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Lecture Financial institutions, instruments and markets (4/e): Chapter 12 - Christopher Viney

Chapter 12 - Government debt, monetary policy, the payments system and interest rates. After completing this chapter, students will be able to: Outline reasons why governments borrow; describe features of the main debt instruments and market participants; show how government securities are priced; discuss monetary policy, interest rates and the payments system. | Chapter 12 Government Debt, Monetary Policy, the Payments System and Interest rates Websites: http://www.rba.gov.au Learning Objectives Outline reasons why governments borrow Describe features of the main debt instruments and market participants Show how government securities are priced Discuss monetary policy, interest rates and the payments system Chapter Organisation 12.1 Introduction 12.2 Commonwealth Govt Borrowing 12.3 Types of Commonwealth Govt Securities 12.4 State Govt Securities 12.5 Monetary Policy 12.6 The Payments System 12.7 Summary 12.1 Introduction Govts need to fund capital and recurrent expenditures This is achieved by issuing debt securities in the money and capital markets Fiscal policy relates to the annual incomes and expenditures of a govt Monetary policy affects the level of short-term interest rates by adjusting the level of financial system liquidity Chapter Organisation 12.1 Introduction 12.2 Commonwealth Govt Borrowing 12.3 Types of Commonwealth Govt . | Chapter 12 Government Debt, Monetary Policy, the Payments System and Interest rates Websites: http://www.rba.gov.au Learning Objectives Outline reasons why governments borrow Describe features of the main debt instruments and market participants Show how government securities are priced Discuss monetary policy, interest rates and the payments system Chapter Organisation 12.1 Introduction 12.2 Commonwealth Govt Borrowing 12.3 Types of Commonwealth Govt Securities 12.4 State Govt Securities 12.5 Monetary Policy 12.6 The Payments System 12.7 Summary 12.1 Introduction Govts need to fund capital and recurrent expenditures This is achieved by issuing debt securities in the money and capital markets Fiscal policy relates to the annual incomes and expenditures of a govt Monetary policy affects the level of short-term interest rates by adjusting the level of financial system liquidity Chapter Organisation 12.1 Introduction 12.2 Commonwealth Govt Borrowing 12.3 Types of Commonwealth Govt Securities 12.4 State Govt Securities 12.5 Monetary Policy 12.6 The Payments System 12.7 Summary 12.2 Commonwealth Govt Borrowing Full financial year Borrow to finance budget deficits Rollover existing bonds which mature Retire debt at/prior to maturity when budget is in surplus Within financial year Borrow to finance short-term mismatches between receipts and payments Rollover existing debt Chapter Organisation 12.1 Introduction 12.2 Commonwealth Govt Borrowing 12.3 Types of Commonwealth Govt Securities 12.4 State Govt Securities 12.5 Monetary Policy 12.6 The Payments System 12.7 Summary 12.3 Types of Cwlth Govt Securities Like the private sector, the Cwlth govt issues both coupon and discount securities Treasury bonds (or T-bonds) for full financial year financing Treasury notes (or T-notes) for within year financing T-bonds Coupon instrument (coupons paid each 6 months) Coupon payment = coupon rate x face value of bond Face value of bond redeemed at maturity date or may be sold in .