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Financial Markets and Institutions > Chapter 2 - interbank market > Flashcards

Chapter 2 - interbank market Flashcards

1
Q

A convertible bond is a bond that

A

has an option to convert to a specified number of shares of common stock at a pre-defined conversion date.

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2
Q

Subordinated debentures

A

Are similar to debentures except that they have a lower priority claim. In the event of default, subordinated
debenture holders are paid only after non-subordinated bondholders have been paid.
Thus, they offer higher expected returns

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3
Q

Monetary markets’ functions

A

• To increase the efficiency of the economic agents’ financial decisions
• To allow economic agents to invest part of their wealth in highly liquid FAs that offer an acceptable return
• Public deficit financing. They help the State (and other Public Administrations) in its pursuit of the economic and financial objectives

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4
Q

Monetary markets’ participants
The ECONOMIC AGENTS that intervene in these markets, offering and demanding short- term funds are:

A

FINANCIAL ENTITIES
§ PUBLIC ADMINISTRATIONS
§ INSURANCE COMPANIES
§ INVESTMENT AND PENSION FUNDS
§ FAMILIES

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5
Q

MAIN MONETARY MARKETS

A

Interbank markets
§ Corporate securities’ market (AIAF)
§ Public Debt Market
§ Mortgage based FAs markets

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6
Q

Lower risk is linked to

A

Lower return

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7
Q

Examples of money markets’ assets

A

Treasury Bills
· Interbank deposits
· Mortgage Backed Assets (i.e., cédulas Hipotecarias)
· Public Bonds
· Commercial Paper
· Money

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8
Q

Most important interbank market is

A

Interbank deposits market

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9
Q

INTERBANK DEPOSITS’ MARKET

A

Monetary market in which financial entities (i.e., banks, saving banks and other credit entities) lend to each other deposits with a maturity of one day (overnight) and longer term periods

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10
Q

Objectives of IDM + operations

A

To “warehouse” surplus funds until they are needed and to provide a low-cost source of funds to Eas and financial intermediaries that need a short-term influsion of funds
Banks analyze their reserve position on a daily basis and either borrow or invest funds, depending on whether they have deficit or excess reserves (to cover minimum reserve requirements- monetary policy-)
To speculate about short-term interest rates’ tendency

Operations are done by means of the deposits in the Central Banks. These deposits are short-term deposits; the mean transaction lasts one day
Traditionally, fax and telephone were used. Nowadays, electronic means are used. Their use has increased the celerity and globalization of the operations in these markets

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11
Q

role of the Bank of Spain

A

Instrumental paper → it facilitates the operations that are made through the accounts that the entities have in the Bank of Spain
Discloses statistics about the evolution and operations of the market

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12
Q

Euribor for longer has

A

Higher ir brcause of risk

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13
Q

OTHER CHARACTERISTICS

A

WHOLESALE MARKET: the participants are financial entities and the volume of funds traded is high
• OPERATIONS ARE CONCENTRATED ON THE SHORT-TERM; it is a primary market
• DEPOSITS ARE NON-TRANSFERABLE or non-tradable ⇒ participants have to wait until maturity
to get the funds back

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14
Q

Commercial paper characterisation

A

Private entities the largest
Short term no more than 18 months
Unsecured
Discount rate
Low risk

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15
Q

Types of commercial paper

A

Serial or custom made

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16
Q

Serial issues of cp

A

Low nominal value Short-term maturity
Periodic issues’ programmes
Are issued using competitive auctions and placed among financial intermediaries

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17
Q

Custom made issuesof cp

A

Issuer with relative solvency - not as high as in serial cp
Interest rates, maturity, nominal value meet investors’ preferences (custom made) Investors (buyers) are usually institutional investors or large firms
Reasons for their acquisition: to obtain a return for a temporary excess of funds Nominal values are higher than in the case of serial issues
Very short-term maturity
Non-programmed issues that are not required to be registered at the CNMV
FAs are sold with the collaboration of intermediaries and sometimes directly

