3.6 Money Market Instruments, Floating-Rate Notes & International Bonds

Short-Term and International Debt

Not all debt is long-term domestic bonds. Governments and corporations borrow for days or months in the money market, some bonds carry floating coupons, and many issuers borrow in foreign markets or foreign currencies. This section covers these instruments.

Short-Term Money Market Instruments

The Canadian money market is the wholesale financial market for debt securities with maturities of one year or less (365 days or fewer). Money market instruments feature high liquidity, minimal price volatility, and low default risk.

Bankers' Acceptances (BAs): A Discontinued Instrument

For decades a Banker's Acceptance (BA) was one of Canada's most traded money market instruments: a short-term draft drawn by a corporate borrower and "accepted" (guaranteed) by a bank, then sold at a discount. BA rates also fed the Canadian Dollar Offered Rate (CDOR) benchmark.

When CDOR ceased publication after June 28, 2024, Canadian banks stopped issuing BAs. Borrowers moved to CORRA-based loans and to commercial paper. Older study material may still describe BAs, so know the concept: a bank's acceptance substituted the bank's credit for the borrower's.

Commercial Paper (CP)

Commercial paper consists of short-term, unsecured promissory notes issued by large, financially stable corporations to finance working capital and seasonal cash deficits.

• Maturity: Typically ranges from 30 to 365 days (most commonly 30 to 90 days).
• Pricing: Sold at a discount to face value and redeemed at par on an actual/365-day basis.
• Lower Borrowing Costs: CP yields are generally lower than commercial bank prime lending rates, saving large corporate issuers millions of dollars in interest expense.
• Prospectus Exemption: Under National Instrument 45-106, short-term debt such as commercial paper can be sold without a prospectus if it matures in one year or less, is not convertible into other securities, and carries a sufficiently high short-term rating from a designated rating organization.

Floating-Rate Notes (FRNs)

Floating-Rate Notes (FRNs) are debt securities whose coupon rate is not fixed, but instead adjusts periodically (quarterly or semi-annually) based on a designated benchmark reference rate (such as the Canadian Overnight Repo Rate Average - CORRA) plus a fixed spread (e.g., $\text{CORRA} + 75\text{ bps}$).

• Interest Rate Sensitivity: Because the coupon rate resets regularly to reflect current market interest rates, the market price of an FRN stays remarkably close to par (100.00). FRNs experience virtually zero interest rate price volatility compared to fixed-coupon bonds.

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International Debt Markets: Eurobonds vs. Foreign Bonds

When borrowers tap international capital markets outside their domestic borders, the securities fall into two distinct legal classifications:

International Debt Classifications
 ├── Eurobonds: Issued outside the home jurisdiction of the currency
 │    └── (e.g., Canadian bank issuing US\$ debt in London)
 └── Foreign Bonds: Issued in a domestic market by a foreign borrower in local currency
      ├── Maple Bonds: Foreign issuers in Canada denominated in CAD
      ├── Yankee Bonds: Foreign issuers in the US denominated in USD
      ├── Bulldog Bonds: Foreign issuers in the UK denominated in GBP
      └── Samurai Bonds: Foreign issuers in Japan denominated in JPY

Eurobonds

A Eurobond is a debt instrument issued in an international market outside the regulatory jurisdiction of the country in whose currency the bond is denominated.

• Example: A Canadian multinational corporation (e.g., Enbridge) issuing a US dollar-denominated bond in London, or a Japanese conglomerate issuing a Canadian dollar-denominated bond (Euro-CAD) across European and Asian markets.
• Key Features: Eurobonds are underwritten by an international syndicate of investment dealers, are traditionally issued in bearer form, are not subject to domestic withholding taxes, and do not require formal registration with domestic securities regulators (such as the SEC or provincial securities commissions).

Foreign Bonds

A foreign bond is issued by a foreign borrower in a domestic capital market, denominated in that domestic country's currency, and subject to that domestic country's regulatory registration rules.

• Maple Bonds: Canadian dollar-denominated bonds issued in Canada by foreign corporations, foreign banks, or supranational organizations (e.g., Apple or the Inter-American Development Bank issuing CAD bonds in Toronto). Maple bonds allow Canadian institutional investors to diversify into global companies without taking on currency exchange risk.
• Yankee Bonds: US dollar bonds issued in the United States by non-U.S. borrowers (e.g., Royal Bank of Canada issuing USD bonds in New York registered with the SEC).
• Bulldog Bonds: British pound (GBP) bonds issued in the UK by foreign borrowers.
• Samurai Bonds: Japanese yen (JPY) bonds issued in Japan by foreign borrowers.

Classification Comparison