2. Short Term Debt Products Flashcards
0
Q
Cash products
- ESAs
- At call funds
- Term loans & deposits
A
- exchange settlement accounts (ESAs funds)
- every licensed bank must have ESA w/ RBA. Providers of payments settle obligations through clearing process of ESA
- RBA pays overnight interest on the balance, at a margin below prevailing cash rate target
- Transactions generally 11am with interest paid on maturity
- Banks can enter overnight repo with each other to facilitate RTGS, settlement is through ESAs - at call funds
- invest very short term liquid funds
- loan & deposit with notional maturity of 1 day
- funds must be called, repaid or renegotiated (rate) before 11am on the day (ie 11am cash). Interest paid month end.
- unsecured - Term loans & deposits
- agreed maturity & interest rate
- short term, may have fixed or floating rates
- interets paid at end of interest period and/or at maturity - term loans & deposits
1
Q
2 main categories of short term instruments
A
- cash products (traditional deposits and loans with short term, generally not negotiable and therefore not securitised
- discount securities (securitised short term products, generally negotiable ie ownership can be transferred through physical holding, pay no interest till maturity therefore are discount securities
2
Q
Discount Securities Major types (4)
A
- Bank accepted bills
- Commercial Paper
- NCDs
- Treasury notes
3
Q
Bank accepted bills
A
- accepted by a bank, therefore securitised, repayable to the addressee to a specific person or bearer
- types: bank accepted; bank endorsed (accepted by institutions other than banks, margin above babs)
- parties: drawer (seeks funds); acceptor (accepts liability to pay proceeds at maturity, usually a bank); payee; discounter (person who buys the bill, often the accepting bank); endorser (person who was previously a holder but has sold the bill - creates legal chain of ownership)
4
Q
Commercial Paper
- difference with BAB
A
- commercial paper = securitised evidence of debt (same as babs) BUT: CP does not have an acceptor and the credit risk lies solely with the issuer (one name paper)
- parties: issuer & payee. Most are payable to bearer
- main issuers: NBFIs; large corporates with high credit ratings
- asset backed securities = significant sector of CP market
- trade at a margin to bank bills
5
Q
Euro commercial paper
A
- ECP = CP or promissory note issued outside issuer’s country of domicile.
- not issued as a spread to BBSW. Can be attractive for relative cost. Usually priced on 360 day basis
6
Q
Negotiable Certificates of Deposit
A
- CP issued by licensed bank; cannot be cashed before maturity
- Credit risk is with the issuer
- interchangeable with BABs in professional market. NCDs used in liability management by ADIs, BABs used in asset management.
7
Q
Treasury NOtes
A
= CP issued by AOFM.
- short term funding instrument to smooth seasonable cashflows of Cwlth
- issued by tender, 1m min; 1m thereafter. Subsequent to tender can be transfered in multiples of $5k.
- “inscribed” - ie ownership of stock is recognised by way of registry maintained by RBA. Settlement conducted by Austraclear
- discounted instruments
9
Q
Repurchase and Reverse Repurchase Agreements
A
- Repo = transaction involving the sale of a security and simultaneous agreement to buy it back at an agreed rate in the future
- Economically similar to a loan. Party who affects the sale of securities is effectively the borrower. NOTE: title of the securities passes to the provider of the cash for the term of the repo.
- repos with set maturity = “term” repos; those with no specific maturity date = “open dated” or “at call” repos
- repos provide a way of covering short sale.
- reverse repo: money is received
- repo: money is paid
- calculation is simple interest
10
Q
Repo Collateral
A
- Collateral for repos is important, as the creditworthiness of the collateral is the basis of the price.
- eg; general collateral (not specific); government general collateral; semi government general collateral; specific collateral.
11
Q
CALCULATIONS:
- FV and PV
- Notional and effective interest
- Interpolating interest rates
- Pricing Discount Securities
- Holding Period Return
- Capital gain / loss
- Forward bank bill pricing and arbitrage
- Calculating Repo Rate
A
- FV and PV
- Notional and effective interest
- Interpolating interest rates
- Pricing Discount Securities
- Holding Period Return
- Capital gain / loss
- Forward bank bill pricing and arbitrage
- Calculating Repo Rate
12
Q
Calc not on sheet: Holding Period Return
TRAP
A
(selling price - purchase price)/purchase price
x 365/days held
Trap: Watch time held vs time remaining on the discount security.
13
Q
Pricing discount securities (calc)
A
use simple interest FV & PV calcs
14
Q
Capital Gain / Loss Calc (not on sheet)
A
Capital Gain = SP - (PP + interest)
15
Q
Repo: economically similar to:
Fundamentally different:
A
Repo is economoically similar to a secured loan.
- 1 party sells the security, is effectively the borrower
- repo buyer is effectively the lender and receives securities as collateral against default
- Repo difference: title of the security passes to the provider of the cash for the term of the repo.
