2. Short Term Debt Products

Question 0

Cash products

• ESAs
• At call funds
• Term loans & deposits

Answer 0

1. 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
2. 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
3. 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
4. term loans & deposits

Question 1

2 main categories of short term instruments

Answer 1

1. cash products (traditional deposits and loans with short term, generally not negotiable and therefore not securitised
2. 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

Question 2

Discount Securities
Major types (4)

Answer 2

1. Bank accepted bills
2. Commercial Paper
3. NCDs
4. Treasury notes

Question 3

Bank accepted bills

Answer 3

• 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)

Question 4

Commercial Paper

- difference with BAB

Answer 4

• 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

Question 5

Euro commercial paper

Answer 5

• 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

Question 6

Negotiable Certificates of Deposit

Answer 6

• 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.

Question 7

Treasury NOtes

Answer 7

= 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

Question 9

Repurchase and Reverse Repurchase Agreements

Answer 9

• 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

Question 10

Repo Collateral

Answer 10

• 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.

Question 11

CALCULATIONS:

1. FV and PV
2. Notional and effective interest
3. Interpolating interest rates
4. Pricing Discount Securities
5. Holding Period Return
6. Capital gain / loss
7. Forward bank bill pricing and arbitrage
8. Calculating Repo Rate

Answer 11

1. FV and PV
2. Notional and effective interest
3. Interpolating interest rates
4. Pricing Discount Securities
5. Holding Period Return
6. Capital gain / loss
7. Forward bank bill pricing and arbitrage
8. Calculating Repo Rate

Question 12

Calc not on sheet: Holding Period Return

TRAP

Answer 12

(selling price - purchase price)/purchase price
x 365/days held

Trap: Watch time held vs time remaining on the discount security.

Question 13

Pricing discount securities (calc)

Answer 13

use simple interest FV & PV calcs

Question 14

Capital Gain / Loss Calc (not on sheet)

Answer 14

Capital Gain = SP - (PP + interest)

Question 15

Repo: economically similar to:

Fundamentally different:

Answer 15

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.

Question 16

Repo calc

Answer 16

To calc repo price, start with initial market price, work out interest over the period to calc repurchase price.

• Repo : pay the value
• reverse repo: receive the value
• eg calc: MV x (1+i*days/365)