AFMA Debt Markets: Exam tips Flashcards
To manage liquidity, the RBA uses which of the following:
- Foreign exchange swaps
- Purchases / sales of long dated CGS
- Interest Rate swaps
- Repurchase/reverse repurchase transactions
a) 1, 2, 3 & 4
b) 1, 2 & 3
c) 2 and 4
d) 1, 2, and 4
d) 1, 2, and 4
(Does not use IRS - there is no exchange of principle
Which of the following is a typical task of the Australian Offic e of FInancial Management?
a) provide portfolio management for state-owned corporations
b) provide intraday liquidity to ESA holders
c) operate a stock lending facility through the RBA
d) Raise long and short term funds for wholesale institutions
c) operate a stock lending facility through the RBA
(note elimination: PM for state owned corps = semis, intraday liquidity for ESA holders is RBA, long and ST funds for wholesale instos = banks)
Which of the following participants is a price maker?
a) Jess accepts a bid rate of 3.50% for a bond issue
b) Bill quotes a rate of 4.30/4.25 for a 10 year bond
c) Steel Corporation issues $100,000 worth of promissory notes
d) EFG Life pools its premiums and invests in asset backed securities
b) Bill quotes a rate of 4.30/4.25 for a 10 year bond
Short term debt products:
- define
- consist of:
Short term debt products:
- define: < 1 year to maturity
- consist of:cash products; discount securities
Cash markets - products (4)
- Exchange Settlement Accounts (ESAs)
- At call funds (or 11am cash)
- Term loans and deposits
- Interest calculated on a simple interest basis
Future Value vs Present Value:
Formula
FV = PV + (PV x i x t)
= PV (1 + it)
PV = FV / (1+it)
Discount Securities:
Characteristics (2)
Major forms (4)
Discount Securities:
Characteristics (2)
- Securities that only pay a single payment at a specific date in the future
- Trade at a discount to their face value
Major forms (4)
- Bank Accepted Bills (BABs) (drawer, acceptor, payee)
- Commercial Paper (aka Promissory Notes) CP / PN (bearer)
- Negotiable Certificates of Deposit (NCDs) (bearer)
- Treasury Notes (T Notes) (inscribed stock)
BABs
Bills of Exchange Act 1909
1. types
2. parties to a bill of exchange:
BABs Bills of Exchange Act 1909 1. types - bills of exchange - bank endorsed bills - bank accepted bills 2. parties to a bill of exchange: - drawer - acceptor - payee - discounter - endorser
CP / PNs / NCDs
6 characteristics
CP / PNs / NCDs 6 characteristics - one name paper - bearer instrument - details of paying bank included - CP/PNs issued by corporates/funding vehicles - NCDs issued by ADIs - ECP is issued outside borrowers country
Treasury Notes
4 characteristics
Treasury Notes 4 characteristics - Issued by AOFM on a tender basis - Maturities up to 9 months - Discount securities - Inscribed stock
Pricing Discount Securities: formula
Price = Face Value / (1+i * d/365)
Express i as decimal
Capital gain or loss: formula
Capital gain = Selling Price - (Purchase price + interest)
Repos and Reverse Repos
- define
- used for:
- repo margining:
Repos and Reverse Repos
- define: transaction involving a purcashe or sale of a security and the simultaneous agreement to reverse the transaction at an agreed date and price in the future
- used for: repos are used as a tool for short term liquidity management
- repo margining:
Default practice is to make margin calls in preference to repricing transaction when relying on repo agreements to cover exposure between parties
Collateral securities are valued on a daily basis and compared to net cash borrowed by counterparty to determine if margin calls are to be made
Repricing is still permitted provided it is agreed by the counterparties
Which of the following statements are TRUE
1) All short term discount instruments are payable to bearer
2) The minimum bid size for treasury notes at an RBA tender is $1,000,000
3) All discount instruments have a fixed face value
4) Promissory notes do not have an acceptor
a) 1, 3 and 4
b) 1 and 2
c) 2, 3 and 4
d) 3 and 4
c) 2, 3 and 4
Note: 1: inscribed stock is different
MUST KNOW THIS: An investor purchases a$1m Bank Bill at a yield of 5% with 90 days to maturity. If he sells it 20 days later at a yield of 4.85%, what is the capital gain earned? a) 256.61 b) 2,962.97 c) 2,706.36 d) 237.20
a) 256.61
Question is asking what is the capital gain or loss. Watch: this is a 2 step process. You need to work out the interest on the principle
Exam question:
Understand concept of bonds trading at par, premium and discount
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Long term debt markets:
Instruments
- Commonwealth Govt securities (issued by AOFM on tender basis)
- Semi government bonds (issued by semis, via tender or dealer panel)
- Non govt securities
- foreign bonds (kangaroos)
- FRNs
- Indexed bonds (capital indexed, coupon indexed)
OTHER
- Eurobonds
- ABS (incl RMBS, bullet or pass through)
- CDOs
- Subordinated securities
- Hybrid securities (reset securities, convertible notes, warrants)
Which of the following statements is TRUE about the cash flow involved in fixed interest securities?
