©2012 McGraw-Hill Ryerson Limited 1 of 33 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)

©2012 McGraw-Hill Ryerson Limited 2 of 33 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

©2012 McGraw-Hill Ryerson Limited 3 of 33 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

©2012 McGraw-Hill Ryerson Limited 4 of 33 Corporate Securities Corporate 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

©2012 McGraw-Hill Ryerson Limited 5 of 33 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.

©2012 McGraw-Hill Ryerson Limited 6 of 33 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

©2012 McGraw-Hill Ryerson Limited 7 of 33 Figure 14-7 Debt-to-equity ratios for nonfinancial private corporations LO2 Source: Adapted from Statistics Canada, “Financial Statistics for Enterprises”, Catalogue No , 2011.

©2012 McGraw-Hill Ryerson Limited 8 of 33 Figure 14-8 Funding Sources of Non-financial Private Corporations LO2 Source: Statistics Canada, , 2011, Table 3-2.