e c i a l l y i f receives more or less than expected at the auction.  it  To  follow a neutral p o l i c y means that the bank attempts to win an amount equal to that maturing i n i t s own p o r t f o l i o each week.  From the point of view of monetary p o l i c y , then, a  decrease i n the t r e a s u r y - b i l l rate has the same effect as a decrease i n the bank rate or an increase i n chartered bank cash reserves. Holdings of t h i s security by the general p u b l i c  1 0  climbed from $2*+ m i l l i o n on December 31, 1953, to $208 m i l l i o n on the same date i n 195^, and this increase can be attributed mainly to the development described i n the previous section of t h i s chapter.  In the l a s t half of 1959, a peak was reached  when the general public held as much as $786 m i l l i o n , although by the l a s t h a l f of 1963, the general p u b l i c ' s holdings were between f500 m i l l i o n and $600 m i l l i o n . t h i s downward trend to several possible  1 1  F u l l e r t o n attributes causes.  1 2  (1) The rate on treasury b i l l s establishes the l e v e l for the whole market with those of other money market securities  just high enough to attract buyers away  from them.  It should be noted that treasury b i l l s  and short-term Government of Canada bonds are the  The Bank of Canada S t a t i s t i c a l Summary uses the categories of Government, Bank of Canada, Chartered Banks and the General P u b l i c . 11  B a n k of Canada, S t a t i s t i c a l Summary. January, 196 *, 1  p.19.  12  F u l l e r t o n , o p . c i t . , pp.178-9.  38 safest and most highly l i q u i d money market i n s t r u ments, but with greater s o p h i s t i c a t i o n ,  investors  are more able to judge the safety of other secur i t i e s and gain a greater y i e l d , (2) As noted above, the discount on treasury b i l l s  is  f u l l y taxable, so there i s a movement to shortterm discount bonds which can p a r t i a l l y avoid the tax, (3) The introduction i n 1961 of the 15% withholding tax on treasury b i l l discount reduced the sale to nonresidents. (4-) B i l l s mature only on Fridays and each maturity i s not always a v a i l a b l e , so these securities  are less  f l e x i b l e than some others. Holdings by the chartered banks, on the other hand, have increased s u b s t a n t i a l l y , e s p e c i a l l y i n the year 1956, when they agreed to hold a 15$ l i q u i d reserve.  Between the 1955 and 1956  year ends, the chartered banks increased t h e i r p o r t f o l i o of treasury b i l l s from $4-30 m i l l i o n to $74-3 m i l l i o n . Table III shows the d i s t r i b u t i o n of holdings on December 31, 1955 and January 1, 1964-.  It becomes evident from an  observation of these figures that the treasury b i l l has evolved from a major vehicle of money market investment to an i n s t r u ment mainly f o r the support of chartered bank l i q u i d i t y . While corporate interest  i n treasury b i l l s i s d e c l i n i n g ,  the l i q u i d i t y feature s t i l l continues to be an incentive. Investment Dealers Association reported that at the end of  The  39  TABLE III  DISTRIBUTION OF TREASURY BILL HOLDINGS (Dollar figures i n m i l l i o n s )  December 31,  Bank of Canada  i  Amount  %  26h  21.2  H69  20.9  35.1  1291  57.1  51  2.9  ^•30  19.1  22»fl  100.0  36  ho.3  General Public Total  Sourcet  January 1, 196^  Amount  Chartered Banks Government  1955  122**  100.0  Bank of Canada, S t a t i s t i c a l Summery. January, 196 *-, pp.18-19. 1  1961 the dealers had 9*1% of the general public*s holdings  2  and t h i s , together with the chartered hanks' share, provides a good market for the security.  Further evidence of trading  a c t i v i t y i s given i n Table II of the previous chapter,. Short Term Government of Canada Direct and Guaranteed Bonds Table II also shows extensive market trading of shortterm Government bonds.  While they are traded a c t i v e l y , how-  ever, t h e i r r i s k of loss through interest rate f l u c t u a t i o n i s greater than that on treasury b i l l s because of t h e i r longer term to maturity.  As of January 1, 1964-, the general public  held $14-72 m i l l i o n ,  l l f  or kl% of the t o t a l outstanding of  maturity up to two years.  This i s substantially larger than  t h e i r holdings of treasury b i l l s , which were $4-30 m i l l i o n on the same date.  The incentive to corporate investors i s the  low coupon discount feature which gives a net y i e l d greater than that on treasury b i l l s and the securities are p a r t i c u l a r l y a t t r a c t i v e when i t i s known that the temporarily i d l e funds w i l l not be needed for a longer time. It should be noted that long-term government bonds are occasionally bought as a short-term investment, and i f not purchased at date of issue, there i s an active market for them.  A major c r i t i c i s m of the 1958 Conversion Loan was that  ^Investment Dealers Association, B r i e f to the Royal Commission on Banking and Finance. Appendix G, p . 5 . llf  B a n k of Canada, S t a t i s t i c a l Summary, January 1964-, p.18.  hi  i n t h e i r enthusiasm to s e l l the entire issue, dealers convinced t h e i r customers to buy longer term bonds i n exchange for those of near maturity they held at the time.  When the market  broke, of course, a severe loss on sale was the unfortunate result. P r o v i n c i a l and Municipal Issues In  1958»  B r i t i s h Columbia pioneered the p r o v i n c i a l  treasury b i l l market and several other provinces followed i n the e a r l y s i x t i e s .  In e a r l y 1 9 6 2 , Manitoba and Saskatchewan  each began to hold regular weekly tenders for $1 m i l l i o n of three-month treasury b i l l s with the i n t e n t i o n , i n each case, to bring the t o t a l amount up to $13 m i l l i o n .  Some of the  weekly offerings were subsequently withdrawn, and because of the t h i n market, the bid has occasionally been refused. Nevertheless, the experiment, on the whole, seems to have been a successful  one. -* 1  Provinces have, i n a d d i t i o n , borrowed heavily by the short-term discount bond of under two-year maturity, and the p a r i t y bond.  Table IV shows the d i s t r i b u t i o n by provinces of  short-term d i r e c t debt as of March 3 1 ,  1962.  Secondary market sales were only 17% of the t o t a l amount outstanding (see Table II) and t h i s indicates a narrow market after the o r i g i n a l issue.  As i n the bond market generally,  yields vary with the size and debt capacity of the province.  ^Canada, The Royal Commission on Banking and Finance (Ottawa: The Queen's P r i n t e r ,  196*0,  p.321.  TABLE IV PROVINCIAL DIRECT DEBT - SELECTED ISSUES OUTSTANDING , MARCH 31, 1962 ( D o l l a r f i g u r e s i n thousands)  New foundland Bonds o f Maturity: 1 year 1 1/2 years 2 years 2 1/2 years 3 years Sub T o t a l  P.E.I.  N.S.  mm  1350  Source:  -  Quebec  -  7500  1350  12500  -  mm  1350  12500  Ontario  28000 24-000 1000 21500  5000  Treasury B i l l s of maturity of l e s s t h a n two years TOTAL  N.B.  -  -  74-500  19500 19500  74-500  Manitoba  2500 14-000  Sask.  A l t a . B.C. T o t a l  36000 2500 4-8300 2000 34^50  8000 14-50 1000 7950  16500  184-00  40562  8000  57062  264O0  -  -  123250  68062  -  -  Dominion Bureau o f S t a t i s t i c s , F i n a n c i a l S t a t i s t i c s o f P r o v i n c i a l Governments I96I, D i r e c t and I n d i r e c t Debt, Year Ended March 31, 1962, pp.10-11.  191312  k3  Many of the larger municipalities have entered the treasury b i l l market with repayments to come from tax r e c e i p t s . It was estimated that approximately $60 m i l l i o n of short-term paper was outstanding i n mid-1962, about h a l f of which was issued by Metropolitan T o r o n t o . ^ 1  The market f o r these issues  i s generally t h i n although corporate treasurers would ordinari l y buy municipal treasury b i l l s with the intention of holding them u n t i l maturity. Finance Company Paper The sales finance companies have grown considerably since World War I I through the great upsurge i n durable consumer buying, manifest p r i n c i p a l l y i n the automobile.  These  i n s t i t u t i o n s finance the installment sales of durable goods by dealers and d i s t r i b u t o r s to i n d i v i d u a l consumers, business, and industry.  The largest i s Industrial Acceptance Corporation  with assets as of March, 1 9 6 3 , of $7%2 m i l l i o n , and i t i s  fol-  lowed by Traders* Finance Corporation and General Motors Acceptance Corporation of Canada. By keeping some of t h e i r debt i n the money market, finance companies obtain the advantage of lower rates of i n terest normally available on short-term borrowings, and are able to reduce t h e i r debt quickly i f the requirement for funds diminishes because of a decline i n t h e i r receivables.  Too  much reliance here, however, would make t h e i r f i n a n c i a l p o s i t i o n  Ibid  vulnerable during periods when short-term funds are i n small supply.  Such a case occurred at the end of December, 1963 >  when I n d u s t r i a l Acceptance Corporation raised t h e i r rate to \% even f o r ten-day money.  Previously, i n December, ten-day  paper had been issued by that company f o r rates varying from  3 l / 8 # to 3 1/2$.  17  Fluctuations i n the sales of automobiles cause t h e i r demand for short-term funds to vary widely, but even when they find they have enough notes outstanding, they w i l l renew some of them to accommodate t h e i r regular purchasers.  The  rate of growth of finance companies has been huge and they present much opportunity f o r investment.  As of December 31>  1963 t h e i r estimated demand and short-term notes payable i n Canadian d o l l a r s amounted to 1731 m i l l i o n and t h i s shows a substantial increase from the $*+93 m i l l i o n at the same date  in I960.  1 8  Of p a r t i c u l a r interest to the investor i s the  safety  of these instruments, as he i s now out of the realm of govern1  ment o b l i g a t i o n s .  The security i s generally the company's own  volume of installment notes receivable, having a face value i n excess of the p r i n c i p a l amount of i t s own l i a b i l i t i e s . ^ 1  The  ' F i n a n c i a l Post. December 2 8 , 1963, p . 3 . ^Dominion Bureau of S t a t i s t i c s , Business F i n a n c i a l S t a t i s t i c s : Selected F i n a n c i a l I n s t i t u t i o n s . March, 196M-. 9 o r example, a l l of I . A . C . ' s notes (short- and long term) are required by i t s trust deed to be secured by notes receivable to the extent of 112$. 1  F  backing these receivables o f f e r , then, i s of utmost importance and one i s encouraged to note that losses of the largest finance companies are less than 1%. They also have substantial l i n e s of c r e d i t at the banks, and because of the r i s k of large redemptions without s u f f i c i e n t new buyers, maturity dates are staggered.  Furthermore, there i s a constant inflow of cash  from receivables. The secondary market i s r e l a t i v e l y i n a c t i v e , and a participant i n the money market stated to the writer that a few dealers attempt to help out t h e i r c l i e n t s i f they f i n d themselves needing cash, but that there i s no guarantee of liquidity.  Nevertheless, when a corporate treasurer has s u r -  plus funds available for which he knows the exact date on which they w i l l be required, he can generally t a i l o r the maturity date accordingly. Rates offered by the different finance companies are normally i n r e l a t i o n to t h e i r s i z e , but the difference minimal between the largest ones.  is  Furthermore, interest  rates can also d i f f e r between companies according to supply and demand conditions; for example, Traders' rates may be l e s s than I . A . C . ' s when the l a t t e r has more notes on the market or s u b s t a n t i a l l y increases i t s issue i n a short space of time.  This s i t u a t i o n i s analogous to the long-  term rates of Quebec and Ontario bonds described i n the previous chapter.  Table V shows some of the companies  involved and t h e i r rates as of December 31j 1963*  TABLE V  FINANCE COMPANY RATES, DECEMBER 31, 1963  30 - 89 days Traders Finance  Corporation  h  l/k%_  90 - 179 days h 3/8%  if  h 1/8%  h  l/k%  General Motors Acceptance Corporation of Canada  if  h 1/8%  h  l/k%  Laurentide F i n a n c i a l Corp.  h 1/8- h  P a c i f i c Finance Corporation  h  h 1/8%  United Dominions Corporation  h  h  Industrial  Source:  Acceptance Corp.  l/h%  iMo  h 1/2% h  l/h%  h 3/8%  McLeod, Young, Wier and C o . , "Weekly Money Market Quotations".  Commercial Paper Commercial paper was f i r s t used i n Canada i n the e a r l y 19 f0's although i t s major stimulus came i n 1958 when the 1  demand for automobiles - and thus the supply of finance paper was depressed and the treasury b i l l rate was very low.  Also,  since 1958, the prime rate on bank loans has seldom been below 5 3/h% and large corporate borrowers found that they could save about 2% per annum by issuing t h e i r own notes.  Table VI  gives evidence of the growth of t h i s market since 195 ** 1  Gorporate paper usually bears a maturity from 30 to 90 days.  It i s often negotiated on a demand basis so the i n -  vestor can obtain a l i q u i d investment at a fixed rate of return.  The instrument thus becomes e s p e c i a l l y a t t r a c t i v e  when the outlook for short-term rates i s uncertain. Those who have written on the subject express widely divergent views, regarding the safety of corporate paper. 20  Fullerton,  f o r example, expresses apprehension that few  companies offer a prospectus defining the terms of the issue or provide any other security than the general assets of the company.  Furthermore, there i s often a minimum of i n v e s t i -  gation by the investment dealer or lending company. 21  Sarpkaya,  on the other hand, emphasizes the large size of  the issuing corporations and the trend toward greater Fullerton, o p . c i t . .  p.l8l.  S . Sarpkaya, "The Commercial Paper Market i n Canada," The Canadian Banker. LXX (Winter, 1963), 110. 2 1  TABLE VI CORPORATE PAPER (Dollar figures i n m i l l i o n s ) Number of Borrowers a)  31,19541955 1956 1957 1958 1959 I960 1961 1962 30,1963  June  7 8 9 9 22 17 33 4-5 4-7 51  Outstanding Amounts Other Canadian currencies dollars  20.8 27.7 28.6 24-. 0 98.5 92.9 162.8 226.8 267.1 306.8  6.8 4-.0 3.3 2.3 1.8 3.0 4-.422.49.6  Canadian bank . loans ' c  215.5 230.3 299.8 355.7 279.6 366.2 338.1 262.9 291.1 229.9  Notes: a)  The number of companies having paper outstanding on the date shown.  b)  Canadian d o l l a r  c)  Bank borrowing by a l l companies which have issued corporate paper. There i s an understatement i n e a r l i e r years because some companies only reported bank loans from the date of t h e i r f i r s t corporate paper borrowings.  Source:  equivalents.  Royal Commission on Banking and Finance, Corporate Paper Survey. (Unnumbered Reprint).  4-9  scrutiny on the part of the investment dealer.  The l a t t e r  wrote more than a year l a t e r than the former, which would indicate the change i n the meantime and more attention given hy the dealers.  The paper i s supposedly backed by a bank  l i n e of c r e d i t although a banker expressed the opinion to the author that corporations often issue notes beyond t h i s amount.  There i s yet to be a default by an issuer but fears  of such have been expressed to the writer even by money market dealers.  They rank corporate paper well below finance  paper where safety i s concerned unless they are well acquainted with the issuing f i r m . One c o n t r o l l e r expressed surprise to the writer at the willingness of corporations to invest i n each other and the dangers of the commercial paper market are substantiated by the following statement by a f i n a n c i a l vice-president: . . . F r o m the lender point of view I am concerned that one of these days a borrower w i l l default i n payment. I do not think the investment community i s doing an adequate job of following up on c r e d i t worthiness of a borrower. For examp l e , I have never had an investment dealer enquire as to our "Total short-term and bank borrowings." This being the case, what control i s there to-ensure that a borrower does not borrow several times his bank credit l i n e and then make an assignment i n bankruptcy? At the time t h i s statement was made, the firm was doing onehalf of i t s  short-term borrowing by issuance of corporate  paper and the other half through the bank. One must conclude from the above remarks that a company contemplating investments i n corporate paper should define s p e c i f i c standards of safety and c a r e f u l l y investigate the  5© borrowing firm i n l i g h t of the standards  established.  Corporate paper i s one of two Canadian money market instruments of interest to the treasurer as a borrower. One of the chief advantages i s that i t provides him with expanded credit f a c i l i t i e s offered by banks.  at a cheaper rate than that  He can compete quite e f f e c t i v e l y  with  finance companies and offer yields only s l i g h t l y higher. In f a c t , when finance company supply i s low, the notes of the better corporations can often be sold at the finance company r a t e .  Judging by the commission paid to dealers  (as low as 1/8 of 1% per annum), t h i s market i s an extremely competitive one; dealers even lose money on some transactions as t h e i r service and t r a n s f e r r i n g costs exceed t h e i r compensation.  Nevertheless,  they are anxious to maintain t h e i r r e -  lationship with the borrower so they can handle the more profitable long-term bond or stock issue. A second major advantage to the borrower i s that  it  enables him to defer borrowing i n the bond market by means of long-term obligations.  The same gains from " r o l l i n g over"  a portion of i t s debt i n lower y i e l d i n g short-term obligations accrue to the non-financial corporation as to governments and finance companies.  A t h i r d advantage i s that the corporation  becomes better known to the dealers and investors who may l a t e r be of considerable importance to the d i s t r i b u t i o n and placement of i t s  securities.  I b i d . , p.112.  2 2  51  A major disadvantage to the borrower i s that he must s t i l l maintain bank credit l i n e s i n order to maintain his credit standing v i s - a - v i s the dealer or lender.  As noted  above, these l i n e s of credit are sometimes exceeded, but even that which i s granted i s not guaranteed; that i s , banks are under no l e g a l o b l i g a t i o n to honor the l i n e of c r e d i t . In a period of tight money, when banks must r e s t r a i n t h e i r lending a c t i v i t i e s , they w i l l reduce t h e i r l i n e s of c r e d i t offered, and i f conditions become p a r t i c u l a r l y stringent, i t i s l i k e l y that they would be more anxious to accommodate t h e i r better customers who deal exclusively with them. Chartered Bank Paper The one i n s t i t u t i o n that has suffered because of the development of the money market has been the chartered bank. Corporate lending has shifted somewhat from the current bank account to short-term investments while the development of the commercial paper market has been at the expense of bank loans.  They do not even charge for the l i n e s of credit that  support corporate paper because to do so would create a l e g a l o b l i g a t i o n to honor them.  To answer these developments, the  banks have introduced three main instruments. Deposit Receipts.  Since 1961, deposit receipts have  been offered for terms of 30 to 364- days i n amounts of $25,000 and over.  Rates have tended to be about 1/4- of 1% below those  on finance paper, although on occasion they have been as high. One bank, the Bank of Nova S c o t i a , began to take term deposits  52 i n I960 f o r periods of one to six years.  This may be an  a t t r a c t i v e investment for a company which depends greatly on other services offered by the chartered banks.  One  r e t a i l e r commented as follows i n response to the questionnaire c i r c u l a t e d by the author: Our investments i n the short-term market (bank deposit r e c e i p t s ) have been i n fluenced by a very good corporate p o l i c y of always being on the best of possible terms with your bankers and c r e d i t o r s . United States Bank Swaps. Banks compete among themselves by o f f e r i n g Canadian companies f u l l y hedged United States d o l l a r deposits.  In t h i s way a Canadian account can  purchase American d o l l a r s and leave them on deposit with the New York branch of a Canadian bank.  This mechanism often  offers a rate of return greater than that paid by Canadian finance companies.  The Canadian branches i n the United Sitates  can pay the higher rate because they are not subject to Federal Reserve regulations or the 8$ cash reserve required i n Canada.  Furthermore, the United States d o l l a r deposits are  not subject to the 15$ withholding tax.  This investment out-  l e t i s as safe as any other deposit with a chartered bank and with the hedging feature, i s not subject to loss from foreign exchange  fluctuations.  Banker s Acceptance. This l a t e s t development i n the money 1  market started i n June, 1962, as an opening for the chartered banks into the commercial paper market.  