a) The type of cashflow on a fixed interest security depends on whether the security was issued at a premium or discount to par
b) Fixed interest securities have one type of cashflow repayment of principle at maturity
c) The types of cashflow on a fixed security depend on the issuer of the security
d) Fixed interest securities have 2 types of cashflow: coupon cashflow and repayment of principle at maturity
d) Fixed interest securities have 2 types of cashflow: coupon cashflow and repayment of principle at maturity
What is the gross price per $100 face value of the following CGS for settlement on 18 April 2012?
Maturity = 15 March 2015
Coupon = 6.75% (paid semi annually)
Yield = 5.62%
a) 102.986
b) 103.609
c) 103.08
d) 102.602
b) 103.609
note question asks for GROSS price no capital price.
Calculate the yield (to 2 decimal places) for the following CGS for settlement 18 April 2012 Capital Price: 102.986 Maturity: 15 March 2015 Coupon: 6.75% (paid semi annually) a) 5.50 b) 5.62 c) 5.26 d) 6.75
b) 5.62
EXAM QN (3 qns in exam, one is FV, one is PV, one is no formula)
The present value of $400 in three year’s time at an annual interest rate of 6.5% with semi annual interest payments is
a) 478, as interest is not reinvested
b) 274.13 assuming interest payment are re invested
c) 330.16 assuming interest payments are reinvested
d) 426
c) 330.16 assuming interest payments are reinvested
PV = FV / ((1+i)^n)
= 400 / ((1+0.065)^6)
= 330.16
Forward Rate Agreements
What does “the 16th” or “the 2nd” mean
Means the 16th day of the month, or the 2nd day of the month.
eg 1s/4s the 16th.
Interest rate swaps
Swaps are used to: (6)
- obtain lower cost of funding for borrowers
- , hedge an interest rate exposure
- obtain higher yielding investment assets
- create types of investment assets not otherwise obtainable
- implement overall asset/liabilities management strategies (eg change characteristics of portfolio without changing physical composition
- Take speculative positions in relation to future movement in interest rates
The present value of any future cashflow is the discuont factor (DF) multiplied by the future value (FV)
PV = DF x Future Value
Types of swaps (5)
- Accreting
- Amortising
- Basis
- Balloon
- Forward Swap
Overnight Index Swaps
- Define
OIS
- Fixed rate swap against a floating rate index which is the overnight cash rate compounded daily
- Allows overnight interest rate exposure to be managed off balance sheet freeing up credit
Currency Swaps - types (3)
Types of currency swaps:
- Currency swap - fixed vs floating
- Cross currency swap - fixed vs floating
- cross currency basis swap - floating vs floating
Currency swap components (3 points on exchange)
- Initial exchange:
- usually set at spot rate
- sets notional amounts for interest payments - Interest payments
- paid periodically based on notionals set at initial exchange - Final exchange
- principals exchanged at the same rate as initial exchange