Ch 15 Money Market Instruments Flashcards
What do direct money market instruments include ?
Bank account deposits with term certificates of deposits
Interbank loans
Commercial paper
Treasury bills
Repurchase rates (repo)
What is the repo rate
The rate at which The SARB lends money to banks , set by the Monetary policy committee
How do repo rates affect economy
High rates raises the cost of borrowing in the country
How do you banks make profits
They loan at a higher rate then the repo rate or pay depositors a lower rate than the repo rate
Name the type of account deposits can be placed
Call deposits - money available to the investor on demand
Notice deposits - where investor has to give specified notice before withdrawal
Term deposits - No withdrawals before the expiry date of term
Intuitively what is a promissory note
A sort of I owe you a specified amount at a specified date
What are 3 traits of a promissory note
They pay out to barer inorder to be traded
Unsecured (just a promise with no asset backings)
No regular interest (only cash flows are purchase and redemption)
What are advantages of money market securities
Fully guaranteed principal by issued if held to maturity
Usually higher rates of return than bank deposits with similar terms
Can be traded
Variety of maturity dates
Highly liquid
Low risk
What are treasury bills
Short term debt obligations of the central government
What is commercial paper
Short term promissory note issued by highly rated banks and some large non financial corporations
How are bankers acceptance and bearer deposit notes different from commercial paper
They are similar but they are guaranteed by the bank (third party)
How do bankers acceptance and bearer deposit notes differ
BA is issued by company but carries the acceptance whereas BDN is issued by bank on behalf of company
What are Money market strips
They are created when the individual interest coupons are separated from the maturity value of a government bond
What are Negotiable Certificate of deposit (NCD)
A short term security issued by banks and building societies showing that a stated sum of money has been deposited for a specified term at a specified rate of interest.
What is a repo agreement
A sale of a security with a commitment to repurchase the same security at a specified price at a later date in the future