The chartered bank  assesses the creditworthiness of the drawer and provides him  53 with an acceptance l i n e of credit for which a fee i s charged. Each accepted draft i s returned to the drawer who then arranges to s e l l i t to an Investment dealer who, i n t u r n , offers i t for sale i n the money market. -^  The drawer i s  2  responsible f o r payment at maturity, but since a fee charged by the bank, the l a t t e r also incurs a l e g a l liability.  is contingent  Maturities range from 30 to 90 days and denomina-  tions are between $100,000 and $1 m i l l i o n .  Essentially this  security i s the same as corporate paper except that i t has the added protection of recourse to the accepting bank.  A company  can thus obtain accommodation at a lower y i e l d to the ultimate investor than by the issuance of an ordinary promissory note, but the net cost i s usually deemed unreasonable because of the 1 lAr% fee  (on an annual basis) paid to the bank.  To date the  acceptance market has not met with very great success and as of J u l y , 1963* i t was estimated that the t o t a l volume was only ok  between $10 m i l l i o n and $15 m i l l i o n . Trust Company Paper The recent growth of trust companies has made them a significant Canadian f i n a n c i a l i n s t i t u t i o n .  From 1939 to I960  savings; with trust companies increased by 630$ while chartered banks showed an increase of only 216%.^  The main appeal of  3 v i a d i m i r Salzyn, "The Canadian Treasury B i l l Market," Canadian Public Administration. VI (September, 1963), 290. 2  Rick Malt, "How Cash Can Go to Work for Even One Day," The F i n a n c i a l Post. July 27, 1963, p . 1 5 . ^The Trust Companies Association of Canada, Submission to the Royal Commission on Banking and Finance. p.6"j>I 2  these companies i s to the small saver but they were offering guaranteed investment c e r t i f i c a t e s long before the rapid 26 growth of the money market.  As of December 31, 1962, i n -  vestment c e r t i f i c a t e s outstanding amounted to $1,026 m i l l i o n ,  2 7  28 of which i t was estimated that h0%, from corporate investors.  or $ KL0. + m i l l i o n , came l  l  Data on seventeen trust companies  at the end of 1962 show that 26% of t h e i r outstanding guaranteed investment c e r t i f i c a t e s were due to mature i n under six months, another 17% within one year, while only 2% were to mature f i v e years hence.  This i l l u s t r a t e s extensive  29  p a r t i c i p a t i o n i n the money market and the increase i n t r u s t company investment c e r t i f i c a t e s from $322 m i l l i o n i n 1955 to 30 $1026 m i l l i o n i n 1962  indicates t h e i r growth with the market.  Their rates have been competitive with those on finance paper although somewhat less f l e x i b l e , e s p e c i a l l y i n periods of tight money.^  The paper i s even less l i q u i d than finance  company paper as the deposits are non-transferable.  Failures  i n the l a s t ten years are unheard of, but a bond dealer has expressed doubt to the writer regarding the management and objectives of some smaller companies under p r o v i n c i a l j u r i s diction.  Nevertheless, deposits with larger trust companies  can become p a r t i c u l a r l y a t t r a c t i v e to some provinces, I b i d . , p.76. 2 6  7canada, The Royal Commission on Banking and Finance (Ottawa: The Queen's P r i n t e r , 196M-), p.181. 2  2 8  I b i d . , p.182.  3 1  Ibid.,  p.l8»+.  2 9  I b i d . . p.l82.  3  °Ibid..  p.l8l.  municipalities and corporations which are r e s t r i c t e d to "trustee"  investments.  Instruments Created hy the Dealer Through t h e i r own extensive operations the  fifteen  privileged dealers - those with sale and repurchase agreements with the Bank of Canada - add considerably to the f l e x i b i l i t y of the money market through two major types of activity. Buy Backs and Dealer Loans. When a dealer does not have the customer's desired maturity of a security i n i n ventory, he can s e l l either short Canadas or treasury b i l l s at a s p e c i f i c price with the agreement to repurchase at a c e r t a i n time i n the future.  These are sold at a discount,  so subject to the l i m i t a t i o n described i n Chapter I I , the investor gains further by his earnings i n terms of a nontaxable c a p i t a l gain.  A l t e r n a t i v e l y , to help finance t h e i r  inventories, dealers borrow from i n s t i t u t i o n s f i n a n c i a l corporations. banking".  including non-  This procedure i s known as "country  At the end of 1963 i t exceeded c a l l and day-loan  borrowings from chartered banks by almost $100 m i l l i o n , and 32  the t o t a l volume at times has exceeded $4-00 m i l l i o n .  The  disadvantage to the investor of low y i e l d i s offset by t h e i r usual c a l l a b l e feature and the double security of the dealer and the instruments i n his inventory.  Ibid..p.305.  56  Back to Back.  The dealer negotiates t h i s transaction  when a lending corporation i s not authorized to deal with other non-financial corporations but can accept trust company guarantee instruments.  The lending company thus loans  funds to the trust company from which the borrower attains accommodation. III.  INTERNATIONAL MONEY MARKET INSTRUMENTS  Opportunities are presented outside the country for the corporate borrower or investor and almost every firm that engages i n i n t e r n a t i o n a l trade must participate to some extent i n the international money market.  There i s , of course,  the added complication of foreign exchange, so a b r i e f consideration of t h i s market w i l l be a useful The Foreign Exchange Market.  digression.  At the time of t h i s writing  the Canadian d o l l a r i s pegged at $92.50 U.S.  The value may  fluctuate but within very narrow l i m i t s of the pegged' rate because of s t a b i l i z a t i o n a c t i v i t i e s  of the Bank of Canada.  There i s no guarantee that the rate w i l l remain f i x e d ,  however,  and appropriate measures to safeguard the corporation are often undertaken. In an ordinary exchange transaction, a foreign currency i s purchased or sold for payment within a few days.  This i s  spot exchange and dealings are carried out through banks. Forward exchange d i f f e r s i n that payment on a contract made now w i l l take place on some future date.  When a treasurer  enters the forward market the process i s known as "hedging"  because he i s guaranteed that on some future date he w i l l be paid i n the same d o l l a r equivalent as exists at present.  He  must, of course, pay a fee to the bank for r e l i e v i n g him of this r i s k .  The U.S. bank swap discussed above i s an example  of an International transaction where hedging occurs. International Money Market Investment and Borrowing. In addition to bank swaps, the Canadian investor may f i n d  it  profitable to invest i n American treasury b i l l s when t h e i r rates are higher than those i n Canada.  This does not occur  very often, however, and Canadian rates usually follow those i n the United States at a s l i g h t l y higher y i e l d .  If the U.S.  rate does go above the Canadian i t would s t i l l have to be enough to compensate for the cost of hedging.  Even with the  lower rate, however, a firm may find such an investment  at-  t r a c t i v e when i t has both income and expenditures i n the United States.  For example, i f i t s e l l s goods i n the United  States and w i l l l a t e r need the money for a purchase, rather than incur the cost of two foreign exchange transactions,  it  may invest the money i n treasury b i l l s , or any other shortterm American security i n which the treasurer has confidence. A l t e r n a t i v e l y , i f the purchase comes f i r s t , short-term borrowing by the issuance of commercial paper may be undertaken and liquidated when the revenues come i n .  No hedging Is r e -  quired as the same d o l l a r s are used for the loan and purchase.33  33GreenshieIds Incorporated, A Memorandum on Short-Term Borrowing Through the International Money Market prepared for Rolls-Royce Limited. (Unnumbered Reprint), p.5.  58 These transactions, of course, are also feasible  i n the United  Kingdom or any other country where a money market e x i s t s . A money market instrument of especial importance to a firm engaged i n foreign trade i s the l e t t e r of c r e d i t .  It  is  a form of banker's acceptance and finds much more extensive use than the domestic acceptance noted above.  This instrument  i s u t i l i z e d when a bank accepts the o b l i g a t i o n for payment of a time draft or b i l l of exchange.  After the customer has sent  his purchase order, he forwards a formal a p p l i c a t i o n f o r a l e t t e r of credit i n favor of the beneficiary, the exporter, who i s paid upon shipment by the accepting bank.  The importer's  bank, known as the "opening bank" w i l l o r d i n a r i l y write an I r revocable l e t t e r of c r e d i t , by which i t authorizes the exporter to draw on the bank account of the importer f o r a sum not exceeding the value contracted between the p a r t i e s .  Shipping  documents, including the b i l l of lading which must be presented to the shipper for receipt of the goods, w i l l be sent to the opening bank and they w i l l be surrendered to the importer only when he has complied with the stipulations of payment or c r e d i t . Because of the complexity of t h i s instrument, the exporter also usually deals with a bank, which i s known as the "confirming bank".  This bank negotiates on his behalf and gives the  exporter assurance that i f he presents his draft and documents i n order, they w i l l be honored, regardless of what may have happened to the foreign importer and opening bank i n the meantime.  59 It i s clear from the above discussion that the reason for  the existence of t h i s instrument i s the d i f f i c u l t y of  assessing the creditworthiness of a foreign customer.  With  increased dealings, better communications, and greater confidence i n the foreign f i r m , t h i s cumbersome method of t r a n s action i s replaced by open accounts as i n ordinary domestic sales. A market for d o l l a r deposits i n Europe, the Euro-dollar market, has grown i n the late f i f t i e s  l a r g e l y because of the  wide acceptance of the American d o l l a r for international transactions.  Euro-dollars are U.S. d o l l a r s on deposit with  banks outside the United States and often the a t t r a c t i o n of higher interest rates to the investor than American banks may under Regulation Q of the Federal Reserve Act.  The t r a n s -  actions are normally hedged and the dealings take place with foreign banks.  It can thus become quite complicated and a  major d i f f i c u l t y i s that of assessing the creditworthiness of the borrower. IV.  SUMMARY AND CONCLUSION  Unfortunately, s t a t i s t i c s  on outstanding amounts of  the various money market instruments are extremely sketchy. Those presented above come from a v a r i e t y of sources and are,  i n many cases, estimates.  A summary of some of the  paper outstanding on various dates i s presented i n Table VII.  The predominance of Government of Canada issues and  those of banks and trust companies i s noteworthy.  This i s  TABLE V I I AMOUNT OUTSTANDING OF SELECTED SHORT-TERM PAPER (Dollar figures Instrument  i n millions) Date  Outstanding  Government o f Canada Treasury B i l l s  - Total - Held by General P u b l i c  December 31,1963  224-0  December 31,1963  Short-term Bonds (under two years maturity) - Total - Held by General P u b l i c  December 31?1963  354S  December 31,1963  14-71  Provincial Bonded debt up t o t h r e e years m a t u r i t y  March 3 1 , 1963  17  T r e a s u r y B i l l s l e s s than two years m a t u r i t y  March 31, 1963  68  Municipal T r u s t Companies Deposit R e c e i p t s and guaranteed investment c e r t i f i c a t e s  December 31,1963  1169  S a l e s Finance and Consumer Loan Companies - Demand and short-term notes payable (Canadian d o l l a r s )  December 31,19.63  731  Corporate  June 30, 1963  229.9  Paper  Investment D e a l e r s "Country Banking" Sources:  December 31,1963  350  (1) Bank o f Canada, S t a t i s t i c a l Summary. January,  (2) Dominion Bureau o f S t a t i s t i c s : Business F i n a n c i a l S t a t i s t i c s ( S e l e c t e d F i n a n c i a l I n s t i t u t i o n s ; and F i n a n c i a l S t a t i s t i c s o f P r o v i n c i a l Government). (3) Canada, Report o f the Royal Commission on Banking and Finance (Ottawa: Queen's P r i n t e r , 1964-), p.305  61 supported by T a b l e s XXVI and XXVII I n the Appendix o f the t h e s i s . , Y i e l d s on the s e c u r i t i e s appear i n Table V I I I . Most o f the instruments d i s c u s s e d come o f age w i t h i n the l a s t decade.  i n t h i s chapter have  F u l l maturity  d i a n money market has not y e t been reached and as  o f the Canacorporate  t r e a s u r e r s are becoming more s o p h i s t i c a t e d , any a c t i o n t a k e n upon the recommendations o f the Royal Commission on Banking and Finance w i l l be o f great i n t e r e s t . In g e n e r a l , the members o f the Royal Commission noted that s e v e r a l i n s t i t u t i o n s , i n c l u d i n g t r u s t companies and s a l e s finance  companies, have become major d e p o s i t o r i e s o f l i q u i d  f i n a n c i a l a s s e t s and thus are i n c r e a s i n g l y assuming a r o l e s i m i l a r t o t h a t o f the c h a r t e r e d recommended t h a t cash r e s e r v e  banks.  They, t h e r e f o r e ,  requirements be more s t r i n g e n t  f o r these i n s t i t u t i o n s and l e s s s t r i n g e n t f o r banks; t h a t the 6% c e i l i n g on i n t e r e s t charged by banks t o c o r p o r a t i o n s  be  removed; and t h a t a l l f i n a n c i a l i n s t i t u t i o n s be s u b j e c t t o increased  government s c r u t i n y and r e g u l a t i o n .  The net e f f e c t o f the recommended a c t i o n w i l l be t o a i d the competitive  p o s i t i o n o f the c h a r t e r e d  banks.  Absence o f  the 6% l o a n i n t e r e s t c e i l i n g would a l l o w them t o charge according  t o the c r e d i t w o r t h i n e s s  lower the prime l o a n r a t e . l a t i o n o f other  o f the borrower and thus  Combine t h i s w i t h i n c r e a s e d  i n s t i t u t i o n s and the c h a r t e r e d  have more t o o f f e r t o the corporate the money market.  regu-  banks may w e l l  borrower and l e n d e r i n  62  TABLE VIII YIELDS OF SELECTED MONEY MARKET INSTRUMENTS, JANUARY 30,196*+  Instrument  Yields  Canada Treasury B i l l s 91 days 182 days  3.77 3-9  k  Finance Company 30 90 180 270  - 89 days - 179 days - 269 days - 365 days  3 3A h h l Ah 3/8 -  h h 1/8 h 3/8 h 5/8  Prime Corporate Paper 24-hour demand 30 days  3 5/8 - 3 3 A 3 3 A - 3 7/8  Bankers' Acceptances Demand 30 days 60 days 90 days  3.50 3.60 3.75 3.85  Trust Companies 30 - 89 days 9© - 179 days 180 - 269 days 270 - 36 days 1 yp. - 3 y r s . k  Source;  3 3A h hl A h 1/2  h 3A -  McLeod, Young, Wier and Company, "Weekly Money Market Quotations".  63  In conclusion, the Canadian money market, while  still  i n i t s development stages, does offer a great deal to the corporate treasurer as a means of ameliorating his p r o f i t s through improved cash management.  Techniques for better use  of t h i s v e h i c l e , factors affecting such a c t i v i t y , and current attitudes and actions of Canadian corporations w i l l cons t i t u t e the discussions of Chapters IV and V .  64-  CHAPTER IV TECHNIQUES OF MONEY MARKET INVESTMENT AND BORROWING  The  investment  and borrowing  o u t l e t s i n the money market  permit much scope f o r the c o r p o r a t e t r e a s u r e r t o a m e l i o r a t e h i s company's p r o f i t s .  T h i s chapter s h a l l c o n s i d e r methods  a v a i l a b l e t o use the market most e f f e c t i v e l y , and p o l i c i e s and a t t i t u d e s o f s e v e r a l a c t i v e I.  participants.  CHANGES IN MONETARY CONDITIONS  Causes o f i n t e r e s t r a t e f l u c t u a t i o n s have been noted i n previous chapters.  Such movements a r e o f p a r t i c u l a r  concern  t o the c o r p o r a t e I n v e s t o r who wishes t o g a i n the g r e a t e s t y i e l d from managing h i s i d l e b a l a n c e s , and c a r e f u l s c r u t i n y can r e s u l t i n rewards simply from the t i m i n g o f purchases justing of maturities c o r r e c t l y .  and a d -  Some judgment r e g a r d i n g  probable t r e n d s i s r e q u i r e d and when e x t e n s i v e t r a d i n g i s contemplated,  the l i q u i d i t y i n h e r e n t i n Government o f Canada  t r e a s u r y b i l l s renders them the most u s e f u l v e h i c l e .  To a i d  t h e i r c l i e n t s i n such manoeuvers, the money market d e a l e r s publish.  circulars.  Some such as t h a t p u b l i s h e d by McLeod,  Young, Wier and Company, p l a c e emphasis on the y i e l d s o f t h e v a r i o u s instruments, w h i l e G r e e n s h i e l d s and o t h e r s s t r e s s a more d e t a i l e d v e r b a l account  o f the t r e n d s and t h e i r  Before n o t i n g some t r e n d s and deducing  causes.  the a p p r o p r i a t e  a c t i o n t o be taken i n l i g h t o f them, i t w i l l be u s e f u l t o  65  c i t e a t y p i c a l action and the appropriate reaction.  Suppose  a firm obtains a large inflow of cash i n a p a r t i c u l a r week and w i l l not require i t f o r corporate purposes u n t i l six months hence.  An example of t h i s type of company i s a c r e d i t  r a t i n g firm which obtains the bulk of i t s receipts right after i t sends out i t s yearly ratings to customers.  Another  example might be a firm which has engaged i n long-term f i n a n cing but does not require some of the funds u n t i l a l a t e r date. Suppose further that the board of directors of the firm has l i m i t e d i t s investments to treasury b i l l s and the dealer advises the treasurer that rates are l i k e l y to r i s e by 1/2 of 1$ within the next week.  If the investment i s $1 m i l l i o n , the  annual before-tax y i e l d difference for the 6-month b i l l s would be $5000; the after-tax difference  (with a 50$ tax rate) for  the six-month period would thus be $1250.  The y i e l d w i l l  a c t u a l l y be only $1250 - (1250 f- 26), or about $1200, because the b i l l s w i l l only be held for twenty-five weeks.  An assump-  t i o n i s that the one-week b i l l s w i l l be capable of being sold at a price nearly equal to the o r i g i n a l . The gain can be augmented further by investing the $1 m i l l i o n for the f i r s t week.  Changes are r a r e l y as dramatic as the example noted  here, although i n the June, 1962 f i n a n c i a l c r i s i s ,  before-tax  yields on six-month b i l l s rose almost 2$ i n a month.  After a  r i s e from 3.83$ to 4-. 12$ between. June 6 and June 13, the a l e r t treasurer contemplating investment might have speculated on the trend and waited u n t i l the following week to buy at 5.16$, or even u n t i l June 27 > to obtain the y i e l d of a near peak of  66 Further implications of short-term price and y i e l d  5•73%*  movements w i l l he discussed i n the following  section.  The causes of movements i n long-term interest  rates  were noted i n Chapter I I . It i s b a s i c a l l y the same factors which cause short-term rates to fluctuate,  but there i s less  time to assess a trend and a c t i o n must be taken more q u i c k l y . The question i s no longer whether to f l o a t a long-term bond issue now or next year, but rather, whether to place funds i n treasury b i l l s today, tomorrow, or next week. As i n the long-term market, one of the more important influences i s the a c t i v i t y of the Bank of Canada i n the open market.  This has already been discussed adequately.  Another  factor to note i s the y i e l d pattern i n the United States and United Kingdom.  For example, on February 28, 196 , when k  i n f l a t i o n a r y tendencies and external pressures on the pound caused Great B r i t a i n to raise i t s bank rate from h% to 5% yields on Canadian government s e c u r i t i e s , b i l l s , also r o s e .  1  y  including treasury  The B r i t i s h action had been predicted  2 two weeks e a r l i e r  and although the investment dealer making  the p r e d i c t i o n referred to i t as "rumour," mention i n i t s weekly c i r c u l a r indicated the p o s s i b i l i t y for rates to i n crease.  Other paper follows the treasury b i l l pattern so  the corporate treasurer should have stayed l i q u i d i f advised that the cost of doing so (in terms of lower yields for nearmaturity instruments) would be more than compensated by the Greenshields Incorporated, Canadian Money Market Review. March 3 , 1964-. A  2  I b i d . , February 18, 1964-.  67 higher rates forthcoming. A f i n a l factor which affects the money market rates to a substantially greater extent than long-term yields occurs at the end of the year.  It was noted i n the previous chapter  that at the 1963 year end short-term money was scarce.  This  s i t u a t i o n was not limited to 1963 and i s l i k e l y to occur i n the l a s t week of every year.  