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Learning Objectives

1. Define primary, secondary, money and capital markets. (LO1)

2. Outline the primary participants raising funds in the capital markets. (LO2)

3. Characterize the Canadian economy as three major sectors allocating funds amongst themselves. (LO3)

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Competition for Funds in the Capital Markets

• Corporations are not the only demander for funds in the capital markets.

• All levels of governments also compete for funds in the capital markets.

LO2

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Government Securities

• Government of Canada Securities T-bills: short-term securities Long-term bonds: active secondary market Canadian Savings Bonds: illiquid long-term bonds After 1998, the federal budget surpluses reduce demand for new

debt and amount of debt outstanding.

• Provincial and Municipal Government Bonds Historically, provinces have borrowed mainly long term but

during the 1990s became active in the short-term market as well. Provinces and municipalities borrow actively in the foreign

markets Municipal bonds account for a small portion of the bond market

LO2

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Corporate SecuritiesCorporate Bonds

– most widely used form of financing in recent years– significant amounts raised abroad

Preferred Stock– least used of all long-term corporate securities

Common Stock– 25% of net new financings in some years– more equity is being raised abroad by Canadian

corporations

LO2

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Figure 14-6 Net new corporate financings by type of security

LO2

Source: Reprinted with permission of Bank of Canada, “Banking and Financial Statistics”, F9 series.

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Corporate Financing in General

• Debt-to-equity ratios among Canadian non-financial private corporations from the 1960s are fluctuating.

• Managers attempt to time their issues of common stock.

• Over a recent period, internally generated funds, consisting of retained earnings and capital consumption allowance generated over 60% of the firm’s funding needs.

• Managers are reluctant to use external financing.

LO2

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Figure 14-7Debt-to-equity ratios for nonfinancial private corporations

LO2

Source: Adapted from Statistics Canada, “Financial Statistics for Enterprises”, Catalogue No. 61-008, 2011.

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Figure 14-8Funding Sources of Non-financial Private Corporations

LO2

Source: Statistics Canada, 61-008-, 2011, Table 3-2.