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Personal Investment Project

Winter 2004

 

Contents

The Market

The financial market is composed of many “components” which includes equities, funds, bonds, commodities, and currency.  This report presents an analysis of selected financial “components” for a time period of 10 weeks starting on December 31 2003 and ending on March 5 2004.

A note on reading graphs. 

The graphs tracking the changes have two vertical axis.  The axis on the left indicates the actual value/yield/price of the ‘component’ in question.  The axis on the right indicates the percent gain/loss on a percent basis if invested at the open price.  The Actual values appear in blue, while the return appears in magenta.

Cash and Cash Equivalences

Treasury Bills (T-Bills) and Bonds

Treasury bills are short-term debt obligations issued normally in denominations ranging from $1000 to $1,000,000, and with 91 day, and 182 day terms.  They are issued by auction once every week,  In the past, T-bills were mainly of interest to large investors such as banks, but have become more accessible to small investors.  T-bills have no default risk and a very liquid.   T-bill yield rates fluctuate with changes in interest rates.

Bonds are fixed income securities issued by various levels of governments and corporations when they want to borrow money.  Unlike G.I.C’s or Canada Saving Bonds, the market value for bonds can fluctuate, even if issued by the government. 

T-Bills and bond yield rates fluctuate due to changes in interest rates.  Generally if interest rates increase the price of bonds decrease and if the interest rates decrease the price of bonds increase.  If the yield rate on a bond is below current interest rates, then the demand for these bonds is low because investors can receive a better return by putting their money in other investments.  In this situation a drop in interest rates will cause the bond yield to decline.  Conversely, if the yield on the bond issued is above the interest rates, then demand for these bonds is high.  In this situation a rise in interest rates will cause the bond yield to increase. 

The individual performance of a 3 month Canada treasury bills for the 10 week periods is shown in Figure 8.  The individual performance of 2 year and 30 year government of Canada bonds are shown in Figure 9 and Figure 10 respectively. The 2 year bond has a coupon rate of 3.50% and matures in June 2005.  The 10 year bond (Figure 11) has a coupon rate of 5.75% and matures in June 2033.  The individual performance of a 10 year US government bond, which matures in May 2013.  Figure 12 compare all the bond rates.  On January 20 the Bank of Canada lowered interest rates by 1/4 percentage point to 2.5%, and on March 2 it lowered interests rates another 1/4 percentage point to 2.25%.  The effect of the rate cut in January on bond yield is evident from the figures.  The T-Bills and the 2 yr Canada bond yield rate fell because it’s yield rates are lower interest rates offered at chartered banks (~2.5%).  Thus investors can benefit more by putting money in to the bank, as opposed to the bonds.  However the yield rate for 30 year bonds increased because it’s yield rate is higher than the current interest rates offered at chartered banks.  Thus investors can receive a higher yield by investing in the bonds.  The effect of the March rate cannot be commented on because of the lack of data.  However it is expected to follow the same trends.

On January 28 the US Federal Reserves decided to keep interests rates unchanged.  This caused the 10 yr US bond yield (and price) to decrease.  This is probably because of speculation that the FEDS might raise interest rates later in the year.
 

Figure 8 3 Month Canada Treasury Bill

 

Figure 9 Canada 2 year Bond

 

Figure 10 Canada 30 year Bond

 

Figure 11 US 10 year Bond

Figure 12 Bond Comparison

 

Canadian Dollar

The performance of the Canadian dollar with respect to the US dollar is shown in Figure 13.  The Canadian dollar is influence by many factors including interest rates and gold prices.  The price of gold is related to the value of the US dollar.  When the US dollar appreciates, gold prices decreases and vice-versa.  When the US dollar depreciates the Canadian dollar strengthens.  As the price of gold increases, the US dollar decrease causing the Canadian dollar to strengthen.  Thus there is a direct correlation between the Canadian dollar and the price of gold, which is shown in Figure 13

Figure 3 Performance of CDN dollar

 

Precious Metals

Gold, silver and other precious metals are exchanged in different markets around the world.  The performance of gold traded in New York is shown in Figure 14.  The graph also compares the price Canadian investors pay for gold (in Canadian dollars), and how currency fluctuations can effect the return on the investment.  As seen below, a Canadian investor will outperform a US investor.  Gold would be classified as a cyclic investment because it is dependent on economic indicators such as currencies, interest rates, and inflation.

Figure 14 Gold performance

 

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