The reason i s that many c o r -  porations wish to liquidate t h e i r marketable security portf o l i o and show as much cash as possible on the balance sheet. Regardless of the ethics or a d v i s a b i l i t y of such a p o l i c y ,  it  does e x i s t , and rates on one- or two-week paper can become very a t t r a c t i v e as issuers require the cash to f i l l the gap u n t i l balance sheet date.  A corporation which does not follow  t h i s p o l i c y , or one which closes i t s books at another date, may find rates extremely a t t r a c t i v e for these few days, and profitable to t a i l o r i t s short-term investment  maturities  accordingly. Other changes i n short-run monetary conditions are generally the same as those i n the long r u n .  Normally, the  former precedes the l a t t e r but i f participants i n the long market foresee changes i n the underlying forces and anticipate the action that w i l l l i k e l y be taken by the central bank, the long market may change d i r e c t i o n before the short.  For  example, long-term rates i n Canada f e l l very sharply i n 1957 and rose i n 1958 p r i o r to the reversal i n short-term r a t e s . Therefore, participants i n the money market might look at the longer-term market as yet another hint as to future fluctuations.  68  II.  THE YIELD CURVE AND TRADING PROFITS  The y i e l d curve described i n Chapter II can play an important role for the treasurer who wishes to take maximum advantage of treasury b i l l dealings.  Because of the normal  pattern of lower yields on outstanding securities closer to maturity, a technique known as "riding the y i e l d curve" can be a rewarding p u r s u i t .  This action consists of buying  treasury b i l l s and s e l l i n g them on the market before maturity. Suppose, for example, that someone bought a 182-day b i l l on September 19, 1963 for an annual after-tax y i e l d of 1.83$. He could have sold i t three months l a t e r on December 19, 1963 at the market y i e l d of 1.77% or 1.81$^ after the dealer was compensated for his services,for  an extra .02% for the three-  month period, or .04-$ on an annual b a s i s .  k  Add to t h i s the  after-tax 1.83$ on the b i l l he held for the three-month period and the annual rate of return i s 1.87$. This technique does have i t s l i m i t a t i o n s as the Bank of Canada lends some support to these rates through i t s bid at the weekly treasury b i l l tender.  reserve  Furthermore, i f  interest rates r i s e substantially while the b i l l i s held,  ^McLeod, Young, Wier and Company L t d . , "Weekly Money Market Quotations." 4The determination of t h i s rate can best be explained i n d o l l a r terms. If he bought a $100 b i l l at 1.83$, the annual y i e l d would be $1.83; but i f he sold i t at maturity (that i s , after one-half year) he would receive only one-half of the annual i n t e r e s t , or $.915. Likewise, the gain i n the example of .02$ becomes $.01 for the six-month b i l l . If he continues t h i s exercise a l l year, making the same gain of $.01 four times, the annual gain i s $.04% or .04-$. It i s assumed that t h i s interest i s not compounded.  the natural drop i n y i e l d caused "by approach toward maturity may be deleted.  In f a c t , Figure 2 shows that the above  example was p a r t i a l l y such a case.  That i s ,  interest  rates  had generally r i s e n from September 19 to December 19, but not enough to completely offset the effect of the y i e l d curve. It should be noted that t h i s technique i s much more practicable i n the United States than i n Canada as treasury b i l l s are no longer such an important money market investment for the corporate treasurer (see Table V I I ) . States, on the other hand, they constitute market s e c u r i t i e s .  In the United  about 70% of money  They are held for quarterly tax payments  while Canadian companies must pay monthly.  In Canada the  difference between the dealer bid and asked yields was .06% on September 19 for 182-day b i l l s , while i t was .50% on 7-day bills.^  Therefore, while the short end of the September 19  y i e l d curve persisted through the following week, and i t may have appeared extremely profitable to buy a 14-day b i l l  to  s e l l a week l a t e r , the high dealer spread would more than offset any gains from "curve r i d i n g " .  D . P . Jacobs, "The marketable Security Portfolios of Non-Financial Corporations, Investment Practices and Trends," The Journal of Finance , XV (September, I960), 34-3. ?  %he reason for the higher spread i n terms of y i e l d on shorter term b i l l s i s that the shorter the term to maturity, the less difference i n price for a given difference i n y i e l d . (See Chapter I I , Footnote 9, p.16).  December 19, 1963  After-  7  ti  i ' / l i 3b' V'ivy- 56 L3-70 77  &''*S  ui  //f w« a?  its-  Days t o M a t u r i t y FIGURE 2 SELECTED AFTER-TAX YIELD CURVES (DATA FROM McLEOD, YOUNG, WIER AND COMPANY LIMITED, "WEEKLY MONEY MARKET QUOTATIONS")  71  III.  LONG TERM RATES AND SHORT TERM INVESTMENT  P o l i c i e s regarding the composition of c a p i t a l structures vary widely between firms.  Some prefer to have a high percent-  age of t h e i r c a p i t a l i n debt while others choose to minimize or eliminate long-term debt.  This depends l a r g e l y upon con-  siderations of leverage versus equity base.  Any firm that  desires some debt i s concerned with i t s cost and naturally wishes to f l o a t a new issue or refund an old one at the lowest debt-servicing costs possible.  The timing of such an issue i s  thus an important factor i n l i g h t of the f l u c t u a t i n g pattern of long-term interest rates, and i t may be viewed as less c o s t l y f o r a constantly expanding f i r m to issue some debt even when i t i s not immediately required. Suppose that a firm expects to need funds i n about a year f o r expansion of f a c i l i t i e s but at the present time longterm interest rates are generally regarded as low, perhaps because of a central bank monetary p o l i c y of ease, or because of a temporary economic slump.  Under these circumstances i t  can presently f l o a t a twenty-year issue with no sinking fund for $10 m i l l i o n at a rate of k%%, and i s advised that a year hence the y i e l d may have to be raised to 5%,  The f i r m has  the choice to wait u n t i l the funds are needed and thus probably pay a higher interest rate f o r them, or to s e l l secur i t i e s immediately and invest the proceeds temporarily i n the money market. The second method can be advantageous, f o r while the f i r m w i l l be losing the d i f f e r e n t i a l between higher borrow-  72 ing than lending rates f o r one year, i t w i l l gain the d i f f e r e n t i a l between the borrowing rates for the entire l i f e of the  issue. The advantages can be i l l u s t r a t e d with an example using  the assumptions outlined above.  Since i n either case i t w i l l  want a maturity of twenty years after the start of the proj e c t , i t s choice i s to borrow now for twenty-one years or a year hence for twenty years.  The f i r s t alternative offers  an annual before-tax saving of 1/2 of 1$, or assuming a 50% tax r a t e , l A of 1% after taxes.  In d o l l a r terms t h i s i s an  annual after-tax saving of $25,000.  Assuming that the company's  after-tax normal rate of return i s 6%, the discounted savings taken one year from now, when the project begins, for the following years w i l l be $286,750 (or 25000 x 11.4-70). The present value of t h i s amount received one year hence i s $270, 05 (or 286750 x .9 3)> and t h i s i s the present value k  k  of the savings made by the a l t e r n a t i v e . One must next consider the costs.  For the following  year, the company w i l l be paying 4-£# before taxes on the $10 m i l l i o n with which i t can earn only 3% i n short-term investments.  This i s an after-tax cost of 3 A of 1%, or $75>000,  of which the present value i s $70,725.  Thus the net present  value of the savings they can achieve by t h i s alternative  $270,1*05 - $70,725 = $199,680. T h i s , of course, i s a hypothetical and simplified example, but the essence of the argument i s s t i l l v a l i d * The higher cost of borrowing l a s t s the entire l i f e of the  is  73  bond issue while the extra cost from lending at a lower rate than borrowing should only l a s t a short time. IV.  CASH MANAGEMENT  Brofit from money market investment depends l a r g e l y on the e f f i c i e n t  use of i d l e cash.  The treasurer must therefore  determine how much cash he w i l l have on hand on p a r t i c u l a r dates and then how much i s needed for corporate purposes. residual i s invested i n the money market.  The  Each of these areas  w i l l be considered i n t u r n . Cash Forecasting.  In almost every firm there i s some  degree of cash forecasting.  The extent may only be an edu-  cated guess on the part of a treasurer but i f the maximum use of cash i s to be achieved a more detailed and formal prediction i s required.  Often cash forecasting i s part of the p r o f i t p l a n ,  where p r o f i t objectives are set for the f i r m , and operations are planned to produce the desired r e s u l t s .  Where such a  budget i s used as a control as well as a planning device,  it  i s easier for the treasurer to maintain r e l i a b l e forecasts as objectives are altered according to changing circumstances. Some firms plan annually although additional shorter planning periods provide for more e f f i c i e n t account.  u t i l i z a t i o n of the cash  Therefore, i t i s becoming more common to plan  monthly, weekly, and even d a i l y . The f i r s t operation i n a popular method of cash f o r e casting i s to determine the cash receipts from sales.  Credit  sales are subtracted from t o t a l sales i n a period to  establish  the expected cash sales and added to t h i s figure i s the  expected c o l l e c t i o n of accounts receivable.  Proceeds from  the sale of used equipment and other income items such as interest and dividends received are then added to obtain a figure for the t o t a l cash receipts anticipated.  The next  step i s to determine the outlays by adding cash purchases of materials and equipment to payment of outstanding trade accounts, wages, administrative expenses, taxes, dividends, i n t e r e s t , and bond redemptions.  Other items, such as the  sale of stock or bonds expected i n a period, are also i n cluded and the net receipts minus the net payments gives the net inflow or outgo.  F i n a l l y , the balance or d e f i c i t  at the beginning of the period i s added or subtracted to estimate that at the end.?  Presumably the company has  determined i t s minimum cash position so i t can decide how much to plan on borrowing or investing temporarily. Suppose, for example, that a company has decided upon a minimum cash balance of $10 m i l l i o n and that i t prepares monthly forecasts for six months ahead and extended approp r i a t e l y every month; that i s , at the end of December i t plans u n t i l June and at the end of January i t extends i t s plans u n t i l J u l y .  Suppose further that (1) at no time  during the six-month period from January u n t i l June i s the cash balance on hand expected to f a l l below $15 m i l l i o n ; (2) i t w i l l be as high as $20 m i l l i o n throughout every month  ' P . Hunt, C M . Williams and G. Donaldson, Basic Business Finance (Homewood: Richard A. Irwin, I n c . , 1961), pp.l51-l£?V  75 except A p r i l ; and (3) a t the end o f June the expected cash balance w i l l be reduced a g a i n t o $10 m i l l i o n . The  most l o g i c a l a l t e r n a t i v e would seem t o be t o i n v e s t  $5 m i l l i o n i n a six-month note and $5 m i l l i o n i n a three-month note, the l a t t e r t o be l i q u i d a t e d a t the end o f March and r e i n v e s t e d a t the end o f A p r i l . be gained  Table  IX shows the p r o f i t s t o  by t h i s approach u s i n g t r e a s u r y b i l l s and t h e i r  y i e l d s as o f December 31,  1963.  T h i s s h a l l be r e f e r r e d t o  as Investment P o l i c y A. An a l t e r n a t i v e approach i s Investment P o l i c y B whereby the company i n v e s t s the e n t i r e $10 m i l l i o n i n six-month notes and p l a n s t o l i q u i d a t e $5 m i l l i o n f o r t h e month o f April.  Table X shows the r e s u l t s from t h i s a t t a c k .  It  should be noted t h a t December 31 r a t e s are used i n b o t h cases and an assumption i s t h e r e f o r e t h a t i n t e r e s t r a t e s w i l l not change between December and A p r i l .  I f such a  change i s expected the f i g u r e s should be a l t e r e d a c c o r d i n g l y , and  i n p a r t i c u l a r , the g a i n from "curve r i d i n g " i n I n v e s t -  ment P o l i c y B may be a l o s s i f i n t e r e s t r a t e s r i s e substantially. There i s y e t a t h i r d p o s s i b l e approach which s h a l l be designated ing  as Investment P o l i c y C.  This consists of invest-  the f u l l $10 m i l l i o n i n six-month b i l l s and l e a v i n g i t  i n v e s t e d f o r the e n t i r e p e r i o d .  When the money i s needed i n  A p r i l , a 30-day promissory note w i l l be i s s u e d .  It i s  assumed t h a t the company has a h i g h c r e d i t r a t i n g and t h a t the prime corporate  paper r a t e o f December 31> 1963 w i l l  p r e v a i l through A p r i l , 1964-.  T h i s r a t e i s 4- 1/8$ and when  76  TABLE IX PROCEEDS FROM INVESTMENT POLICY A  Annual a f t e r - t a x y i e l d f o r 6-month T r e a s u r y B i l l f o r 6 months  Amount i n v e s t e d Proceeds from  Amount i n v e s t e d  f o r 3 months  Proceeds from Net Proceeds  $4-7250  1. million  $22250  Investment  Annual a f t e r - t a x y i e l d f o r 2-month T r e a s u r y B i l l Amount i n v e s t e d  $5 m i l l i o n  Investment  Annual a f t e r - t a x y i e l d f o r 3-month T r e a s u r y B i l l  Proceeds from  1.1  f o r 2 months Investment  1.73$ $5 m i l l i o n  $14-750 $84-250  TABLE X PROCEEDS FROM INVESTMENT POLICY B  Annual after-tax y i e l d f o r 6-month Treasury B i l l s  1J  Amount invested for 6 months  $5 m i l l i o n  $4-7250  Proceeds from Investment  Amount invested for 3 months i n 6-month B i l l s  million  $23625  Proceeds from Investment  Annual after-tax y i e l d f o r 2-month Treasury B i l l s  1.73$  Amount invested for 2 months  $5 m i l l i o n  Proceeds from Investment  $14-750  Gain from "Riding the Yield Curve" (per analysis i n previous section) j 0007 x $5 m i l l i o n =$  2  Net Proceeds  1 7  $  0  $87375  78 the d e a l e r commission o f 1/8 o f 1% i s added, the net b e f o r e o t a x cost t o the company i s 4- l A $ ,  or 2.04$ a f t e r  taxes.  0  Table XI shows the r e s u l t s o f such a p o l i c y . I t would  seem from the above a n a l y s i s t h a t  P o l i c y B i s the most a p p r o p r i a t e . the assumptions t h a t bill;  Investment  However, i t i s based upon  (1) the o n l y v e h i c l e i s the t r e a s u r y  (2) t h a t the December 31,  1963  y i e l d s on t r e a s u r y  bills  w i l l h o l d through A p r i l , 1964-; (3) t h a t the y i e l d s on c o r porate paper w i l l a l s o remain c o n s t a n t ; and are o n l y made on a monthly b a s i s . may  (4-) cash f o r e c a s t s  These assumptions may  or  not be reasonable a t the time an investment i s contem-  plated.  As noted p r e v i o u s l y , the t r e a s u r y b i l l i s not the  o n l y method o f investment and, i n f a c t , f a r from the most important one.  Other papers o f f e r h i g h e r y i e l d s and are  l i k e l y t o be used i n s t e a d .  The advantages i n y i e l d , however,  may be o f f s e t by a s a c r i f i c e i n l i q u i d i t y and even i f the paper can be s o l d b e f o r e m a t u r i t y a s i g n i f i c a n t l o s s on s a l e may be the r e s u l t . appropriate.  Thus, Investment P o l i c y B may be i n -  In such a case t h i s p o l i c y should be  examined  i n r e l a t i o n t o Investment P o l i c y A o r C u s i n g f i n a n c e o r o t h e r paper. be v a l i d .  The second and t h i r d assumptions may  a l s o not  Even i n the example c i t e d above, i n t e r e s t  rates  were r i s i n g from September t o December, 1963, and i f t h i s t r e n d i s expected t o c o n t i n u e p r o f i t s from r i d i n g the y i e l d  McLeod, Young, Wier and Company L i m i t e d , "Weekly Money Market Q u o t a t i o n s . " It i s assumed i n a l l cases i n the examples noted i n t h i s s e c t i o n t h a t the tax r a t e i s  52$.  79  TABLE XI PROCEEDS FROM INVESTMENT POLICY C  Annual after-tax y i e l d for 6-month Treasury B i l l s  1.89$  Amount invested for 6 months  $10 m i l l i o n  $94-500  Proceeds from Investment  Annual after-tax cost of Corporate Paper  2.04-$  Amount issued for 1 month  $5 m i l l i o n  Cost of the Issue  $ 8500  Net Proceeds  $86000  80 curve w i l l be reduced or e l i m i n a t e d .  Furthermore, t h e y are  i n v e s t i n g f o r s i x months a t lower y i e l d s than w i l l be obtainable. advantages  Both of these f a c t o r s w i l l i n c r e a s e the o f Investment  relative  P o l i c y A.  I f the f o u r t h assumption,  monthly cash f o r e c a s t s , i s  not v a l i d the e n t i r e a n a l y s i s may the company may  later  be a l t e r e d .  For example,  f i n d t h a t funds are not r e q u i r e d  throughout  the e n t i r e month of A p r i l but o n l y the l a s t two weeks. issuance o f c o r p o r a t e paper f o r such a s h o r t time may f e a s i b l e so the c o s t s o f a bank l o a n should be or the type o f paper bought may except a t 30,  60,  or 90 days.  The not be  investigated;  not be a t t a i n a b l e f o r m a t u r i t y In the l a t t e r case, the  p o s s i b i l i t y of buying the paper f o r a three-month  period  and  t h e n i n v e s t i n g i n a more l i q u i d instrument f o r the two weeks o f A p r i l should be examined.  I t i s obvious t h a t more p r e c i s e  cash f o r e c a s t s w i l l i n c r e a s e the number o f p o s s i b i l i t i e s  and  maximize the gains p o s s i b l e from investment by keeping the funds more f u l l y u t i l i z e d i n the  paper.  One must conclude from the above remarks t h a t t h e r e i s not one p o l i c y that i s u n i v e r s a l l y b e t t e r t h a n any o t h e r . The important p o i n t i s t h a t i t i s u s e f u l f o r an a n a l y s i s as the one made above t o take p l a c e b e f o r e the  such  investment.  In the q u e s t i o n n a i r e s c i r c u l a t e d by the a u t h o r , comments were requested.  Many respondents expressed p r i d e i n t h e i r e x t e n s i v e  cash f o r e c a s t i n g but none mentioned decide upon a l t e r n a t i v e s .  any f o r m a l i z e d approach t o  One f i r m d i d s t a t e that i n a c c o r -  dance w i t h t h e i r c a s h f o r e c a s t i n g i t t a i l o r e d i t s m a t u r i t y  81 dates.  Most of i t s payments were mailed on the t w e n t i e t h of  every month, so when r e c e i p t s came i n throughout  the month,  they were i n v e s t e d i n paper t o mature on the t w e n t y - f i r s t , t w e n t y - f o u r t h and t w e n t y - f i f t h .  However, i t d i d not mention  c o n s i d e r a t i o n o f other a l t e r n a t i v e s , such as remaining  fully  i n v e s t e d f o r a l o n g e r time and borrowing t o meet these payments.  T h e r e f o r e , an approach c o n s i s t i n g o f a c o n s i d e r a t i o n  o f a l t e r n a t i v e s i n l i g h t of f u t u r e e x p e c t a t i o n s and types o f a u t h o r i z e d investment media i s recommended h e r e . Cash Economizing. cash balance was Important  In the a n a l y s i s above the minimum  g i v e n ; d e t e r m i n a t i o n of t h i s f i g u r e i s an  decision.  I f the f i r m i n the example was  actually  a b l e t o work w i t h a minimum balance of $5 m i l l i o n i n s t e a d o f $10  m i l l i o n , a l a r g e sum  investment was  of p o t e n t i a l gains from money market  foregone.  With the l a r g e postwar economic expansion, working  additional  c a p i t a l needs have made f i r m s aware t h a t t h e y c o u l d  generate a volume of s a l e s w i t h much l e s s c a s h than t h e y had earlier anticipated.  In poor business years when i n v e n t o r i e s  were reduced and there was was  more cash a v a i l a b l e , the t r e a s u r e r  then a b l e t o use the excess.  Garvy e x p l a i n e d t h i s i n  terms of the " r a t c h e t e f f e c t " : a need caused an a c t i o n , but 9 once the need disappeared the a c t i o n remained.  I n s p i t e of  a r i s e i n i n t e r e s t r a t e s d u r i n g an expansion, r a t h e r than  G a r v y , G., Deposit V e l o c i t y and I t s S i g n i f i c a n c e . York: F e d e r a l Reserve Bank, 19WT, p.70. 7  (New  encourage corporate security investment, additional c a p i t a l investment took place.  T h i s , i n turn, created a corporate  demand for money which pushed interest rates up further. With money harder and more expensive to obtain, the corporation, out of necessity, worked with a smaller cash/sales r a t i o than i t had previously, and thus learned to economize cash.  Then when the economy's growth slowed down, the  treasurer learned to work with less cash and thus could invest i n short-term securities the surplus not needed. To examine the v a l i d i t y of the above argument i n l i g h t of recent Canadian events, Table XII shows the cash/sales ratios i n recent years.  