Unitec
Institute of Technology
Assignment 1
Referring to the course
ALAF630: The Economics of Money and Financial Markets

The Economics of Money and Financial Markets in New Zealand

Semester One 2001

Name: Thomas Kramer

Handed in to: Beverley Moodie
Deadline: 3rd April 2000

Table of contents

1 Financial Market Instruments for New Zealand ...1
1.1 Crown Debt Instruments ... 1
1.1.1 Government Stock ... 2
1.1.2 Treasury Bills ... 2
1.1.3 Reserve Bank Bills ... 3
1.1.4 Kiwi Bonds ... 3
1.1.5 Government Bond Coupons ... 3
1.1.6 Inflation-Indexed Bonds ... 4
1.2 Non-Crown Debt Instruments ... 4
1.2.1 Corporate and State Owned Enterprise Bonds ... 4
1.2.2 Bills of Exchange ... 5
1.2.3 Promissory Notes ... 5
1.2.4 Certificate of Deposit ... 6

2 Major Trends in the NZ Financial Market ... 7

3 Importance of a Financial System′s Stability ... 9
3.1 Introduction ... 9
3.2 The Importance of Financial Markets ... 9
3.3 Sources of Financial System Problems ... 10
3.4 Surveillance of Financial Instability ... 13
3.5 Conclusion ... 15

4 References ... 16

1 Financial Market Instruments for New Zealand

It is an aim of a financial market to provide a source of finance to particular target groups. This section deals largely with the financial instruments used by the market participants to raise funds, how these instruments are issued and how they are traded.

The participants in the money and bond market are investors and borrowers. To highlight financial instruments from the borrowers′ point of view it makes sense to divide the group of borrowers in two distinct categories:

The `Crown′ market consists of the Reserve Bank and the central government whereas the borrowers in the `Non-Crown′ market are financial intermediaries such as banks, corporations, state owned enterprises, local authorities, etc. as you can see in the table above. (Potter, 2000 [A]; Potter, 2000 [B]) The financial instruments in these two markets will be analysed separately in the sections to come:
The `Crown′ market consists of the Reserve Bank and the central government whereas the borrowers in the `Non-Crown′ market are financial intermediaries such as banks, corporations, state owned enterprises, local authorities, etc. as you can see in the table above. (Potter, 2000 [A]; Potter, 2000 [B])
The financial instruments in these two markets will be analysed separately in the sections to come:

1.1 Crown Debt Instruments

The debt instruments of the borrowers in the Crown market (Reserve Bank and central government) are presented in the following graph with regards to their proportions of use:

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1.1.1 Government Stock

Government bonds (stock) are the Crown’s long-term debt instruments to obtain fund requirements. Due to the fact that revenue can be raised from collecting taxes the Crown is the most creditworthy entity in New Zealand. The Government bonds are the most commonly traded instruments in the market since their interest rates are much lower than similar securities issued by non-government institutions. Since 1983 this type of bonds are issued through competitive bidding tenders supporting the government to fund its fiscal deficits through borrowing, and increasing the liquidity of the government bond market. The government determines the quantity of bonds issued to borrowers by considering its fiscal position, its desired mix of domestic and foreign debt, the maturation of outstanding bonds, etc.. (Potter, 2000 [A])

1.1.2 Treasury Bills

Treasury bills count for the second largest share of government debt. In contrast to government stocks they are short-term instruments used for covering the government’s ongoing expenditures. They can be sold either by weekly tenders or by open market operations (seasonal treasury bills) conducted by the Reserve Bank. Depending on where the treasury bills are issued its maturity ranges from one to three months when sold over the open market operations, otherwise either three, six or twelve months when issued in the weekly tenders. The quantity of bills issued is determined by the government by a forecast of its financing requirements on a particular day. (Potter, 2000 [A])

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