103-1 Cash And Equivalents

Question 1

Cash

Answer 1

Refers to cash equivalents and bank instruments of deposit that have a high level of liquidity

Question 2

Marketability

Answer 2

The ability to sell and investment quickly on a readily identifiable market (I.e., no consideration of whether a corresponding loss of principal occurs at the time of sale)

Contrast this w/ liquidity

Question 3

Certificates of deposit (CDs)

Answer 3

Aka time deposits

Deposits made w/ a bank or savings and loan for a specified period, commonly 1 month to 5 years

Investor who wants to redeem the CD before its stated maturity date must pay a penalty in the form of either a one-time fee or a lower overall IR

FDIC insured up to $250,000 per ownership category

Question 4

Negotiable CDs

Answer 4

Deposits of $100,000 or more placed w/ commercial banks at a specified rate for a term of up to 1 year

Bought mostly by institutional investors

Bought/sold in secondary market at a market-determined price

Question 5

Passbook savings account

Answer 5

Established w/ a commercial bank or savings and loan and is a redeemable investment

No minimum balance
Penalty-free withdrawal at any time
No check writing
Low IR

Question 6

Money Market Deposit Accounts (MMDAs)

Answer 6

Offered by banks and savings and loans

Bank obligations and are federally insured, subject to the $250,000 ownership category limit

Question 7

Money Market Mutual Funds

Answer 7

Invest in high quality short-term investments such as U.S. Treasury Bills, commercial paper, and negotiable CDs

Question 8

U.S. Treasury Bills

Answer 8

Weekly auction
(52-week T-bills are auctioned every 4 weeks)
4-, 13-, 26-, 52-week T-bills in $100 increments w/ a $100 minimum purchase

Purchased at a discount

Interest income not taxable until bill matures
Interest income taxed at income tax rates
Not subject to state or local income tax
Amount of the discount taxed as ordinary income at maturity

Question 9

Commercial Paper

Answer 9

A negotiable, short-term, unsecured promissory note issued by a large corporation to finance accounts receivable and inventories

Usually issued in denominations of $100k+

Money market mutual funds primary purchasers of commercial paper

Term to maturity is no more than 270 days

Question 10

Repurchase Agreements

Answer 10

Aka repos

To satisfy short-term liquidity needs, dealers in gov securities will sell some of those securities to another dealer an agreement to sell them back at a later date at an agreed-upon price

Frequently found in money market mutual funds because they have an extremely short maturity and very low risk

Question 11

Repo rate

Answer 11

Rate of interest on the repo

Question 12

Reverse repurchase agreement

Answer 12

The dealer buys government securities from another dealer and then sells them back at a higher price

Question 13

Banker’s Acceptances

Answer 13

Short-term drafts drawn by a private company on a major bank used to finance imports and exports

Typically traded at a discount from their face value on the secondary market

Analogous to a personal line of credit issued to a borrower by a financial institution

Question 14

Eurodollars

Answer 14

U.S. dollar-denominated deposits at banks outside the U.S. used to settle international transactions

The avg deposit is very large (in the millions) and has a maturity of less than 6 months

Question 15

Eurodollar CD

Answer 15

This type of CD shares the same characteristics of its domestic counterpart except that the obligation is the liability of a non-U.S. bank

Euro CDs are less liquid and, therefore, offer a slightly higher yield than domestic CDs