One w i l l note that the years 1951,  1956 and 1959, i n which there were the most rapid r i s e i n sales, coincided with the most rapid declines i n cash/sales r a t i o s ; and i n the years of slowed growth i n sales (1952, 1954-, 1957, 1958, I960 and 1961), the r a t i o s a l l climbed or showed minimal decreases from the previous years.  Table  XIII shows further that manufacturing firms have had lower cash/sales r a t i o s than non-manufacturing firms i n good years and higher r a t i o s i n lean years.  This may be attributed to  the larger size and greater s u s c e p t i b i l i t y of the former to cyclical  swings.  10  Bruce King MacLaury, "The Canadian Money Market, Development and Impact" (Doctoral Dissertation, Harvard University, 196l), p.24-5.  83  TABLE XII SALES AND CASH OF CANADIAN NON-FINANCIAL CORPORATIONS (Millions of d o l l a r s ; percent) Year  Cash  1950 1951 1952 1953 19541955 1956 1957 1958 1959 I960 1961  $1225 113 1267 13 9 1515 1637 154-7 1571 1706 16541597 1789  Notes:  k  k  Sales  $ 25827 3064-7 332 5 36862 37968 4-2311 43461 50399 50811 554-96 574-27 594-52 k  Cash/Sales k  .9#  3.8  3.7  4-.0 3.9 3.2 3.1 3.3 2.9 2.8 3.0  These s t a t i s t i c s are t o t a l s for a l l f u l l y tabulated corporations minus "finance, insurance, and r e a l estate" category. Taxation S t a t i s t i c s . Taxation year includes a l l corporations whose f i s c a l year ends within the stated calendar year.  Source:  Canada, Department of National Revenue, Taxation Division,Taxation S t a t i s t i c s .  TABLE X I I I SALES AND CASH OF CANADIAN MANUFACTURING (Millions of dollars;  percent)  Year  Cash  Sales  1950 1951  $ 64-5 502  $ 12853 15360  1952  1953 195V 1955 1956  1957  1958 1959 1960 1961  Source:  553  604729 77 602 632 753 - 668 64-1 725 k  CORPORATIONS  16267  17756 17758 19805 22213 22111 217742382424680 25289  Cash/Sales  5.0$ 3.3 3.4-  3. 4-.1 3v8 2.7 2.9 3.5 2.8 2.6 2.8 k  Canada, Department o f N a t i o n a l Revenue, T a x a t i o n D i v i s i o n , Taxation S t a t i s t i c s .  85 It was mentioned that i n years of rapid growth when interest rates were high, there was a great deal of c a p i t a l investment.  This s i t u a t i o n exposes an interesting paradox,  as just when money market securities were most a t t r a c t i v e , the corporation had less funds available to invest i n them. Of course, i t also had less cash r e l a t i v e to sales.  The  conclusion, then, i s that high interest rates were not necessarily the cause of money market investment, and i n f a c t , the relationship should be an inverse one.  The  treasurer should have taken note of the "ratchet e f f e c t , " however, and r e a l i z e d that he was able to work with less cash than he had e a r l i e r supposed.  F i n a l l y , when his sales  growth slowed down and investment opportunities i n his own company decreased, he could have maintained the previous cash/sales r a t i o , and with the excess cash, obtained some return from the money market.  At t h i s time money was l i k e l y  to be easier and his returns not as great as before, but the opportunity to invest did e x i s t . The l a s t condition, that of easier money with slowed expansion, i s not always a v a l i d one.  In f a c t , during recent  years the Bank of Canada, through i t s monetary p o l i c y , has maintained interest rates at a high l e v e l i n spite of slowed expansion.  Therefore, r e l a t i v e l y high interest rates have  coincided with a v a i l a b i l i t y of funds for temporary investment. The most useful t o o l to aid cash economizing i s the cash budget similar to that described i n the previous section. Other methods include c e n t r a l i z i n g of bank balances, improved  86  communications between branches, and improved synchronization of trade payments and receivable  V.  collection.  EMPIRICAL OBSERVATIONS  Much of the short-term borrowing and investment  activity  of a p a r t i c u l a r firm Is tempered by the character of the firm i t s e l f or the industry of which i t forms a p a r t . s h a l l be discussed i n the following chapter.  These factors  This part s h a l l  consider some of the investment and borrowing p o l i c i e s of Canadian firms to give an impression of attitudes of several f i n a n c i a l executives regarding the money market, and what i s currently being done by some firms to take advantage of the opportunities. Cash Forecasting The most detailed reply to the questionnaire regarding cash forecasting i n conjunction with money market a c t i v i t y was submitted by a large i n d u s t r i a l corporation with t o t a l assets exceeding $150 m i l l i o n .  The assistant treasurer  made the following comments after stating the large scope of his firm's operations: . . . T h u s to gain the maximum benefit from surplus funds (or conversely to avoid having i d l e funds i n the bank at no i n t e r e s t ) , to meet short-term r e quirements, for a d d i t i o n a l funds at the lowest possible cost, and to be forewarned regarding the need for a d d i t i o n a l , more permanent c a p i t a l i t i s necessary to prepare plans ranging i n term from one month to five years. These f i n a n c i a l plans are developed from short- and long-term operating forecasts, projected c a p i t a l expenditures and other estimates of the future, most of which are compiled as part of a regular routine.  87 A long-term forecast gives us an i n d i c a t i o n of the cash which w i l l he generated i n t e r n a l l y , the demands on i t for c a p i t a l expenditures, the amounts which w i l l he available for investment or debt r e payment, and i s one of the factors taken into account for dividend p o l i c y . The one-year cash forecast i s a more detailed plan by months for the next quarter and by quarters for the balance of the year. It i s revised every three months. From t h i s and data on monthly v a r i a t i o n s , we can judge whether investments should be f o r , say, 30 or 60 days, or extended into six to nine months. We can also judge from t h i s whether i t would be preferable to select some e a s i l y saleable security rather than some fixed term commitment which would result i n a loss i f additional funds were needed i n an emergency. The f i n a l measures consist of a forecast for one month which i s developed i n considerable d e t a i l and a d a i l y cash statement prepared i n similar form. These l a t t e r elements i n cash planning provide us with a d a i l y check on our progress against the plan and allow us to invest cash for as short as one day or as long as 30 days, independent of what may be indicated by longer term estimates. Another large i n d u s t r i a l firm with t o t a l assets exceeding $50 m i l l i o n reported use of a cash forecast i n conjunct i o n with a p r o f i t plan.  The treasurer stated the following:  We prepare a 12-month running forecast of p r o f i t and loss and a 12-month running forecast of cash flow. We merge these into a forecast of change i n f i n a n c i a l p o s i t i o n and a forecasted balance sheet. This procedure permits us to see well i n advance whether or not the results we predict w i l l be s a t i s factory. If i t appears that they are not going to be s a t i s f a c t o r y , i t gives us plenty of time to change our plans and f i n d a basis that w i l l produce the desired r e s u l t s . These reports are based upon a forecast of unit sales, production, and inventory, broken down into , , and Various special products. To the unit forecast we are able quite accurately to apply the weighted average sales prices to obtain sales estimates and the weighted average cost prices to obtain cost of sales and cost  88 of p r o d u c t i o n . We have d e t a i l e d methods of f o r e c a s t i n g and budgeting s a l e s and adminis t r a t i v e expense and o t h e r major disbursement areas i n c l u d i n g c a p i t a l disbursements f o r expansion, improvement and replacement o f c a p i t a l facilities. We a l s o m a i n t a i n a l o n g range 5-year s a l e s f o r e c a s t , a 5-year p r o f i t and l o s s and cash f l o w , which are prepared on a d i f f e r e n t b a s i s than the 12-month short range f o r e c a s t s which permit a more d e t a i l e d approach. The companies quoted above were l a r g e , but t h e i r p r o cedures were not n e c e s s a r i l y a f u n c t i o n of s i z e . t r o l l e r o f a f i r m w i t h a s s e t s of l e s s than $15 ported t h a t h i s company prepared pro-forma  The  con-  million re-  financial  state-  ments on a monthly b a s i s and while he d e s c r i b e d h i s weekly cash f o r e c a s t s as "rough e s t i m a t e s " , they d i d permit him t o i n v e s t i n t r e a s u r y b i l l s f o r about t e n days each month between l a r g e cash i n f l o w s and o u t f l o w s . Banker R e l a t i o n s h i p s It has been noted t h a t banks are adverse t o the issuance of  commercial  paper, e s p e c i a l l y because they are f o r c e d t o  support the market through t h e i r l i n e s o f c r e d i t .  However,  the extent t o which a c t i o n i s taken by the banks t o prevent t h e i r customers from i s s u i n g paper d i f f e r s w i d e l y among f i r m s and,  j u d g i n g by statements o f respondents t o the  q u e s t i o n n a i r e , the paramount f a c t o r s are a t t i t u d e s of c o r porate t r e a s u r e r s and b a r g a i n i n g between them and bankers. of  their  The f o l l o w i n g examples w i l l i l l u s t r a t e t h i s  reasoning.  line  The treasurer of a company with an A M I credit r a t i n g and a sophisticated  system of cash management stated that:  ...we would not borrow from commercial corporations because we prefer to pay s l i g h t l y more and keep our l i n e s of credit with our bankers f i r m l y established. When money i s essential i t i s usually hardest to get and the commercial type of borrowing i s on a here-today-gone-tomorrow b a s i s , whereas the banks are constant, and we f e e l i t i s better to keep our credit w e l l established with them. A construction supply firm with a highly c y c l i c a l cash flow reported: At present, we choose to remain i n the short-term money market since i t i s more economical with i n terest rates i n the range o f 4-$ to 4- 1/2$, whereas long-term borrowing rates would be i n the 6$ to 6 1/2$ range and, of course, i n addition to t h i s you would have the l e g a l , f i n a n c i a l and underwriting costs which go along with a long-term issue. This p o l i c y can only be followed as long as suff i c i e n t funds are available i n the short-term market and, at the same time, we believe that any short-term borrowing on the open market must be f u l l y backed by a l i n e of credit with the banks. One commercial paper borrower had an understanding with his banker that he would do at least 66$ of his short-term borrowing there, while another had a similar agreement, but the amount was 50$. There i s also a wide v a r i e t y of p o l i c i e s on the ment side.  invest-  Some firms keep a minimum cash balance with the  bank, while one mentioned that i t has agreed to keep a $700,000 deposit with i t s bank for services rendered; f o r a period of about ten days every month the balance declined below t h i s figure and an annual 4- 1/2$ interest rate was paid to the extent of t h i s deficiency.  A firm was quoted  i n the previous chapter as investing i n term deposits only  to maintain banker r e l a t i o n s h i p s . placated.Its  Another stated that  banker by buying treasury b i l l s there.  it  On  the investment side the banks have at least offered the corporate treasurer a competitive instrument, the bank term deposit; on the borrowing side, both t h e i r loans and acceptances were deemed excessively expensive. Investment  Policies  As i n the case of banker r e l a t i o n s h i p s , one cannot generalize with respect to investment p o l i c i e s .  Board of  d i r e c t o r approval was generally required for the various s e c u r i t i e s and one finance company executive stated that most larger firms placed l i m i t s on the amounts of various instruments.  He noted further that since his company has  been growing very r a p i d l y i n the past several years, one of his continuing problems was to convince larger indust r i a l firms to increase t h e i r quotas of his notes.  He  also mentioned that while a l l finance company notes were placed through investment dealers, he did extensive marketing himself on an informal basis.  Thus, once again,  personal attitudes and the bargaining process were paramount considerations. Not one firm reporting on t h e i r procedure detailed any type of formal analysis as recommended e a r l i e r i n the chapter, but many firms outlined considerations i n cluding expected needs according to t h e i r cash flow, s e c u r i t y , marketability, and y i e l d .  °ne of the basic problems regarding safety of the investment was that there were no concrete standards of performance.  Many firms expressed fear as to  defaults  i n commercial paper, yet the fact remains that to date there has been none; nor have any of the finance companies l i s t e d i n Table V f a i l e d to meet a maturity payment.  Examples presented below give an impression of  the v a r i e t y of attitudes of several treasurers  active  i n the money market and how these attitudes affect portfolios.  their  The p o r t f o l i o s themselves are presented i n  Table XIV. Company A.  The treasurer of a large public u t i l i t y  stated that the basic p o l i c y r e l a t i n g to investments was "maximum security with complete l i q u i d i t y . "  Table XIV  shows that t h i s p o l i c y was not i n fact adhered t o , although the treasurer also mentioned that maturity dates were t a i l o r e d c a r e f u l l y to corporate needs.  The meaning of  maximum security was also not clear but the absence of commercial paper i s noteworthy. Company B.  The secretary-treasurer noted that,  in  conjunction with a p o l i c y of highest net y i e l d consistent with safety and l i q u i d i t y , his company r a r e l y invested for a period beyond six months i n non-Government of Canada securities.  The following remarks further explained his  portfolio: . . . T h e growth and a v a i l a b i l i t y of P r o v i n c i a l and Municipal low-coupon bonds and notes have resulted i n our using t h i s medium f o r a sub-  92 s t a n t i a l amount of our term lending rather than Finance and Trust Company paper, which media we had used extensively i n p r i o r years. In conclusion, I would point out that one c r i t i c i s m we have of the present short-term market i s that quality of investment does not always seem to be reflected i n the yields a v a i l a b l e . This may have something to do with the r e l a t i v e amount of money available from lenders who are taxable as compared with those who are not taxable on c a p i t a l gain, combined with lack of appreciation on the part of some lenders as to the inherent r i s k s i n lending to some borrowers. Company C .  The Vice-President-Finance of a large  appliance firm stated the following regarding his Investment p o l i c y : From a review of the investment s e c u r i t i e s statements, you w i l l note that our securities are highly marketable. Our p o l i c y i s to keep l i q u i d and not to get locked into an investment s i t u a t i o n even though t h i s p o l i c y does reduce the y i e l d that we might obtain. However, we f e e l that i t i s wise i n order that we may take advantage of any opportunity that might present i t s e l f where a substantial amount of cash might be required. Table XIV indicates that a large proportion of the firm's investment was not, i n f a c t , highly marketable. forecast  However, i t  i t s cash needs and i t was thus l i k e l y that the large  sum on c a l l would suffice for any unexpected requirements. Furthermore, the detailed l i s t  sent to the author gave  evidence of a substantial d i v e r s i f i c a t i o n both i n issuers and maturity dates. Company D.  This i s the company of assets over $ 5 0  m i l l i o n quoted In the "Banker Relationships" section above. Regarding i t s investment p o l i c y , i t agreed with Company B  93 that the y i e l d s on corporate paper did not j u s t i f y the r i s k and i n conjunction with i t s p o l i c y of good hank r e l a t i o n s , invested mainly i n hank term deposits, treasury h i l l s .  U.S. "swaps," and  While i t s p o l i c y indicated lack of  aggressiveness i n searching for the highest yielding i n struments, the following extract from the treasurer's l e t t e r showed much aggressiveness i n another respect: . . . W i t h regard to r e a l short-term money we always look at our hank balance at 1 0 : 3 0 Friday morning, ascertain our probable exposure for drawing on the week-end on Friday u n t i l close of banking, then we i n vest the balance for the week-end by dealing with a large underwriting house on a s e l l - and buy-back basis with short-term treasury b i l l s held as c o l l a t e r a l . Thus, we may have a v a r i e t y of investments a l l at the same time, namely, bank deposit c e r t i f i c a t e s for t h i r t y , s i x t y , or ninety days, t h i r t y , s i x t y , or ninety-day treasury b i l l s and week-end loans on short-term market supported by treasury b i l l c o l l a t e r a l . We graph our bank balance v s . our investments and t r y at a l l times to have the maximum amount of refund invested. It pays o f f , has no r i s k and i s using funds that would otherwise be i d l e . Company E .  The Vice-President-Finance of t h i s  was interviewed by the author.  firm  Table XIV shows a well  d i v e r s i f i e d p o r t f o l i o , most of which was In discounted bonds.  He stated that he kept informed of movements within  the money market, and had a thorough understanding of d i s count and y i e l d movements.  In f a c t , he claimed that many  issuers and dealers often misquoted p r i c e s , so he made continual reference to his own y i e l d book.  Not only did  he receive a d a i l y statement from his bank, but reconciled t h i s with his own cash flow and issuance of cheques, and  9k he knew each day exactly what his cash p o s i t i o n was.  His  hank account was kept at a minimum and often was a negative figure.  This was unknown to the hank because of the bank  f l o a t , and when a d e f i c i t occurred he was sure to replenish i t before his outstanding cheques would be entered i n his account. His p o l i c y with regard to long-term debt was equally aggressive.  His firm was continually expanding, so when  few issues were placed on the market by others, and the market seemed receptive, he would float an issue whether he needed the money or notj then he invested the proceeds temporarily.  Furthermore, his bond indentures from previous  issues had sinking fund provisions, but instead of c a l l i n g bonds at 100, he bought outstanding bonds on the market at as low as 83.  The price was t h i s low because these bonds  were o r i g i n a l l y sold when interest rates were much l e s s . Therefore, he f u l f i l l e d his sinking fund requirements, and made substantial p r o f i t s i n the process. He admitted to a slight "window-dressing" of the cash account for annual report purposes.  The reasoning was that  shareholders l i k e d to see some cash, and t h i s was accomplished by not renewing some of the investments that matured at the end of the year u n t i l the beginning of the next.  Nevertheless,  the company d i d show i t s short-term s e c u r i t i e s separately on the balance sheet and p r o f i t from t h i s dealing i n the income statement. This f i n a n c i a l man agreed with those i n Companies B and D that y i e l d differences did not merit investment i n c o r -  95 porate paper.  He stated that i f the firm i n which he placed  about $5 m i l l i o n had f i n a n c i a l d i f f i c u l t i e s and defaulted, court delays might hold up payment when his own firm needed the funds for corporate purposes.  He would then be em-  barrassed to t e l l board of directors that he made the investment for an after-tax y i e l d advantage of about 1/8 of 1%. It i s noteworthy that his board was an exception to the r u l e by showing enough confidence to place no r e s t r i c t i o n s whatever upon his investment p o l i c i e s . The company made ten-year and five-year predictions of c a p i t a l expenditures, the l a t t e r i n greater d e t a i l than the former.  Furthermore, a one-year cash forecast was made by  months i n conjunction with the operations budget.  Thus,  inflows and outflows were known well i n advance and maturity dates could be t a i l o r e d accordingly.  The d a i l y forecast has  already been noted and i t enabled the Vice-President-Finance to invest for periods as short as a week.  He has occasionally  placed money over the week-end and expected to give more attention to t h i s outlet i n the future. Aside from these companies noted i n the examples above, other respondents indicated further v a r i e t y i n p o l i c i e s and attitudes.  In p a r t i c u l a r , two firms i n a chronic cash sur-  plus p o s i t i o n preferred to place the funds i n equities because the dividends were not taxable i n the hands of c o r porations.  The secretary-treasurer of one of these firms  mentioned the r i s k of c a p i t a l loss through forced sale, but expressed confidence that the r i s i n g trend i n stock prices should continue.  96  TABLE XIV INVESTMENT PORTFOLIOS OF SELECTED COMPANIES (In percentages of t o t a l short-term investments)  Security  Company C  A  B  Government of Canada Direct and Guaranteed Bonds  7.5  3^.3  30.8  -  34-. 5  P r o v i n c i a l Direct and Guaranteed Bonds  22.0  32.2  7.9  -  52.0  4-.1  -  4-.1  Municipal  -  Bank Term Deposits (Canadian and U.S. Funds  -  -  D  E  22.4-  12.3  100.0  39.6  -  8.3  -  2.7  Finance Paper  8.5  -  1.6  -  6.7  Commercial Paper  -  -  12.6  Dealer Loand  -  21.2  100.0  100.0  Trust Company Deposits  Total  Note:  Sources:  Companies reported on different  Selected Canadian companies.  34-.7 100.0 100.0 100.0  dates  97 Several replies  indicated  disagreement  with the attitudes  o f Companies B and D c o n c e r n i n g s a f e t y , and one t r e a s u r e r r e garded  a p o l i c y o f o n l y p l a c i n g funds  "extreme v i e w " . borrowings The  Composite  results  o f the respondents  i n governments as a n  of total  i n v e s t m e n t s and  a r e p r e s e n t e d i n t h e Appendix.  p r e d o m i n a n c e o f F e d e r a l Government o b l i g a t i o n s a n d t h o s e  o f b a n k s and t r u s t that  companies i s noteworthy  o n l y three respondents  investing  as i s the f a c t  i n c o r p o r a t e paper  made  u s e o f t h a t media, a l o n e . F r o m a n e x a m i n a t i o n o f t h e r e s p o n s e s one must that  t h e r e was a v a r i e t y o f i n v e s t m e n t  on t h e d i f f e r e n t directors  p o l i c i e s based  o f t h e companies.  cash.  mainly  a t t i t u d e s o f t h e e x e c u t i v e s and boards o f T h e r e were a l s o  substantial  d i f f e r e n c e s a s t o how h a r d c o m p a n i e s were w i l l i n g their  conclude  t o work  O n l y two c o m p a n i e s r e p o r t e d t h e u s e o f week-end  i n v e s t m e n t s and one t r e a s u r e r  stated that  h i s board o f  d i r e c t o r s d i d not t h i n k a n investment f o r a few days  only  was " w o r t h w h i l e " . The  f a c t o r s noted above d e t e r m i n e  t h e investment o r  b o r r o w i n g p o l i c y when t h e r e i s a s u r p l u s o r d e f i c i e n c y o f funds.  Such e x c e s s e s o f , o r needs f o r , c a s h a r e l a r g e l y  determined  by c h a r a c t e r i s t i c s  peculiar t o an industry o r  by t h e f i n a n c i a l  structure  of individual firms.  These  con-  siderations w i l l  form the d i s c u s s i o n o f t h e f o l l o w i n g chapter.  CHAPTER V INFLUENCES UPON MONEY MARKET ACTIVITY The non-financial corporation's major scope of a c t i v i t y does not include dealing i n s e c u r i t i e s .  It has  i t s own nature of trade toward which e f f o r t s are concent r a t e d , and money market dealings should thus be a marginal portion of operations to take place when the firm has surplus funds available or needs a d d i t i o n a l cash to carry on i t s business.  Many factors cause some firms to have more  of such surpluses or needs than others, and these considerations s h a l l be the subject of this chapter.  It should be  noted that the factors do not always carry the same weight. For example, one company may have a large dividend payment of $5 m i l l i o n while another, only $100,000; the former w i l l have to save i n a n t i c i p a t i o n of the payment while the l a t t e r may find dividends a minor aspect of i t s cash flow.  One  should also note that the factors do not always work i n the same d i r e c t i o n and a firm may discover, for example, that bank borrowing f a c i l i t i e s eliminate the need to save for any lump sum payments. I.  THE INDIVIDUAL FIRM  If a firm can earn 8% before taxes on c a p i t a l invested within i t s e l f ,  i t i s obvious that such c a p i t a l i s being put  to better use than i n s e c u r i t i e s y i e l d i n g 3% or h%.  There-  99 f o r e , i t i s advantageous for the company to have i t s  cash  and marketable security accounts as small as possible. The more even the cash flow, the easier i t becomes for the company to minimize these accounts, but most firms are subject to fluctuations a r i s i n g from causes noted below. Use of Trade C r e d i t .  With the exception of r e t a i l sales,  buying and s e l l i n g are r a r e l y done on a cash basis.  As t h i s  i s affected by p a r t i c u l a r industry c h a r a c t e r i s t i c s i t s h a l l be discussed i n the next part of the chapter, but i t  is  often a function of the firm i t s e l f or i t s suppliers and customers.  A company may deal extensively with one supplier  from which i t receives invoices throughout the month payable on the tenth of the following month.  Furthermore, i t may  receive payment from customers throughout the month, and thus have a surplus build up for which a lump-sum payment must be made.  The supplier, on the other hand, may have to  make Its disbursements throughout the month, so receipts must be held for these payments.  The i d e a l s i t u a t i o n for  minimizing the cash account would be a coincidence of receipts and payments. The use of trade credit has had an important influence on the cash account In periods of credit r e s t r a i n t . ^  With  money harder to obtain, firms have found i t arduous to c o l l e c t accounts according to the agreed terms and such  J . H . Young, J . F . H e l l i w e l l , W.A. McKay, o p . c i t . p p . V - l , V-2.  100 terms have become i n c r e a s i n g l y d i f f i c u l t  t o enforce i n l i g h t  of more c o m p e t i t i v e b u s i n e s s c o n d i t i o n s .  The r e s u l t i s t h a t  the s u p p l i e r must m a i n t a i n a d d i t i o n a l l i q u i d r e s e r v e s t o compensate f o r slowed  collections.  Cash d i s c o u n t s can a i d i n e n s u r i n g q u i c k e r customer payments. to  Terms of 2/10,  net/30,  are a s u b s t a n t i a l i n c e n t i v e  the customer; i f he chooses t o pay a $1000 b i l l i n t h i r t y  days he gets the use of $980 f o r an e x t r a twenty days at the cost of the d i s c o u n t foregone o f $20.  He thus pays 2.04-$ f o r  the use of $980 f o r twenty days (or one-eighteenth of a y e a r ) , and i n annual terms the c o s t o f the continued l o s s o f d i s count i s 2.04- x 18  or 3 6 . 7 2 $ .  One  c o n t r o l l e r who  v i o u s l y g i v e n such d i s c o u n t s t o customers,  had  pre-  however, s t a t e d  t h a t he d i d not f i n d the arrangement s a t i s f a c t o r y ; customers would o f t e n take the d i s c o u n t even when paying l a t e , b i l l i n g them a c c o r d i n g l y was source o f f r i c t i o n . for too,  and  not o n l y a nuisance but a l s o a  A s i m i l a r t a c t i c is- t o charge  interest  overdue accounts, but the same c o n t r o l l e r noted t h a t t h i s , hampered customer r e l a t i o n s h i p s . Lump Sum  Payments.  C e r t a i n types of payments are made  on s p e c i f i c dates throughout  the c a l e n d a r year and  funds  2 must be saved f o r these purposes.  The f i r s t  i s the ac-  cumulation of tax r e s e r v e s f o r monthly payments.  Garvy, o p . c i t . . pp.68-69  The need  101 for such saving i s greater i n the United States where taxes are paid quarterly, and one Canadian firm with a sizable portion of i t s earnings i n the United States reported a substantial investment i n American treasury b i l l s for tax purposes. A second category of lump-sum payments relates to the f i n a n c i a l structure of the f i r m .  Dividends and interest  remuneration and debt repayment or amortization take place at specified times during the year and funds must be accumulated accordingly.  A l s o , when a long-term security-  issue i s f l o a t e d , funds may not be needed immediately i n the business,  and thus a large cash surplus r e s u l t s .  This  condition Is e s p e c i a l l y pertinent to a continually expanding firm which goes to the market frequently f o r funds.  The  extent to which the firm can immediately reinvest retained earnings to finance the expansion w i l l have the effect of reducing the size of security issues, and thus also reduce the pool of surplus funds. L i q u i d i t y i s often desired-to take advantage of b u s i ness opportunities, such as, exercise of options, a c q u i s i t i o n of inventories, and deposits on b i d s .  These oppor-  t u n i t i e s are l a r g e l y a function of the industry and s h a l l be discussed as such i n the following part of the chapter. Reserves are also maintained for precautionary purposes. Funds may be unexpectedly needed because of a s t r i k e , transportation t i e - u p , a sudden decline i n sales, and the like.  102  Size of Firm.  The size of a company w i l l have an  effect upon the amount of l i q u i d reserves and, more importantly, changes i n them.  The corner grocer, for example,  w i l l obviously have a much smaller monthly cash swing than a large grocery chain and the factors noted i n the previous section w i l l have greater consequences for the l a t t e r .  Its  c a p i t a l needs, p a y r o l l , tax payments, and emergency reserves w i l l be l a r g e r , as w i l l the surplus or deficiencies result.  which  Investment and borrowing opportunities are likewise  a function of size*  The large chain w i l l l i k e l y find borrow-  ing available i n the commercial paper market, while the corner grocer, i f i n a surplus p o s i t i o n , w i l l probably not have enough to buy the smallest unit treasury b i l l . Table XV shows the average cash and security p o r t f o l i o s f o r the different sizes of Canadian firms i n 1961.  The  average size of the sum of these two accounts i s , of course, greater for larger firms; more significant i s the fact that as firms increase i n size t h e i r r a t i o of cash to t o t a l securities f a l l s .  Thus, not only do large firms have more  l i q u i d funds a v a i l a b l e , but they use a greater proportion for  investment. Debt versus Surplus Positions.  Two firms i n the same  industry and similar i n a l l respects noted thus f a r may have s u b s t a n t i a l l y different current accounts because of the r e l a t i v e preference for a debt or surplus p o s i t i o n .  Some  companies l i k e to build up t h e i r cash account to make pay-  TABLE XV CASH AND SECURITY HOLDINGS OF CANADIAN COMPANIES (Dollar figures i n thousands) Asset Size  Cash  Under  Government Securities  Other Securities  Total Securities  Total Cash & Securities  Number of Firms  Average Cash & Securities  Cash/ Total Securities  $  100,000  156.2  9.5  133.2  14-2.7  298.9  52136  .006  1.09  $  100,00024-9,999  14-9.7  24-.8  302.5  327.3  4-77.0  26222  . 02  .46  $  250,0004-99,999  175.3  28.1  337.9  366.0  54-1.3.  12287  . 04-  .V8  $  500,ooo999,999  150.5  35.7  397.6  4-33.3  583.8  6710  .09  .38  $  1,000,0004-,999,999  376.4-  101.3  1165.4-  1266.7  164-7.1  54-39  .32  .30  $  5,000,0009,999,999  180.6  56.1  678.3  734-.4-  915.0  807  1.13  .25  $ 10,000,00024-,999,999  251.8  130.4-  906.1  1036.5  1288.3  535  2.4-0  .24-  $25 ,000,00099 ,000,000  4-57.4-  273.7  2069.8  234-3.5  2800.9  350  8.00  .19  $100,000,000 and over  4-19.6  677.9  234-0.0  3017.9  34-27.5  110  31.10  .l*f  Source: Department of National Revenue, Taxation D i v i s i o n , Taxation S t a t i s t i c s . 1 9 6 3 « P . 1 5 6 ,  merits, while others prefer revolving credit from the hank. T h e o r e t i c a l l y , the l a t t e r type borrows from the bank with the understanding that i t w i l l eliminate the debt p o s i t i o n periodically.  However, several firms reported that they are  continual borrowers on a demand basis.  The reasoning here  was that t h e i r operations showed a greater return than the 6% interest for the loan.  This system was even more advan-  tageous before September 1962 when banks allowed overdrafts. The firm would then show a negative cash balance and pay interest only to the extent of i t s overdrawn account on a d a i l y basis.  Overdrafts are no longer allowed, so a company  must now take out a loan for a c e r t a i n period of time and pay interest even on the funds l e f t on deposit i n the bank during the period. above 6%.  The effective  rate of interest i s thus  This procedure may become even more costly to the  smaller firm i f l e g i s l a t i v e action i s taken upon the recommendation made by the Royal Commission on Banking and Finance that the 6% interest c e i l i n g be removed. Of the 137 respondents to the questionnaire who claimed no money market p a r t i c i p a t i o n , sixty-seven  stated  the use of bank borrowing, twelve claimed no bank borrowing, two mentioned that t h e i r cash needs were f u l f i l l e d within t h e i r intercorporate organization, and f i f t y - s i x made no statement regarding t h e i r borrowing p o s i t i o n (See Appendix). To the extent that borrowing i s used i n l i e u of a p o l i c y of always having enough cash or marketable s e c u r i t i e s on hand to meet payments, less funds are available i n non-  105  f i n a n c i a l corporations for investment into the money market. One firm even reported use of hank credit beyond current needs: Our short term cash requirements are predicted on the maintenance of debt/equity r a t i o t h e o r e t i c a l l y set at 6 0 A 0 . Between Issues of s e c u r i t i e s (a discreet rather than continuous process), commercial bank loans are used to supply funds for both operating and c a p i t a l expenditures, ks the loan approaches a stated credit l i m i t , a new Issue of s e c u r i t i e s i s floated to r e t i r e i t , and from that point the cycle starts again. Such a p o l i c y again reduces a c t i v i t y i n the money market and i s opposed to one of issuing long-term s e c u r i t i e s before the cash account becomes negative. Intercorporate Relations.  P a r t i c i p a t i o n i n the money  market i s further reduced by the extent of intercorporate cash transfers between parents and subsidiaries and between associated companies.  When peaks and troughs of cash offset  one another i t i s wise to lend between the companies, and to that extent, eliminate the p r o f i t s of intermediaries.  Con-  versely, when the peaks and troughs occur at the same time i n parent and subsidiaries they can pool t h e i r funds to make the investment a worthwhile amount and thus enhance money market a c t i v i t y . The investment and borrowing p o l i c i e s of a subsidiary may be somewhat i n h i b i t e d by Its parent and the l a t t e r may either place r e s t r i c t i o n s or supply the f i n a n c i a l requirements of the former.  From the point of view of the whole organization,  t h i s can be advantageous as the subsidiary's short term r e quirements may be f u l f i l l e d by corporate paper issued under  106 the stronger name of the parent. Other R e s t r i c t i o n s .  The trust deed of a debt o b l i g a t i o n  often c a r r i e s r e s t r i c t i o n s regarding l i q u i d i t y .  One firm  which had placed a long-term o b l i g a t i o n with an insurance company was forced to maintain a specified minimum working c a p i t a l p o s i t i o n , and t h i s had the effects of reducing i t s borrowing and decreasing i t s funds available f o r temporary investment.  In actual f a c t , the firm was able to manipulate  i t s balance sheet to reduce the burden of the r e s t r i c t i o n by denoting a bank loan a "special" item, and placing i t side the current l i a b i l i t i e s  out-  section.  When a firm deals with a government i t must often leave a deposit to assure f u l f i l l m e n t of the contract.  Rather than  place t h i s deposit i n cash, government s e c u r i t i e s are used. At least one p r o v i n c i a l government has been known to  insist  that i t s own obligations be used for t h i s purpose. A f i n a l c h a r a c t e r i s t i c which can have a substantial on a firm's cash flow i s i t s l o c a t i o n .  effect  When goods must be  transported inland by ship, the company i n the centre of the country must stockpile i t s inventory i n the f a l l to l a s t through the winter months, while i t s counterpart on the coast can even out i t s transportation costs.  Furthermore, a firm  with heavy construction payments w i l l have a more even cash flow i f i t i s located on the coast where the ground does not freeze i n the winter.  107 II.  INDUSTRY CHARACTERISTICS  The cash flow of a company i s highly dependent upon i t s nature of trade.  Certain factors peculiar to the various  industries cause different types of fluctuations i n t h e i r cash accounts and each major type of industry s h a l l be considered.  To aid i n the a n a l y s i s , the following tables are  presented below: Table Table Table Table  XVI XVII XVIII XIX  -  Table XX  -  Table Table Table Table  -  XXI XXII XXIII XXIV  Day's Receivables Outstanding. Day's Payable Outstanding. Sales Growth from 1957 - 1961. Proportion of T o t a l L i a b i l i t i e s i n Mortgage and Other Funded Debt. Mining Production by month using 194-9 base Year Index. Manufacturing Shipments by Months. R e t a i l Trade by Months. R e t a i l Credit Outstanding by Quarters. Wholesale Trade by Months.  These tables s h a l l be referred to i n the t e x t .  The i n -  dustries are broken down into groups and sub-groups where s i g n i f i c a n t differences exist within them and reference s h a l l be made to pertinent items affecting cash flows.  Figures  used i n Tables XVI and XVII are for the year 1961; those i n Tables XIX to XXIV are for the year 1963.  Where monthly  fluctuations are noted, the year 1963 has been found to be typical. Mining. Mining production has a gradual increase during the spring, a s l i g h t downturn i n J u l y , a pick-up again i n the autumn, and f i n a l l y a decrease i n the winter.  Such  fluctuations cause seasonal changes i n the cash flows.  An  even greater need for cash balances arises from the develop-  108  TABLE XVI COMPUTATION OF DAY'S RECEIVABLES OUTSTANDING, YEAR 1961 (Dollar figures in. millions)  INDUSTRY  Sales  Average day's sales  Year-end receivables  Day's r e c e i v ables outstanding  Mining, Quarrying and 2233.7  6.1  256.1  4-2  25289.V  69.4-  2909.0  4-2  Construction  4-287.7  11.5  697.9  61  Transportation  2124-.9  5.8  234-. 5  40  578.9  1.6  83.8  52  14-26.6 679.4-  4425  O i l Wells Manufacturing  Utilities  8 )  Merchandising: Wholesale Retall  11865.3 9977.9  Includes " E l e c t r i c Power," Utilities." Source:  3 2.427.3  "Gas D i s t r i b u t i o n , " and "Other  Canada, Department of National Revenue, Taxation D i v i s i o n , Taxation S t a t i s t i c s . 1963-  109  TABLE XVII COMPUTATION OF DAY'S PAYABLES OUTSTANDING, YEAR 1961 (Dollar figures i n m i l l i o n s )  Cost of sales  INDUSTRY  Mining Manufacturing Construction  Average day's purchase  Year-end payables  Day's payables outstanding  658.9  1.8  192.2  107  18670.9  50.8  1700,6  34-  34-58.6  9.5  500.4-  53  Transportation  199.4-  .55  209.0  380  Utilities  161.2  .44  62.8  14-3  806.9 536.6  30  5 1  ^  Merchandising: Wholesale Retail  9811.7 764-2.4-  a) Includes "Electric Power," Utilities."  Source:  26.8 20.9  26  "Gas D i s t r i b u t i o n , " and "Other  Canada, Department of National Revenue, Taxation D i v i s i o n , Taxation S t a t i s t i c s , 1963.  110  TABLE XVIII SALES GROWTH (Dollar figures i n m i l l i o n s )  INDUSTRY  1957  Mining  1882.6  Manu-  22111.2  facturing Construc-  tion  Transpor-  tation  Utilities 3  Merchandising:  Wholesale Retail a")  1958  185-+.9  2092.8  21773.9 23822.5  I960  1961  Growth  1957-1961  2233.7  18.  24680.0 25289.4-  1*+.  2168.6  3636.2  3830.8  4-04-4-.5  4-220.6 4-287.7  15.2$  1806.6  1796.8  2014-.1  2084-.5  2124-.9  17.6$  365.7  4-36.4-  531.6  54-0.3  578.9  58.5$  10219.7 8157.7  10278.5 10990.9 8619.6 9467.2  Includes " E l e c t r i c Power," Utilities."  Source:  1959  11367.6 11865.3 9598.0 9977.9  16. 22.  "Gas D i s t r i b u t i o n , " and "Other  Canada, Department of National Revenue, Taxation D i v i s i o n , Taxation S t a t i s t i c s . 1963.  Ill  TABLE XIX PERCENTAGE OF TOTAL LIABILITIES IN MORTGAGE AND OTHER FUNDED DEBT, YEAR 1961 (Dollar figures i n m i l l i o n s ) INDUSTRY  Mortgage and other funded  Total liabilities  .  $  Mortgage and other funded debt to t o t a l  debt  ;  Mining  2182.4*  6306.6  34-.7$  Manufacturing  24-92.6  6367.3  37.6$  263.9  264-2.2  10.0$  Transportation  1508.3  4-4-99.4-  33.6$  Utilities*  1225.0  2704-.3  4-5.3$  509.2  9271.1  5.5$  Construction  }  Merchandising  Includes "Electric Power," Utilities."  liabilities  "Gas D i s t r i b u t i o n , " and "Other  Sourcet Canada, Department of National Revenue, Taxation D i v i s i o n , Taxation S t a t i s t i c s . 1963*  TABLE XX MINING PRODUCTION (Volume Index 194-9 = 100)  1963  Metals  January February March April  169.9 177.0 182.7 191. 4-  June July August  211.9 183.1 198.8  December  184-.2  207.3  May  220.2 208.0 202.0  September October November  Source:  Non-Metals  201.0 203.1 210.1 207.1 23^.9 231.5 201.2 244.1 251.7 256.4274.4221.9  Fuels  54-0.8 555.2 539.2 4-71.4^83.3 497.7 4-90.1 468.9 514-.0 512.8 522.1 561.1  D.B.S., Canadian S t a t i s t i c a l Review. A p r i l ,  p.6.  1964,  ¥13 ment of new mines once the ore i s discovered and the research that accompanies such discovery. Table XXVII shows that the day's payables outstanding f a r exceeded the day's receivables outstanding, allowing mines, i n e f f e c t , to use the funds of others for t h e i r own purposes. The sales of the industry have grown i n the years  1957-61  thus the need for c a p i t a l funds has also increased.  and  In f a c t ,  the r a t i o of debt to t o t a l l i a b i l i t i e s was r e l a t i v e l y high i n 1 9 6 1 compared to other industries and t h i s indicates  greater  interest and sinking fund payments as well as lump sums of funds received from security issues. Manufacturing.  Manufacturing firms i n general have a  shorter payment than receivable period, and thus experience the need for cash to help finance t h e i r customers.  While  t h e i r growth i n sales has not been as large as most other i n d u s t r i e s , they do more debt financing than any other, carrying with i t the implications noted i n the previous section. The best i n d i c a t i o n of seasonal fluctuations i s  shipments  and because of substantial differences between segments of the industry, Table XXI breaks down these groupings. f i r s t category, foods and beverages,  The  shows wide f l u c t u a t i o n  by months with no r e a l discernible pattern.  This i s  because  of the wide v a r i e t y of foods and beverages, each with i t s own pattern.  From production s t a t i s t i c s , ^  the sector showing the  D . B . S . , Canadian S t a t i s t i c a l Review, A p r i l , 1 9 6 , p . 7 . k  TABLE XXI MANUFACTURING SHIPMENTS (Dollar figures i n m i l l i o n s ) 1963 January February March April May June July August September October November December 1963  January February March April May June July August September October November December December Source:  Food and beverages  Textiles  •+12.7 •+02.7 1+17.1 -+38.1 1+81.5 4-79.5 4-93.4•+82.3 4-77.4503.3 4-77.5 •+59.6  87.3 82.9 92.2 86.0 96.2 93.6 79.7 85.6 95.8 103.9 97.6 9*+. 5  Transportation Equipment  Electrical products  Non-Metallic mineral products  252.7 23 . 21+4-.2 272.9 305.6 270.0 215.1 105.9 214-.5 275.6 322.6 337. 337.4-  103.9 107.2 113.4104-.9 114-.5 116.8 108.7 107.2 135.7 136.9 131.1 123.6 123.6  •+1.1 1+0.5 1+7.8 5 .0 69. 73.6 72.9 71.0 71.8 73.6 6*+. 9 1+8.7 -+S.7  k  k  k  Wood  Primarymetal.  90.6 95.9 107.0 100.7 117. 4118.7  Metal fabricating  269.2 21+4-.5 268.2 257.6 285.1 263.6 258.6 262.7 259.5 281.5 279.6 268.5  14-4-.6  14-2.7 139. 14-1.1 130.8 129.0 k  k  k  121.0 112.9  125.4128.9  D . B . S . , Canadian S t a t i s t i c a l Review. & p r i l , 1964-, pp.7-10.  k  60.9  14-7.3 146.5 11+7.0 161.5 11+0.7  63.  166.2 14-9.4-  121.8 110.7 110.1 107.2 121.7 113.1 120.7 120.9 121.2 118.9 116.6 126.9  5 .3  67.8 7 .2 75.3 7 .l 82.1* 64-. 466iV  150.0  Petroleum and coal products  Machinery  k  k  68.6 63.5 k  Chemical and Chemical products  120.7 120.1+ 132.8 14-4-.6 162.2 1^.7 125.4132.7 14-0.6 11+8.1 137.0 126.7  115 greatest seasonal change was the canning industry, of which the production increased substantially i n the summer months after the f r u i t was c o l l e c t e d .  Also noteworthy were spring  and summer increases i n the production of beer and soft drinks to meet the increased summer demand i n these seasons. The following responses to the questionnaire give further impressions of c h a r a c t e r i s t i c s enhancing the opportunity for money market a c t i v i t y i n the food and beverage sector of the industry: Sugar Refinery. As the sugar r e f i n e r i e s of this company are located on inland ports, i t i s necessary to accumulate substantial inventories of raw sugar over the period when navigation i s closed. In consequence, substantial sums df money are invested i n inventories throughout the winter and substantial recourse is- made to the short-term money market to finance t h i s requirement. In the spring and summer the reverse holds true and substantial sums are available for shortterm investments. Bread Company. Our period of short-term borrowing i s usually for the period December to March, which i s our slack sales period each year. Malting Company. Our company i s required to buy i t s winter requirements of barley (Our raw materials) i n the late summer and f a l l i n order to obtain the desired q u a l i t y for malting and also to take advantage of water rates for transportation (which are roughly one-third to one-half the corresponding r a i l rates) to Eastern Canada. This results i n a substantial accumulation of inventory which has to be financed by bank borrowings and commercial notes. . . . C a s h flow estimates are made for 2 or 3 years i n advance as required. In addition, the current cash p o s i t i o n i s watched almost d a i l y to keep track of borrowings and the proportion between bank and paper. There can be substantial fluctuation(#100,000 $200,000) depending on barley purchases, which can fluctuate considerably due to weather, a v a i l a b i l i t y ,  116  e t c . , and a l s o i n c a s h c o l l e c t i o n s , w h i c h can a l s o v a r y , e s p e c i a l l y i n the e x p o r t f i e l d . Candy Company. I n o u r b u s i n e s s c a s h comes i n a t the p e a k s , such a s , C h r i s t m a s and E a s t e r and i s r e q u i r e d i n the o f f - s e a s o n s f o r p u r c h a s e s , d i v i d e n d s , wages and o t h e r r u n n i n g e x p e n s e s . D a i r y Company. The s u r p l u s funds we do have, we keep i n r e a s o n a b l y s h o r t - t e r m paper due t o the f a c t t h a t we have, g e n e r a l l y s p e a k i n g , f a i r l y l a r g e commitments i n the summer months on our i n v e n t o r i e s and i n t h e s p r i n g months on c a p i t a l expenditures. The importance o f s e a s o n a l f l u c t u a t i o n s i n f o o d and beverage m a n u f a c t u r i n g i s f u r t h e r supported by T a b l e XXIX i n theAppendix i n w h i c h n i n e t e e n o f the t w e n t y - f o u r  report-  i n g f i r m s i n d i c a t e d t h i s as a r e a s o n f o r money market activity.  F u r t h e r m o r e , T a b l e X X V I I I i n the Appendix shows  the predominance o f the " f o o d and b e v e r a g e " segment as issuers of corporate paper. is  The s t a b i l i t y o f the i n d u s t r y  a p o s s i b l e r e a s o n e n a b l i n g the f i r m s t o meet t h e i r  s e a s o n a l needs t h r o u g h t h i s m e d i a . Most o f t h e o t h e r s e c t o r s o f the m a n u f a c t u r i n g i n d u s t r y are affected  by t h e s h o r t - t e r m c o n s t r u c t i o n c y c l e and T a b l e  X X I shows i n c r e a s e s  i n shipments i n the s p r i n g ,  especially  May. T a b l e XXIX i n t h e Appendix i n d i c a t e s e s p e c i a l of  importance  s e a s o n a l f l u c t u a t i o n s i n e l e c t r i c a l equipment and i r o n ,  s t e e l and n o n - f e r r o u s m e t a l s .  Because o f the b u l k i n e s s o f  metals, the t r a n s p o r t a t i o n f a c t o r i s important to i n l a n d companies, and one r e p o r t e d a l a r g e b u i l d u p i n i n v e n t o r y b e f o r e the w i n t e r months.  Peak s a l e s p e r i o d s were c i t e d by  117  one  company as being l a r g e l y determined  by automobile  pro-  d u c t i o n , and i t w i l l be noted t h a t T r a n s p o r t a t i o n Equipment has a h i g h l y seasonal p a t t e r n .  On the other hand, a s t r u c -  t u r a l s t e e l f i r m noted i t s o p e r a t i o n as c y c l i c a l but seasonal.  T h e r e f o r e , i t s cash f l o w was  determined  not  princi-  p a l l y by the l o n g e r term c o n s t r u c t i o n c y c l e . Construction.  The time p e r i o d s o f r e c e i v a b l e s and pay-  a b l e s o u t s t a n d i n g i n the c o n s t r u c t i o n i n d u s t r y are q u i t e . c l o s e l y synchronized.  One  f i r m r e p o r t e d t h i r t y - d a y terms  on r e c e i v a b l e s but "hold-backs" tended t o i n c r e a s e t h i s period.  Growth has been about average although the i n d u s t r y  i s l e s s l e v e r a g e d than any o t h e r .  The  heavy c o n s t r u c t i o n  p e r i o d i s i n the second and t h i r d q u a r t e r s of the year, but the e f f e c t t h i s has on cash f l o w s shows some v a r i a t i o n between companies, as noted by the f o l l o w i n g comments: C o n s t r u c t i o n Firm. In the C o n s t r u c t i o n I n d u s t r y borrowing i s g e n e r a l l y o f a short-term nature; the c a p i t a l borrowed being used p r i m a r i l y f o r : (1) s e c u r i t y d e p o s i t s w i t h tenders (2) 30-day f i n a n c i n g of Accounts R e c e i v a b l e (3) the f i n a n c i n g of hold-backs which v a r y from 10$ t o 20$ o f the t o t a l c o n t r a c t e d amount. C o n s t r u c t i o n Supply Company. In our b u s i n e s s which i s h i g h l y c y c l i c a l , our g r e a t e s t s a l e s take p l a c e d u r i n g the p e r i o d May through October o f each year, w i t h the r e s u l t t h a t the cash f l o w from r e c e i v a b l e s i s r e l a t i v e l y s m a l l f o r the f i r s t f i v e months of the year. During t h i s time, of course, our short term borrowings r e a c h t h e i r peak and t h e r e a f t e r they tend t o decrease u n t i l the low p o i n t i s reached i n December and January.  118 Cement Company. Cash f o r e c a s t i n g i s t i e d t o our annual budgeting f o r c a p i t a l e x p e n d i t u r e s , the t i m i n g of these w i t h progress payment r e q u i r e ments and d i v i d e n d payments. Large i n v e n t o r y requirements such as f u e l o i l by tanker l o a d approximately every e i g h t months. Our l e n d i n g begins t o b u i l d up each year by May i n c r e a s i n g r a p i d l y through the heavy c o n s t r u c t i o n season t o a peak d u r i n g Nov - Dec. Major c a p i t a l i n s t a l l a t i o n s are done over the s l a c k e r w i n t e r season i n p r e p a r a t i o n f o r the next s p r i n g . Heavy o u t f l o w g e n e r a l l y Jan. - A p r i l . Cement Company. Our business i s s t r i c t l y seasonal and we f i n d that l a r g e cash balances accumulate up t o March 31st at which time t h e y d i m i n i s h u n t i l September when they a g a i n b e g i n t o b u i l d up. As a matter o f p o l i c y then, excess cash I n the F a l l (beginning b u i l d - u p p e r i o d ) would be i n v e s t e d f o r l o n g e r terms i n order t o achieve the h i g h e s t r a t e . T h i s b a s i c p h i l o s o p h y must be tempered by the need f o r l a r g e cash at October 31 t o cover i n t e r e s t and bond repayments. Paving F i r m . G e n e r a l l y speaking, our Investment i n short term funds i s c o n f i n e d t o e i t h e r Government of Canada T r e a s u r y B i l l s or Bank Guaranteed Deposit R e c e i p t s . T h i s , g e n e r a l l y speaking, takes p l a c e i n the l a t t e r p a r t Of our f i s c a l year which ends March 31st. During the o p e r a t i n g season, g e n e r a l l y from A p r i l t o November, we do experience f l u c t u a t i o n s on our bank d e p o s i t s d u r i n g the month and we are how g i v i n g a great d e a l more a t t e n t i o n t o i n v e s t i n g these monthly s u r p l u s e s f o r p e r i o d s of from one t o two weeks. Transportation.  The f i g u r e f o r days payable o u t s t a n d i n g  i n Table XVII f o r the t r a n s p o r t a t i o n b u s i n e s s i s meaningless as i t w i l l be noted t h a t year-end cost of s a l e s .  payables exceeded t h e i r  T h i s s i t u a t i o n a r i s e s because the i n d u s t r y  does not buy and  s e l l commodities so t h e i r payables are f o r  o t h e r expenses.  The l a r g e investment  i n c a p i t a l equipment  c o n t r i b u t e s t o a l a r g e debt s t r u c t u r e a l t h o u g h growth has not been e x c e e d i n g l y g r e a t .  119 R a i l t r a n s p o r t a t i o n has peaks i n the s p r i n g and summer months.  Other types of t r a n s p o r t a t i o n f o l l o w t h i s p a t t e r n  g e n e r a l l y , a l t h o u g h the f o l l o w i n g responses w i l l  indicate  p e c u l i a r i t i e s i n h e r e n t i n them. Steamship Company. Our normal cash f l o w c y c l e culminates a t December 31 o f each y e a r . . . During the next 4- months, the l a k e s h i p t r a d e i s i n o p e r a t i v e and we r u n down c a s h b a l a n c e s through payments f o r overhead and s h i p r e p a i r s . In a d d i t i o n , our land t r a n s p o r t a t i o n b u s i n e s s e s borrow from the parent company d u r i n g the f i r s t s i x months of the year t o pay f o r l i c e n s e s , i n s u r a n c e , and equipment. Cash b a l a n c e s from May to October remain more or l e s s s t a t i c and r a p i d l y b u i l d up a g a i n d u r i n g November and December. The requirements o f s h i p y a r d s f o r f i n a n c i n g v a r i e s c o n s i d e r a b l y from year t o year and does not present any c o n s i s t e n t seasonal t r e n d . Our short term l e n d i n g p o l i c y t h e r e f o r e i s as follows: 1.  M a i n t a i n an investment i n mid-term Government of Canada bonds t o be used f o r s h i p yard d e p o s i t purposes.  2.  M a i n t a i n investment o f year Government o f Canada bonds.  3.  Invest ' on v a r i o u s instruments coming due i n 2 week i n t e r v a l s d u r i n g p e r i o d from January t o A p r i l .  4-.  M a i n t a i n v a r i a b l e balances on " c a l l " t o f i n a n c e day t o day demands.  in  1-2  T r u c k i n g F i r m . Because of the f a c t t h a t most o f our payments must be made i n cash and by t h i s I mean o t h e r than p a y r o l l , items such as Income Tax, l i c e n s i n g , gasolene, e t c e t e r a , the shortage of t h i s commodity i s o f v i t a l importance t o any Truck Company here. A l s o , another p o i n t i s , that when your wage b i l l runs at approximately F i f t y Per Cent of your Revenue, a s u p p l y o f ready cash i s of paramount importance t o t h i s o p e r a t i o n , we t h e r e f o r e operate on c r e d i t accommodation from one o f the l o c a l banks.  120 Utilities,  As i n the case of t r a n s p o r t a t i o n , the days  payable o u t s t a n d i n g i s a meaningless The  figure.  noteworthy f e a t u r e s of p u b l i c u t i l i t i e s are t h e i r  huge r a t e of r e c e n t growth and f r e q u e n t t r i p s t o s e c u r i t i e s markets, and Table XXIX i n the Appendix shows " c a p i t a l p e n d i t u r e s " as t h e i r main reason f o r money market  ex-  activity.  S e v e r a l f i r m s noted t h a t because of t h e i r l a r g e s i z e thus s u b s t a n t i a l amounts r e q u i r e d when an i s s u e was  and made,  they have t r i e d t o f i n d times when the market seemed most receptive. for  Thus they have had l a r g e sums of cash on hand  temporary investment  b e f o r e and d u r i n g c o n s t r u c t i o n .  As r e p o r t e d by the t r e a s u r e r o f an e l e c t r i c a l company: The need o f c o n t i n u i n g c a p i t a l expenditures are important i n our i n d u s t r y due t o i n c r e a s i n g demand f o r e l e c t r i c power. A c e r t a i n amount i s generated i n t e r n a l l y from d e p r e c i a t i o n arid r e t a i n e d earnings l e s s l o n g term debt s i n k i n g fund requirements. The needs do not always d o v e t a i l w i t h the e x p e n d i t u r e s . Excess funds are tempor a r i l y employed i n short-term investments and d e f i c i e n c i e s by bank l o a n s or other s h o r t - t e r m borrowings. Unusual l a r g e expenditures t h a t cannot be generated i n t e r n a l l y over a few years are covered t o the extent necessary by issuance of long-term debt and e q u i t y f i n a n c i n g t o the proper p r o p o r t i o n and depending on the s e c u r i t y market. Telephone companies are not seasonal but have marked p a t t e r n s w i t h i n the month.  One  secretary reported that h i s  payments o c c u r r e d between the t e n t h and the f i f t e e n t h , w h i l e his  r e c e i p t s flowed i n between the t w e n t i e t h and t w e n t y - s i x t h . N a t u r a l Gas companies, on the o t h e r hand, have a d i s t i n c t  seasonal p a t t e r n :  121  . . . I may say that cash requirements and cash surpluses i n the natural gas business d i f f e r materially from those of manufacturing and r e t a i l business. The revenue Is greater than expenses during the heating months and the expenses exceed the revenue i n the warmer or summer months. Consequently, surplus funds accumulate i n the e a r l y months of the year which are used to meet operating expenditures occurring i n the l a t t e r part of the year. C a p i t a l expenditures are usually financed by the issue of bonds or long term debt. Merchandising.  Wholesale firms have longer receivables  than payment periods, while these periods are about equal for r e t a i l companies.  Cash discounts are common to r e t a i l e r s and  there i s thus an incentive to make lump-sum payments on the tenth and/or the f i f t e e n t h of the month.  Merchandisers show  a generally small leverage p o s i t i o n and much of t h e i r f a c i l i t i e s are rented.  Therefore, quarterly or semi-annual mortgage  and debt servicing payments are small while monthly rentals are high.  The r e t a i l business has shown substantial growth  and a department store chain expressed a continuing need for funds to expand f a c i l i t i e s . Table XXII i l l u s t r a t e s that most sectors of the r e t a i l trade show sales peaks i n the Christmas season and Table XXIX lends support to the importance of seasonal peaks i n the industry.  The r e s u l t i n g cash flow was noted as follows  by the assistant-treasurer of a department store chain: The Company i s primarily In the Department Store business across Canada. During the course of the year the department store industry's cash requirements for inventories and receivables r i s e s gradually to a peak generally i n late November, and f a l l s off r a p i d l y and s u b s t a n t i a l l y by year-end. The slower periods of the Spring and Summer provide the opportunities for major  122  TABLE XXII VALUE OF RETAIL TRADE (Dollar figures i n m i l l i o n s ) 1963  January February March April May June July August September October November December  1963  January February March April May June July August September October November December  Grocery and combination  Other Food and beverage  303.8 290.6 329.9 300.9 3 .9 326.3 313.7 34-7.9 308.6 328.7 34-8.1 34-9.5  89.2 91.8 102.1  k k  Variety  20.3 20i2 25.3 31.0  31.9  32.8  31.435.4-  30.0 32.5 38.2 68.0  104-.2 106.9  113.8  116.1  127.3 105.1 115.9 117.5 168.9  Motor vehicle 211.9 212.0  265.4303.2 318.2  298.7 255.8 202.0 172.8 252.3 267.2 24-5.2  General  Department  >+8.5 -+3.2 1+9.1 55.0 62.8  100.7 9 .9 11-+. 7 129.7 135.2 121.4111.8 133.0 14-0.4-  62.7  61+.8 68.3 60.0 61+.3 65.7 69.4-  Garages & filling stations 96.2 85.2 90.4-  102.8 108.7 104-.6  119.7 118.7 105.6 110.6 107.9 110.6  k  146.5  187.1 230.4-  Family Clothing 16.7  12.2  16.8 21.4-  20.7 20.9  -17.1  20.9 20.0 23.1 28.4-  37.7  123  TABLE XXII  1963  Shoe  12.0 8.0 11.6 15.6 15.9 16.6 13.6  January February March April May June July August September October November December  1963  lk.5  13.7 16.422.5  Restaurants  4-5.7 4-2.6 1+8.8 1+8.1 50.3 50.455.2 58.1 50.8 50.8 4-9.44-7.9  January February March April May June July August September October November December  Source;  (continued)  Hardware  Lumber & building material  20.2 19.7  26.8 23.6 30.2 32.9  21.1+ 26.1+  33.7 3 .l k  31.3 32.7 3L 33.6 k  30.1+  1+0.3  Fuel dealers  36.0 3 .l k  37.437.2 36.2 35.7 36.3 37.1 36.6 39.3 36.3 1+8.5  1+2.2 1+7.8 1+8.3 1+8.5 1+6.3  Furniture and appliance  7.5 35.3 4-2.3 4-3.7  k  1+6.2  33.8  -+!+.3 4-3.2 7.5 46.5 55.1 58.5 58.2  Drug  Jewelry  36.0  7.7 7.3 8.5 9.1 10.8 10.7  51.  k  1+2.3  3 .l k  37.437.2 36.2 35.7 36.3 37.1 36.6 39.3 36.3  US.5  k  10.8 11.1 10.2 12.432.2  D . B . S . , Canadian S t a t i s t i c a l Review. A p r i l , 1964-,  PP. 53-54-.  124e x p e n d i t u r e s f o r f i x t u r e s and c o n s t r u c t i o n of s t o r e s , and a f f e c t , t o some degree, the c a s h heeds o f the i n d u s t r y i n the f i r s t t h r e e - q u a r t e r s of the o p e r a t i n g year. The p e r i o d i c payments of d i v i d e n d s n a t u r a l l y have a nominal e f f e c t on the cash needs of companies i h t h i s i n d u s t r y , however, income t a x payments are f a i r l y r e g u l a r i z e d from month t o month, and t h e r e f o r e , do not m a t e r i a l l y a f f e c t a normalized p a t t e r n of cash f l o w . . ...the Company's cash r e s o u r c e s are s m a l l i n r e l a t i o n to current l i a b i l i t i e s . However, these r e s o u r c e s are supported by a s u b s t a n t i a l amount of accounts r e c e i v a b l e which provide a v e r y steady cash f l o w t o meet the payment of c u r r e n t l i a b i l i t i e s . Table X X I I I i l l u s t r a t e s t h a t the c r e d i t extended  by most  types of r e t a i l e r s f o l l o w s t h e i r s a l e s p a t t e r n s w i t h peaks at the end of the year.  A n o t a b l e e x c e p t i o n f o r s a l e s and  retail  c r e d i t o u t s t a n d i n g i s the automobile  s e c t o r which has peaks  a c c o r d i n g t o the i n t r o d u c t i o n o f new  models.  Chain r e t a i l e r s have the a d d i t i o n a l problem  of numerous  bank accounts and the cash needs of i n d i v i d u a l s t o r e s renders it  difficult  t o i n t e g r a t e the cash b a l a n c e s f o r investment.  N e v e r t h e l e s s , one r e t a i l e r mentioned that he brought the cash accounts t o g e t h e r every F r i d a y f o r weekend investments w i t h a f i n a n c e company.  An a d d i t i o n a l problem  i s cash forecasting  because of the l a r g e number and d i v e r s i t y o f payments and receivables.  The t r e a s u r e r o f a Hardware c h a i n which imported  s u b s t a n t i a l l y and a l s o had a l a r g e wholesale department, s t a t e d that he c o u l d not know when l e t t e r s of c r e d i t would a r r i v e nor when a l a r g e b i d t o a c o n t r a c t o r would be He, t h e r e f o r e , d i d not even attempt  accepted.  a d e t a i l e d cash f o r e c a s t  and loaned c o n t i n u o u s l y from the bank w i t h an e s t a b l i s h e d credit limit.  He expressed much d i s p l e a s u r e w i t h the d i s -  125  TABLE XXIII RETAIL CREDIT OUTSTANDING (Dollar figures i n m i l l i o n s ) 1963  Quarters  Motor vehicles  1 2 3 4  107.1 115.3  1963  Jewelry  1 2 3 4  18.0 17.0 16.7  110.4113.1  Clothing  Hardware  52.3  3^.3 40.3 4-1.0 4-1.6  53.2 53.1 65.7  General  Quarters  23.6  32.436.3 37.2 37.5  Fuel dealers 67.0 4-7.1 4-1.5 59.5  Source: D . B . S . Canadian S t a t i s t i c a l  Furniture appliance and radio 10.3 10.9 11.4 12.1  Department 383.1 387.3  393.5 4-56.7  Grocery and combination 184.1 186.0  188.2 197.5  Garages & filling stations 29.6  30.9 31.5  30.2  Review. A p r i l 1964, p.57.  126  continuance o f the o v e r d r a f t system and found that he was paying 6% on some money i n h i s c a s h account a t the hank. Table XXIV shows that the wholesale t r a d e f o l l o w s the r e t a i l i n most s e c t o r s except, o f course, t h a t s e a s o n a l f l u c t u a t i o n s o f the former precede those o f the l a t t e r . III.  SUMMARY AND CONCLUSION  I f a f i r m ' s own t r a d e y i e l d s g r e a t e r r e t u r n s on i n v e s t e d c a p i t a l t h a n money market s e c u r i t i e s the t r e a s u r e r would want t o minimize a c t i v i t y i n the l a t t e r by an even cash f l o w . However, c o n s i d e r a t i o n s r e l a t i n g t o the f i n a n c i a l  structure  or p o l i c y o f the i n d i v i d u a l f i r m and the nature o f i t s i n d u s t r y cause f l u c t u a t i o n s i n the c a s h account throughout t h e k  year o r over a p e r i o d o f y e a r s .  When such peaks o r troughs  cannot be avoided the y i e l d from money market investment p r o v i d e s an i n c e n t i v e f o r the f i r m i n a s u r p l u s p o s i t i o n t o g a i n some r e t u r n from i t s temporary excess c a s h b a l a n c e . C o n v e r s e l y , a company i n a d e f i c i t p o s i t i o n can examine i t s f i n a n c i a l s t r e n g t h and weigh the lower c o s t s o f commercial paper issuance a g a i n s t i t s e f f e c t s upon h i s banker  relation-  ships.  ^Table XXIX i n the Appendix i l l u s t r a t e s the predominance among the respondents o f s e a s o n a l f l u c t u a t i o n and c a p i t a l expenditures as reasons f o r money market a c t i v i t y .  127  TABLE XXIV VALUE OF WHOLESALE TRADE (Dollar figures i n m i l l i o n s )  1963  January February March April May June July August September October November December  1963 January February March April May June July August September October November December  Foods  167.8 189.2 192.2  187.5  214.0 207.4  225.5 232.7 206.6  231.1  204.2 224.3  Farm machinery  3.0 4.4 7.0 10.8 11.0 9.1 11.5 6.6 5.6 5.8 2.6 7.5  Clothing, footwear & textiles  23.2 25.9  28.6 31.0 27.1 25.7 23.0  ?M 40.8  34.4 35.3 29.9  Coal and coke  13.7 12.7 10.9 9.2 12.3 10.1 8.6 11.7 13.9 16.5  15.3 16.2  Drugs and sundries  Electrical appliances  19.8 20.0 22.2 19.5 21.6 20.3 19.0 20.6  17.2 17.0 16.5 18.3 16.5  27.1 22.2 21.4  20.6 22.0 28.0  24.6  Hardware  25.0 22.8 26.2 28.6 33.1 32.6  28.8 30.6 31.5 33.1 32.1 31.5  12.9  13.8 14.8 20.9  Building supplies  66.9 59.5 75.4 75.2 95.7 90.0 91.5 90.5 99.0 107.1 94.2 76.3  128  TABLE XXIV  1963  JanuaryFebruary March April May June July August September October November December  Source:  Industry & transport machinery  50.0 58.1 88.3 71.1 90.8 78.8 64.9 61.6  65.4 71.1 64.6  63.2  (continued)  Auto P a r t s and equipment  26.5 28.8  40.0 41.2  43.5 42.2  38.9 45.0 38.0 39.6 36.8 36.4  Newsprint and paper products  22.1 22.5 23.8 27.2 28.9 26.7 28.9 28.1 29.7 31.0 29.4 26.9  Tobacco & confectionery  53.1 55.2 79.2 62.2 74.6 72.0 64.7  65.9 70.4 66.6 57.9 78.6  D.B.S., Canadian S t a t i s t i c a l Review. A p r i l 1964,  p.56  129  CHAPTER V I CONCLUSION A p r o f i t a b l e n o n - f i n a n c i a l c o r p o r a t i o n seeks t o a v o i d the need f o r money market a c t i v i t y ; as l o n g as the company can e a r n a g r e a t e r r e t u r n on the investment i n i t s e l f investment takes precedence. i t s own  such  However, i n the conduct of  b u s i n e s s a f f a i r s the f i r m w i l l l i k e l y f i n d t h a t a  v a r i e t y of f a c t o r s cause peaks and troughs i n the cash account. vestment  When t h i s o c c u r s , any r e t u r n from temporary i n o f s u r p l u s e s i s b e t t e r than l e a v i n g the c a s h i d l e .  To p a r t i c i p a t e i n the money market the t r e a s u r e r does not n e c e s s a r i l y have t o be an expert i n the f i e l d ment a n a l y s i s . contacted was  of i n v e s t -  A t y p i c a l s i t u a t i o n w i t h those whom the author board of d i r e c t o r a p p r o v a l on quotas of the  various instruments.  From t h e r e the t r e a s u r e r would d e a l  w i t h one investment d e a l e r , and i t d i d not r e q u i r e much i m a g i n a t i o n or a g g r e s s i v e n e s s t o g a i n r e t u r n s on i d l e i n t h i s manner.  funds  However, the more a c t i v e p a r t i c i p a n t s were  aware of y i e l d - p r i c e r e l a t i o n s h i p s , d e a l t w i t h many i n v e s t ment f i r m s i n s e a r c h of the most p r o f i t a b l e o u t l e t , and f o l l o w e d economic t r e n d s t o make t h e i r money market o p e r a t i o n s fit  i n w i t h those of the company's own  trade.  The  less  s o p h i s t i c a t e d d i d not even examine one- or two-week investment o p p o r t u n i t i e s , while the most a g g r e s s i v e attempted  to earn a  r e t u r n on e v e r y d o l l a r not e s s e n t i a l t o the running of the  130 business.  I t i s hoped t h a t e x p o s i t i o n  some o f these more s o p h i s t i c a t e d  o f the a c t i v i t i e s o f  p a r t i c i p a n t s has i n d i c a t e d  the wide range and p r o f i t a b l e o p p o r t u n i t i e s financial  f o r the non-  corporation.  For a c t i v e p a r t i c i p a t i o n i n almost any venture, an unders t a n d i n g o f what makes i t work i s e s s e n t i a l .  Therefore,  Chapter I I o u t l i n e d the g e n e r a l background and Chapter I I I attempted t o give an understanding o f the money market by o u t l i n i n g i t s b r i e f , but e v e n t f u l , h i s t o r y , and the v e h i c l e s i n use.  When d e a l i n g  i n money market s e c u r i t i e s i t i s  n e c e s s a r y t o l e a r n how t o p a r t i c i p a t e i n the bond market, and  understand y i e l d - p r i c e r e l a t i o n s h i p s and dangers i n -  herent i n some o f the instruments.  The secondary bond market  also plays  an important r o l e and can o f f e r p r o f i t a b l e oppor-  tunities.  Perhaps the most p e r t i n e n t  conclusion  o f Chapter  I I i s t h a t bonds are not "money i n the bank" and i n r e t u r n f o r a y i e l d , t h e y do possess some r i s k s .  Even where the  instrument has impeccable s a f e t y o f p r i n c i p a l upon redemption, as i n Government o f Canada o b l i g a t i o n s , t h e r e s t i l l  exists  the danger o f y i e l d f l u c t u a t i o n s ; some o f the most knowledgable bond d e a l e r s  learned  a hard l e s s o n i n the C o n v e r s i o n  Loan o f 1958. The  h i s t o r y o f the money market presented i n Chapter I I I  i s most l i k e l y not a l l o f the s t o r y t h a t w i l l be t o l d i n a few  years from now.  I f any a c t i o n i s taken upon the recom-  mendations o f the Royal Commission on Banking and Finance, i n t e r r e l a t i o n s h i p s between the f i n a n c i a l i n s t i t u t i o n s w i l l  131 be substantially altered as noted i n the concluding section of the chapter.  As for the instruments, one can conclude  that at the top of the hierachy of p r i n c i p a l safety rests Government of Canada obligations, followed by those of the f i n a n c i a l l y stronger provinces, the banks, and other f i n a n c i a l i n s t i t u t i o n s , i n that order.  The f i n a n c i a l i n s t i t u t i o n s  themselves must be i n d i v i d u a l l y examined as must be most of the provinces and m u n i c i p a l i t i e s .  The paper of non-financial  corporations requires even closer scrutiny and i t i s recommended that the p r i n c i p l e s of prudent bond buying outlined i n Chapter II be followed when contemplating such investment. The l i q u i d i t y offered by the instruments depends upon the issuer and the term to maturity.  If the buyer knows exactly  when the funds w i l l be needed i t w i l l pay to invest i n the highest y i e l d i n g instrument which meets his standards of safety and matures on the date required.  Otherwise, he looks  at the extent of secondary market dealings. Comparative yields generally vary inversely with l i q u i d i t y and safety,  although they are also affected by the amount of  paper outstanding from the different issuers and the times to maturity of the various issues put put by the i n d i v i d u a l i n stitutions.  The author agrees with a few of the active  f i n a n c i a l men that the y i e l d differences do not adequately r e f l e c t the r i s k and although there i s yet to be a default i n corporate paper, fear of such by some prominent investment dealers indicates that a s l i g h t loss i n y i e l d i s a worthwhile insurance cost when rejecting corporate paper which f a i l s meet r i g i d safety standards.  to  132 The  most p e r t i n e n t f i n d i n g r e g a r d i n g investment and  borrowing p o l i c i e s i s t h a t few, i f any, f i n a n c i a l men a r e u s i n g a f o r m a l i z e d approach beyond the p r e p a r a t i o n o f a d e t a i l e d cash f o r e c a s t .  I t was demonstrated t h a t what may  seem t o be the most l o g i c a l p o l i c y i s not always the most p r o f i t a b l e and t h e r e f o r e a d e t a i l e d a n a l y s i s , as suggested i n Chapter IV i s recommended. o f t h a t chapter  Another important  conclusion  i s the l a r g e p a r t played by a t t i t u d e s and  the degree o f s o p h i s t i c a t i o n o f t h e f i n a n c i a l o f f i c e r s o f a company.  Each has h i s own d e f i n i t i o n s o f such terms as  " l i q u i d i t y " and " s a f e t y " and these a t t i t u d e s together the b a r g a i n i n g process  with  and banker r e l a t i o n s h i p s a r e i n s t r u -  mental f a c t o r s i n the investment or borrowing d e c i s i o n . I t should be added here that one a t t i t u d e p r e v a i l i n g w i t h a l l respondents who gave d e t a i l e d i n f o r m a t i o n t o the author was t h a t such i n f o r m a t i o n was t o be t r e a t e d as c o n f i d e n t i a l . Reasons given were t h a t  (1) they d i d not want the investment  community t o know w i t h whom they were d e a l i n g and t o what e x t e n t ; and (2) the nature  o f the i n f o r m a t i o n was not pub-  l i s h e d i n t h e i r annual r e p o r t s and, as such, was not f o r p u b l i c use.  Even a f t e r second r e q u e s t s , 207 of the 505 f i r m s  s o l i c i t e d r e f u s e d t o give any i n f o r m a t i o n t o the author, o r did  not r e p l y (See Table XXV i n t h e Appendix); so i f i t i s  to be l e a r n e d e x a c t l y how much o f every type o f paper r e s t s i n the hands o f t h e n o n - f i n a n c i a l c o r p o r a t i o n on any p a r t i c u l a r dates,  such i n f o r m a t i o n w i l l have t o be compiled  government agency.  by a  To dat e , t h i s has not been attempted.  133 The  extent  o f money market a c t i v i t y i s l a r g e l y d e t e r -  mined by a company's cash f l o w . peaks and  The  f a c t o r s a f f e c t i n g the  troughs i n a company's cash account are  numerous and  can c a r r y such a l a r g e range o f weights that  each f i r m would have to examine i t s own V was  so  intended  to note the absolute  situation.  Chapter  f a c t o r s themselves  and  what i s l i k e l y t o a f f e c t t h e i r weights and d i r e c t i o n s . Beyond t h a t p o i n t , one  cannot g e n e r a l i z e and  weights have t o be adjusted The  the  actual  f o r each i n d i v i d u a l company.  f a c t o r s t o be considered  the extent  the  are the use  of trade c r e d i t ,  o f lump-sum payments to occur on s p e c i f i c  s i z e o f the f i r m , p o l i c i e s r e g a r d i n g  dates,  a debt v e r s u s  sur-  p l u s cash p o s i t i o n , banker r e l a t i o n s h i p s , i n t e r c o r p o r a t e r e l a t i o n s , s e n i o r debt r e s t r i c t i o n s , d e a l i n g s w i t h governments, l o c a t i o n of the f i r m , s e a s o n a l i t y o f the and  industry,  c a p i t a l s t r u c t u r e of the company. In c o n c l u s i o n , the Canadian money market was  not  l i s h e d mainly f o r the b e n e f i t o f the n o n - f i n a n c i a l tion.  Through i t s short h i s t o r y , however, i t has  i t s e l f to present  estabcorpora-  shown  l u c r a t i v e o p p o r t u n i t i e s t o enhance a  company's p r o f i t s through improved f i n a n c i a l management. Knowledge o f the workings o f t h i s mechanism r e q u i r e s much l e s s s o p h i s t i c a t i o n than other d u t i e s of the executive,  such as d e t e r m i n a t i o n  of cost o f  financial capital.  Furthermore, i t does not take much o f h i s time once he e s t a b l i s h e d h i s p o l i c y and  o u t l i n e d a formal  approach.  has  Because  of the short term o f the t r a n s a c t i o n from buy t o  maturity,  p r o f i t s are e a s i l y p i n p o i n t e d  which f u r t h e r  renders a c t i v e , though prudent money market s a t i s f y i n g and rewarding p u r s u i t .  dealing a  135 BIBLIOGRAPHY A.  BOOKS Chandler, L e s t e r V. The Economics o f Money and Banking. New York: Harper and B r o t h e r s , 1959. F u l l e r t o n , Douglas H., The Bond Market i n Canada. T o r o n t o : The C a r s w e l l Company L t d . , 1962. Garvy, George. Deposit V e l o c i t y and I t s S i g n i f i c a n c e . New York: F e d e r a l Reserve Bank, 1959« Graham, Benjamin, David L. Dodd, and Sidney C o t t l e . Security Analysis. New York: McGraw-Hill Book Company, Inc., 1962. Hood, W i l l i a m C. F i n a n c i n g o f Economic A c t i v i t y i n Canada, The Royal Commission on Canada's Economic P r o s p e c t s , Ottawa, 1959. Hunt, Pearson, C h a r l e s M. W i l l i a m s , and Gordon Donaldson. B a s i c Business F i n a n c e . Homewood, I l l i n o i s : R i c h a r d D. I r w i n , Inc., 1961. Lyon, Roger A. Investment P o r t f o l i o Management i n the Commercial Bank. New Brunswick, New J e r s e y : Rutgers  U n i v e r s i t y Press, i960.  Sauvain, Harry C. Investment Management. C l i f f s , N.J.: P r e n t i c e - H a l l , 1959.  Englewood  Shepherd, Sidney A. F o r e i g n Exchange i n Canada: An O u t l i n e . Toronto: The U n i v e r s i t y o f Toronto P r e s s , 195%, Towers, Graham, F. F i n a n c i n g F o r e i g n Trade. Royal Bank of Canada, 19^  M o n t r e a l : The  Wasserman, Max J . , C h a r l e s W. Hultman, and L a s z l o Z s o l d o s . I n t e r n a t i o n a l F i n a n c e . New York: Simmons-Boardman P u b l i s h i n g C o r p o r a t i o n , 1963. B.  PERIODICALS A x i l r o d , Stephen H., and Ralph A. Young. " I n t e r e s t Rates and Monetary P o l i c y , " F e d e r a l Reserve B u l l e t i n . X L V I I I (September, 1962), pp. 1110-1137. B l o c h , E. "Short C y c l e s i n Corporate Demand f o r Government Securities and Cash," The American Economic Review, LIII (December, 1963), pp. 105«-1077. 5  136 Burton, J.C. "The Management o f Corporate L i q u i d A s s e t s , " The J o u r n a l ' o f Finance, X V I I I (September, 1963)  pp. 551-552.  The F i n a n c i a l P o s t. December 28, 1963,  p. 3.  F r a s e r , W i l l i a m J . "Large Manufacturing Firms as S u p p l i e r s of Funds t o the United S t a t e s Government S e c u r i t i e s Market," The J o u r n a l o f F i n a n c e , X I I I (December,  1958), pp. 499-509^  F u l l e r t o n , Douglas H. "A Guide t o a B e t t e r Understanding of the Bond Market, Part I , " Canadian B u s i n e s s . XXXV (June, 1962), pp. 96-106. "A Guide t o a B e t t e r Understanding o f the Bond Market, Part I I , " Canadian B u s i n e s s XXXV ( J u l y , 1962),  pp. 4-8-52.  G i l l , David B. "Make Cash Work Hard," October 11, 1958, p.7.  The F i n a n c i a l Post.  H e n r i , Norman L. "The Growth o f Notice Deposits i n Canada," The Canadian Banker. LXX (Autumn, 1963), PP. 95-104-. Jacobs, D.P. "Marketable S e c u r i t y P o r t f o l i o s o f N o n - f i n a n c i a l C o r p o r a t i o n s , " J o u r n a l o f F i n a n c e , XV (September, I960),  pp. 34-1-52.  Land, B r i a n . "How Canada's Money Market Keeps I d l e Cash at Work," Canadian B u s i n e s s . XXXI (February, 1958) pp. 26-31. Lasher, A.C. "Managing Your Corporate Cash f o r P r o f i t , " Duns Review and Modern Industry. LXXV (August, I960), pp. 4-5-4-8. Malt, R i c k . "How Cash Can Go t o Work f o r Even One The F i n a n c i a l Post, J u l y 27, 1963, p.15.  Day,"  Macintosh, Robert M. "Broadening the Money Market," Canadian Banker, LXI (Autumn, 1954-), pp. 63-73.  The  "The Day-to-Day Loan Market i n a Year o f Easy Money," The Canadian Banker. LXII (Winter, 1955), pp. 22-4-0. M c C l e l l a n d , Peter. "The Canadian C a p i t a l Market," The Canadian Banker, LXX (Summer, 1963), pp. 78-91. McLeod, A.N. "What Management Should Know About I n t e r e s t Rates." The Business Q u a r t e r l y (Spring, I960), pp. 18-24-,  137 Ross-Skinner, J . "The P r o f i t a b l e A r t o f Handling Corporate Cash." Duns Review and Modern I n d u s t r y . LXXIX (May,  1962) ,vv7~3B-TZr.  S a l y z y n , V l a d i m i r , "The Canadian T r e a s u r y B i l l Market, Canadian P u b l i c A d m i n i s t r a t i o n . V I (September, 1963)»  pp. 288-29HT  Sarpkaya, S. "The Commercial Paper Market i n Canada," The Canadian Banker, LXX (Winter, 1963), PP. 109-113. S h e l d r l c k , J.B. "Investment of S u r p l u s Cash." The Canadian Chartered Accountant. LXXX (June, 1962), pp. 551-557. W i l s o n , J.S.G. "The Canadian Money Market Experiment," Banca Nazionale d e l Lavoro Q u a r t e r l y Review, Rome, No.¥+ (March, 1 9 ^ 1 , pp. 1 9 - F ^ C.  GOVERNMENT PUBLICATIONS Bank o f Canada, Annual Reports, 1953-56. , S t a t i s t i c a l Summary, January - A p r i l , 196k  (monthly).  , S t a t i s t i c a l Summary, F i n a n c i a l Supplement,  1962.  , Submission t o the Royal Commission F i n a n c e . 1962.  on Banking and  Canada, Department o f N a t i o n a l Revenue, T a x a t i o n D i v i s i o n , T a x a t i o n S t a t i s t i c s . 1952-1963 ( a n n u a l l y ) . , Dominion Bureau o f S t a t i s t i c s , Review, A p r i l , 1 9 6 .  Canadian S t a t i s t i c a l  k  Dominion Bureau o f S t a t i s t i c s , Business F i n a n c i a l S t a t i s t i c s , Balance Sheets, S e l e c t e d F i n a n c i a l I n s t i t u t i o n s . F o u r t h Quarter, 1963. , Dominion Bureau o f S t a t i s t i c s , F i n a n c i a l S t a t i s t i c s of P r o v i n c i a l Governments, 1961, D i r e c t and I n d i r e c t Debt. Year Ended March 31, l96~2. .  , Report o f The Royal Commission F i n a n c e . 1955.  D.  on Banking and  Ottawa: The Queen's P r i n t e r ,  1964.  OTHER SOURCES Canadian Bankers A s s o c i a t i o n , Submission t o the Royal Commission on Banking and F i n a n c e . 196*2.  138 General Motors Acceptance C o r p o r a t i o n o f Canada L i m i t e d , Prospectus, Short Term Notes, 1962. Federated C o u n c i l o f S a l e s Finance Companies, Submission t o the Royal Commission on Banking and F i n a n c e . 1962. G r e e n s h i e l d s Incorporated, A Memorandum on Short Term Borrowing through the I n t e r n a t i o n a l ' Money Market prepared f o r Rolls-Royce L i m i t e d (Unnumbered r e p r i n t ) . . "Weekly Money Market Review," January-May,  1964  Tweekly). I n d u s t r i a l Acceptance C o r p o r a t i o n , Prospectus, Bond Debentures, 1962. , Submission t o the Royal Commission on Banking F i n a n c e . 1962.  and  Investment Dealers A s s o c i a t i o n o f Canada, Submission t o the Royal Commission on Banking and F i n a n c e . 1962. Johnson, D., W.T. Brock, and J.C. Murphy, "The Corporate T r e a s u r e r and the Money Market." Unpublished paper presented a t The U n i v e r s i t y o f Western Ontario:, 1963 • K e l l y , D a n i e l M., " I n v e s t i n g T e m p o r a r i l y I d l e Corporate Funds (address b e f o r e The Committee on Gas I n d u s t r y F i n a n c e , American A s s o c i a t i o n , V i r g i n i a Beach, Va., May 2 8 , 1962). L a u r e n t i d e F i n a n c i a l C o r p o r a t i o n L t d . , Prospectus, Bond Debentures, 1963. , Submission t o the Royal Commission on and Finance, 196*2.  Banking  Mackenzie, J.P.S., "The Development of the Commercial Paper Market i n Canada" (paper presented t o the Canadian P o l i t i c a l Science A s s o c i a t i o n , McMaster U n i v e r s i t y , Hamilton, O n t a r i o , June 9 , 1 9 6 2 ) . MacLaury, Bruce King."The Canadian Money Market, Development and Impact." D o c t o r a l D i s s e r t a t i o n , Harvard U n i v e r s i t y , Cambridge, 1961. The T r u s t Companies A s s o c i a t i o n of Canada, Submission t o the Royal Commission on Banking and F i n a n c e . 1962. Young, I.M., J.F. H e l l i w e l l , and W.A. McKay,"The Response o f C o r p o r a t i o n s t o Monetary P o l i c y , " (A Study Prepared f o r The Royal Commission on Banking and F i n a n c e . 1962).  139  APPENDIX RESULTS OF QUESTIONNAIRE The  Questionnaire Survey,  In November, 1963? a p i l o t  survey o f n i n e t y - e i g h t q u e s t i o n n a i r e s was mailed and f o r t y one f i r m s r e p l i e d .  Second requests w i t h a s u p p o r t i n g l e t t e r  from Dr. H.L. Purdy were mailed i n January 1964 t o the o t h e r f i f t y - s e v e n f i r m s and twenty-six r e p l i e d . were mailed i n January 1964,  o f which 177  requests were mailed t o the remaining r e c e i v e d from f i f t y - f o u r  companies.  An a d d i t i o n a l 407 answered.  Second  230 and r e p l i e s were I n t o t a l , 505 q u e s t i o n -  n a i r e s were mailed; 161 i n d i c a t e d p a r t i c i p a t i o n i n the money market, 137  claimed no p a r t i c i p a t i o n and 207 e i t h e r d i d not  answer o r r e f u s e d t o give i n f o r m a t i o n , broken down by i n d u s t r y i n Table The  1  These t o t a l s a r e  XXV.  f i r m s s o l i c i t e d were s e l e c t e d from the F i n a n c i a l Post  Surveys of I n d u s t r i a l s , O i l s , and Mines, and the i n t e n t i o n was t o sample a l a r g e v a r i e t y of i n d u s t r i e s and s i z e s o f firms.  Data presented on the b a s i s of the q u e s t i o n n a i r e s  are s u b j e c t t o the f o l l o w i n g l i m i t a t i o n s : 1) S t a t i s t i c a l v a l i d i t y i s not claimed and g e n e r a l i z a t i o n s p e r t a i n o n l y t o the f i r m s which r e p l i e d ;  •'•Example o f t h e l e t t e r , q u e s t i o n n a i r e , supporting l e t t e r and second requests are presented at the c o n c l u s i o n of the Appendix.  14-0  TABLE XXV RESPONSE TO QUESTIONNAIRE Industry-  Property Development Public  Solicited  Number of replies  Money Market participation  17  10  4-  30  Utility  P r i n t i n g and Publishing  14-  8  I r o n , S t e e l and Non-Ferrous Metals 82  4-7  Mining  18  O i l and Pipeline  38  Pulp and Paper  32  Transportation  13  Electrical 21  Construction  28  Chemical and Allied  24-  Textile  32  Food and Beverage Totals Merchandising  61 505 72  6  21  9  28  19  7  4-  3  24-  19  5  20  9  11  8  4-  15  Equipment  No Money Market participation  3  412  14-  10  19  7  12  14-  h  10  34-  22  12  4-8  20  28  298  161  4-  137  14-1 2) Not a l l firms which replied regarding p a r t i c i p a t i o n were w i l l i n g to provide d e t a i l s to the questions. The number that did submit d e t a i l s i s given where data are presented; 3) Data for investment and borrowing by the respondents were not a l l given as of the same date.  Therefore,  percentages are used rather than d o l l a r figures and an assumption i s that each firm allocated i t s p o r t f o l i o i n a consistent manner. Instruments for Investment.  Table XXVI gives the percent-  age of t o t a l investment i n the different instruments by 100 firms which gave the requested figure data, out of the 298 replying.  Of the 26.5$ invested i n banks and trust companies  at least 9.6$ and 3.5$ were s p e c i f i c a l l y noted as Canadian and American banks, respectively.  There was, of course, much  difference i n the amounts invested by various companies and thus some of the figures were weighted by heavy investment of one of two large firms.  Therefore, a more meaningful account  of the propensity toward the different papers i s the number of corporations buying each type, and t h i s i s presented i n Table XXVII. From Tables XXVI and XXVII the predominance of Canadian Government obligations and those of banks and trust companies i s apparent.  Of the seventy-five  firms investing i n the  l a t t e r , at least thirty-two held paper issued by banks.  It  was noted i n Chapter III that the deposit receipt i s an effective  means of gaining a return on cash while continuing  TABLE XXVI CORPORATE HOLDINGS OF MONEY MARKET SECURITIES Instrument  Per Cent  Government of Canada Bonds and Treasury B i l l s Provincial Municipal Finance Company Corporate Paper Investment Dealer "Buy Back" Banks and Trust Companies U.S. Treasury B i l l s  32.3 12.0 3.2 10.6  5.8 5.8  26.5  3.8  100.0  Source:  Response to  Questionnaire  TABLE XXVII NUMBER OF REPORTING FIRMS INVESTING IN INSTRUMENTS Number of firms investing  Instrument  Government of Canada Bonds and Treasury B i l l s Provincial Municipal Finance Company Corporate Paper Investment Dealer "Buy Back" Banks and Trust Companies U.S. Treasury B i l l s Source:  Response to  Questionnaire  57 37 13 3 26 13 75 5  k  l>+3 t o m a i n t a i n good banker r e l a t i o n s , and t h i s i s the most  logical  e x p l a n a t i o n f o r the great i n t e r e s t i n t h e instrument. I s s u e r s o f Commercial  Paper.  A t o t a l of t h i r t y - f i v e  r e p o r t e d i s s u a n c e o f commercial paper. them down by i n d u s t r i a l c a t e g o r y .  firms  T a b l e XXVIII breaks  I t should be noted t h a t a l l  but t h r e e o f the i s s u e r s had an A M I c r e d i t r a t i n g .  A possible  reason f o r t h e predominance o f food manufacturing f i r m s i s t h e i r c y c l i c a l s t a b i l i t y and thus s a f e t y o f t h e i r  obligations.  Reasons f o r Money Market A c t i v i t y . The q u e s t i o n n a i r e asked f o r reasons f o r l e n d i n g o r borrowing i n the money market, and Table XXLX breaks down the r e s u l t s by number o f f i r m s i n each industry.  E s p e c i a l l y noteworthy  i n the t a b l e i s the importance  o f " c a p i t a l e x p e n d i t u r e s " as the reason f o r p u b l i c  utility  p a r t i c i p a t i o n and the s e a s o n a l peaks i n most manufacturing i n d u s t r i e s and i n merchandising. Bank Borrowing and Other Q u e s t i o n n a i r e Items. Of t h e 137 n o n - p a r t i c i p a n t s i n Table XXV, s i x t y - s e v e n claimed bank borrowi n g , twelve claimed no bank borrowing, two mentioned cash needs were attended t o by o t h e r members o f t h e i r  that  their  inter-  corporate o r g a n i z a t i o n and no answer was r e c e i v e d from f i x t y s i x f i r m s r e g a r d i n g t h e i r short-term borrowing  position.  Among the bank borrowers, one s t a t e d the use o f acceptances and one had a l o a n o u t s t a n d i n g from the I n d u s t r i a l Development Bank, i n b o t h cases t o supplement  bank borrowing.  TABLE XXVIII ISSUERS OF CORPORATE PAPER Industry  Number  Food and Beverage Iron, S t e e l and Non-Ferrous Metal Merchandising O i l and P i p e l i n e Textile Construction Public U t i l i t y E l e c t r i c a l Equipment  10 5 6 5 3 2 2 2  Total  35  Source: Response t o Q u e s t i o n n a i r e  TABLE XXIX REASONS FOR MONEY MARKET Industry  Property Public  Number o f firms reporting  Interest payments  Dividend payments  1  1  -  20  5  5  1  3  19  3  5  Development  Utility  Printing & Publishing I r o n , S t e e l and NonF e r r o u s Metals  Capital expenditure  Tax  Sinking fund  Seasonal peaks  1 1 + 1 8  3  k  k  2 7  2  2  Mining  ACTIVITY  1  2 1  3  7 1  13 -  13  5  6  8  6  k  3  Pulp and Paper  k  2  3  2  3  2  3  Transportation  3  1  3  1  Electrical  5  O i l and P i p e l i n e  Equipment  1 I  k  k  9  Chemical and A l l i e d  7  2  2  Textile  3  1  1 10  Food and Beverage  2k  3  k  Merchandising  20  Jt  _g  133  2  5  Construction  Totals  1  29  3  k  1  k  k 2  3  -31 58  1  2  28  2 -2  25  19 12  81  146  Answers t o S e c t i o n I I I , C do not l e n d themselves t o meaningful t a b u l a t i o n as more than one-half o f the respondents d i d not answer them and t h e r e was no c o n s i s t e n c y i n the r e p l i e s . For example, i n the q u e s t i o n r e g a r d i n g a r a t i o of cash t o current l i a b i l i t i e s ,  answers i n the " I r o n , S t e e l and Non-  f e r r o u s M e t a l s " category ranged from  25$  to  200$.  14-7  SURVEY FORMS  Dear As p a r t o f the work f o r my M a s t e r o f B u s i n e s s A d m i n i s t r a t i o n d e g r e e a t the U n i v e r s i t y o f B r i t i s h C o l u m b i a , I am w r i t i n g a t h e s i s on The C a n a d i a n C o r p o r a t i o n and I t s Use o f the S h o r t Term Money M a r k e t . I t w i l l b a s i c a l l y examine how f i r m s o b t a i n f u n d s f r o m , and put s u r p l u s c a s h t o use i n these m a r k e t s . I n my s t u d y the f i n a n c i a l i n s t r u m e n t s t h a t c o m p r i s e t h e s h o r t t e r m market ( p a p e r w i t h m a t u r i t y up t o t h r e e y e a r s ) a r e t h o s e l i s t e d i n p a r t s I and I I o f t h e a t t a c h e d q u e s t i o n n a i r e ; 5  As my r e s e a r c h c o n s i s t s m a i n l y o f c o l l a t i n g i n f o r m a t i o n f r o m s e l e c t e d f i r m s , i n c l u d i n g y o u r s , I am a s k i n g you t o be k i n d enough t o s u p p l y me w i t h some n e c e s s a r y d a t a . I r e a l i z e t h a t y o u r t i m e i s v a l u a b l e , so I have a t t a c h e d a q u e s t i o n n a i r e which should o n l y take a short time to a n s w e r . The a n s w e r s t o q u e s t i o n s r e q u e s t i n g f i g u r e s need o n l y be a p p r o x i m a t i o n s , so t i m e - c o n s u m i n g e x a m i n a t i o n i n t o y o u r a c c o u n t s f o r e x a c t n e s s i s u n n e c e s s a r y . I n a d d i t i o n t o the q u e s t i o n n a i r e i n f o r m a t i o n , the f o l l o w i n g i t e m s a r e a l s o r e q u e s t e d ? 1.  Annual Reports ( o r r e p r i n t e d F i n a n c i a l Statements) f o r each o f the y e a r s f r o m 1952 t o 1962. I f a l l o f t h e s e a r e not a v a i l a b l e , p l e a s e send what you do ha.ve.  2.  C o p i e s o f y o u r l i s t s o f s h o r t t e r m i n v e s t m e n t s as a t t h e end o f O c t o b e r a n d / o r November 1963, that i s , s u r p l u s funds you a r e l e n d i n g t o t h e m a r k e t and, i f a v a i l a b l e , s u c h l i s t s a t y e a r end f o r the p r e v i o u s y e a r s . These l i s t s w o u l d be most h e l p f u l i f t h e y showed m a t u r i t y d a t e , f a c e v a l u e , book v a l u e , and d e s c r i p t i o n ( t h a t i s , s o u r c e , s u c h as " F i n a n c e Company P a p e r , " You may w i s h t o keep the a c t u a l f i r m s you d e a l w i t h c o n f i d e n t i a l , so names a r e not r e q u e s t e d . ,  3.  The same as #2, but ( t h a t i s , f u n d s you  f o r s h o r t t e r m b o r r o v / i n g by y o u r Company o b t a i n f r o m the s h o r t t e r m m a r k e t ) .  The l i s t s m e n t i o n e d above a r e a c t u a l l y the most i m p o r t a n t p a r t o f the i n f o r m a t i o n requested:) s o , e v e n i f you c a n n o t s e n d a l l I have a s k e d f o r , the 1963 l i s t s a l o n e w i l l be very h e l p f u l . A l s o a p p r e c i a t e d w o u l d be any s t a t e m e n t o f p o l i c y on y o u r use o f the s h o r t t e r m m a r k e t , any r e c e n t changes on t h i s p o l i c y , o r any o t h e r i n f o r m a t i o n you t h i n k w o u l d be h e l p f u l . The d a t a I am r e q u e s t i n g a r e e s s e n t i a l t o the s u c c e s s o f t h i s t h e s i s , so y o u r a s s i s t a n c e w o u l d be g r e a t l y appreciated. Even i f you have no d e a l i n g s w h a t e v e r i n t h e .market, a s i m p l e s t a t e m e n t t o t h a t e f f e c t and a r e p l y t o p a r t C o n l y o f the q u e s t i o n n a i r e w o u l d be most h e l p f u l .  cooperation  T h a n k i n g you i n advance f o r y o u r t r o u b l e and I t r u s t I s h a l l r e c e i v e , I remain Yours very  David  truly,  Pascal  the  Q U E S T I 0 II ii A I R E You need not bother g i v i n g any i n f o r m a t i o n here that d u p l i c a t e s the l i s t s you are e n c l o s i n g under items # 1 and #2 o f my l e t t e r . I.  USES OF FUNDS% What are the approximate amounts you p r e s e n t l y have invested in? 1. Government o f Canada bonds o f m a t u r i t y under one year I 1 - 2 years ; 2 - 3 years Government of Canada Treasury B i l l s . i short term d i s c o u n t .  2. P r o v i n c i a l t r e a s u r y " b i l l s bonds 5 p a r i t y "bonds  3= M u n i c i p a l bonds o r other o b l i g a t i o n s up t o throe years maturity . 4. Finance Company notes o r acceptance paper 5. Commercial paper  .  6. Investment D e a l e r s ' "buy hacks" and loans 7- Banks and Trust Company notes and guaranteed d e p o s i t receipts 5 i n t e r e s t e a r n i n g hank d e p o s i t s 8. Bankers' acceptances 9 « U.S.A. and U.K. short term paper 10. G r a i n Co.. Paper I I . SOURCES OF FUNDSs " What are the approximate amounts you p r e s e n t l y borrow "by? 1. Commercial bank demand notes and o v e r d r a f t s Bankers' acceptances . 2. Promissory - notes  5  / . commercial • i v »i „V (other than" to banks;.  3. S e l f - l i q u i d a t i n g short term bank borrowing 4. Borrowing from governments f o r r e s e a r c h o r development, 5= Finance Company loans III.  .  GENERAL; A. For which of the f o l l o w i n g reasons, and i n about what amount, do you p l a c e surplus funds i n short term investments? I n d i c a t e where a p p l i c a b l e . 1. I n t e r e s t payments  .  2. Dividends 3.  .  C a p i t a l expenditures  4. S i n k i n g fund payments 5. Taxes 6. Inventory end/or  . rocoivable.lpeakS^  7. Other (continued)  • X.  Q U E S T I O N N A I R E  III.  (continued)  GENERAL ( c o n t i n u e d ) .• B. F o r w h i c h o f t h e f o l l o w i n g r e a s o n s and i n about what amounts do y o u engage i n s h o r t t e r m b o r r o w i n g ? 1. D i v i d e n d s  .  2. C a p i t a l e x p e n d i t u r e s  .  3. S e a s o n a l i n v e n t o r y f l u c t u a t i o n s 4» T a x e s 5. Other  .  . .  .  C. P l e a s e answer t h e f o l l o w i n g ? 1. Would y o u s a y t h a t y o u g i v e much a t t e n t i o n t o p u t t i n g s u r p l u s funds t o use i n the s h o r t term markets? 2. Do y o u a d v o c a t e need f o r s u c h a t t e n t i o n i n y o u r industry? 3. I I y o u have i n v e s t e d s u r p l u s f u n d s i n s h o r t t e r m ma.rkets, about how much e x t r a a n n u a l p r o f i t do y o u e s t i m a t e t h i s h a s added? 4« About what r a t i o o f c a s h t o c u r r e n t l i a b i l i t i e s w o u l d y o u recommend f o r f i r m s i n y o u r i n d u s t r y ?  5« F o r p u r p o s e s o f c o n f i d e n c e , w o u l d y o u p r e f e r t h a t I r e f r a i n e d f r o m m e n t i o n i n g y o u r Company's name i n t h e thesis?  P l e a s e l i s t b e l o w and on t h e r e v e r s e s i d e any o t h e r i n f o r m a t i o n you t h i n k may be h e l p f u l . ( F o r example, e x t e n t o f f l u c t u a t i o n s i n s h o r t t e r m l e n d i n g and b o r r o w i n g o v e r t h e y e a r , t i m e s and c a u s e s o f p e a k s , and e x t e n t o f c a s h f o r e c a s t i n g . )  U n i v e r s i t y of B r i t i s h  Columbia,  Dear Mr. D a v i d P a s c a l i s w r i t i n g h i s t h e s i s f o r t h e M a s t e r o f B u s i n e s s A d m i n i s t r a t i o n degree u n d e r a f a c u l t y committee o f w h i c h I am c h a i r m a n . I n t h e case o f Mr. P a s c a l ' s t h e s i s , a s i n many o t h e r s , t h e r e i s a r e q u i r e m e n t f o r t h e c o l l e c t i o n o f d a t a from b u s i n e s s f i r m s . Some o f t h e s e d a t a t h e f i r m s may v i e w a s b e i n g c o n f i d e n t i a l a n d , on b e h a l f o f t h e F a c u l t y o f B u s i n e s s A d m i n i s t r a t i o n , I c a n add my a s s u r a n c e t o t h a t o f Mr. P a s c a l ' s t h a t any s t i p u l a t i o n l a i d down by t h e companies who a r e good enough t o a s s i s t Mr. P a s c a l w i l l be c a r e f u l l y r e s p e c t e d . S i n c e r e l y /q^hrs,  'H. L. P u r d y , r  152  Dear W i t h r e f e r e n c e t o a l e t t e r and q u e s t i o n n a i r e m a i l e d t o you r e c e n t l y ( a copy o f w h i c h i s a t t a c h e d ) , I am now e n c l o s i n g a l e t t e r o f a u t h o r i z a t i o n from my t h e s i s c h a i r m a n , Dr. H.L. P u r d y . I f p r e s s u r e s o f t i m e have d e l a y e d y o u r a n s w e r , t h i s s e c o n d r e q u e s t i s n o t i n t e n d e d t o r u s h y o u , "but s e v e r a l f i r m s have r e f r a i n e d f r o m r e p l y i n g , f o r p u r p o s e s o f k e e p i n g the i n f o r m a t i o n c o n f i d e n t i a l . I f t h e l a t t e r i s t h e c a s e , I do hops you w i l l g i v e i t a s e c o n d t h o u g h t i n l i g h t o f D r . P u r d y ' s and my own a s s u r a n c e t h a t any r e q u e s t f o r c o n f i d e n c e you may have w i l l he r e s p e c t e d . I f y o u r f i r m has no d e a l i n g s w h a t e v e r i n t h e m a r k e t , j u s t a s i m p l e s t a t e m e n t t o t h a t e f f e c t and a r e p l y t o p a r t C o n l y o f t h e q u e s t i o n n a i r e w o u l d be most a p p r e c i a t e d . l  Yours v e r y  truly,  David P a s c a l . encls.  153  Dear Sorao tirao ago a l e t t e r and q u e s t i o n n a i r e were m a i l e d t o y o u r e q u e s t i n g d a t a f o r a t h e s i s r e g a r d i n g y o u r p a r t i c i p a t i o n i n t h e s h o r t t e r m money m a r k e t . From t h e r e s p o n s e t o p r e v i o u s s e c o n d r e q u e s t s , i t was l e a r n e d t h a t s e v e r a l f i r m s d i d n o t r e p l y o r i g i n a l l y b e c a u s e t h e y had no s h o r t t e r m i n v e s t m e n t s o f t e m p o r a r i l y i d l e f u n d s a n d / o r no b o r r o w i n g s o t h e r t h a n f r o m c o m m e r c i a l b a n k s . I f suoh i s y o u r c a s e , I w o u l d v e r y much a p p r e c i a t e y o u r s i m p l y l e t t i n g me know of t h i s f a c t . S e v e r a l f i r m s have e x p r e s s e d c o n c e r n r e g a r d i n g t h e c o n f i d e n t i a l n a t u r e o f t h e i n f o r m a t i o n . May I a s s u r e y o u t h a t t h e d a t a a r e c o m p i l e d i n t o t a l s a n d no i d e n t i f i c a t i o n o f s p e c i f i c f i r m s w i l l be r e v e a l e d w i t h o u t t h e e x p r e s s p e r m i s s i o n o f t h e company. Once t h e d a t a a r e c o m p i l e d t h e r e c o r d s w i l l be d e s t r o y e d . C o l l e c t i o n o f these data a r e e s s e n t i a l t o the success o f the t h e s i s . I f y o u have m i s p l a c e d t h e o r i g i n a l l e t t e r and q u e s t i o n n a i r e a n d w o u l d s t i l l l i k e t o a i d me, p l e a s e l e t me know a n d I s h a l l send a s e c o n d c o p y . F o r y o u r c o n v e n i e n c e , s e v e r a l s t a t e m e n t s a r e l i s t e d b e l o w and i t w o u l d be a p p r e c i a t e d i f y o u w o u l d t i c k t h e a p p r o p r i a t e one and r e t u r n this letter. Yours very  David We have no s h o r t t e r m i n v e s t m e n t s bank b o r r o w i n g ) .  truly,  Pascal  or borrowings (other  Send u s a n o t h e r l e t t e r and q u e s t i o n n a i r e We have n o t y e t been a b l e t o c o m p l e t e t h e o r i g i n a l q u e s t i o n n a i r e b u t e x p e c t t o do so .  .  than  

Cite

Citation Scheme:

        

Citations by CSL (citeproc-js)

Usage Statistics

Share

Embed

Customize your widget with the following options, then copy and paste the code below into the HTML of your page to embed this item in your website.
                        
                            <div id="ubcOpenCollectionsWidgetDisplay">
                            <script id="ubcOpenCollectionsWidget"
                            src="{[{embed.src}]}"
                            data-item="{[{embed.item}]}"
                            data-collection="{[{embed.collection}]}"
                            data-metadata="{[{embed.showMetadata}]}"
                            data-width="{[{embed.width}]}"
                            async >
                            </script>
                            </div>
                        
                    
IIIF logo Our image viewer uses the IIIF 2.0 standard. To load this item in other compatible viewers, use this url:
http://iiif.library.ubc.ca/presentation/dsp.831.1-0102418/manifest

Comment

Related Items