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18
Q

Commercial paper return

A

Risk premium and liquidity premium over treasury bills

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19
Q

Bonds characteristic

A

Medium and long term fixed term securities issued by corporations or state

Provide contractual right to receive an interest

20
Q

Bonds are considered fixed-term securities as they

A

offer savers (the buyers-holders) a specified amount at a given time (their conditions are specified in the bond indenture)

21
Q

FIXED-TERM SECURITIES’ CHARACTERISTICS

A

PRINCIPAL OR NOMINAL VALUE 2. ISSUE PRICE
3. FACE VALUE
4. MATURITY DATE
5. INTEREST PAYMENTS
6. REEDEMPTION OR REPAYMENT SYSTEM
7. GUARANTEES 8. CONVENANTS 9. LIQUIDITY

22
Q

Convertible bonds

A

Bonds that may be converted into shares of common stock. This feature permits bondholders to share in the firm’s good fortunes if the stock price rises.
Mandatory convertibles are short duration securities—generally with yields higher than found on the underlying common shares — that are mandatorily convertible upon maturity into a fixed number of
common shares

23
Q

Mortgage bonds

A

Although they are medium and long-term FAs; these Fas are considered MONEY MARKETS’ SECURITIES ⇒ they usually have high liquidity and low risk

24
Q

Money market characteristic

A

traders usually arrange purchases and sales between participants over the phone and complete them electronically. Because of this characteristic, money market securities usually have an active secondary market.

25
Q

Mortgage bonds

A

Although they are medium and long-term FAs; these Fas are considered MONEY MARKETS’
SECURITIES ⇒ they usually have high liquidity and low risk

26
Q

Mortgage bonds other characteristics (CÉDULAS HIPOTECARIAS)

A

Maturity: 2 to 5 years (medium-term)
* May be issued by: Banks, Savings Banks, CECE, Cooperative Credit Entities and Financial Credit
Entities
High liquidity: most of them, are traded in a secondary organised market: AIAF
* Do not need to be registered at the Mercantile Registry (cédulas)

27
Q

(CÉDULAS HIPOTECARIAS)

A

Medium-term fixed-term securities that are guaranteed by the totality of the mortages of
the issuer except those that explicitily guarantee an issuance of BONOS HIPOTECARIOS or
those that have been (cesión) a terceros mediante PARTICIPACIONES HIPOTECARIAS

28
Q

(BONOS HIPOTECARIOS)

A

Medium Term fixed-term securities that are guaranteed by one or more mortgages that
specifically guarantee those bonds

29
Q

(BONOS HIPOTECARIOS) characteristics

A

Maturity: between 2 to 5 years (medium term)
* Issued by: Banks, Savings Banks, CECA, Cooperative Credit Entities and Financial Credit Entities
* High liquidity, although they are not traded in the organised market AIAF, they are negotiated in non-organised
markets between the financial intermediaries

*They require a public inscription in the Mercantile Registry
*Holders ⇒ PREFERENCE OVER THE MORTGAGES THAT CONSTITUTE THE GUARANTEE

*The value of mortage bonds (bonos hipotecarios) issued at least < 2% than the actual value of
incumbent mortgages.

30
Q

covered bonds

A

Medium Fixed-term securities, similar to mortgage bonds, that are backed by credits and loans to
Public Administrations.

31
Q

covered bonds characteristic

A

The amount issued by a credit entity cannot be higher than 70% of the guarantee
* Their holders have a preference right over the credits that serve as guarantee
* No inscription in the Mercantile Registry is needed
* Represented by an accounting annotation and may be traded in the financial markets

32
Q

PREFERENCE SHARES

A

between debt and equity
complex and highly risky
They are like
unsecured debt, but for accounting purposes are regarded as securities representative of the
capital stock of the issuer.
(have
no maturity). Their return is not guaranteed.
Their liquidity is linked to the existence of a secondary market,
in which frequently, the issuers are the ones that provide the liquidity

33
Q

preference shares

A

Interest-rate or Market risk: As perpetuities, their price may experiment large fluctuations.
Risk of not getting the interest payments: They offer a predetermined remuneration (fixed or variable), which is
noncumulative and depends on the generation of sufficient profits.
Solvency risk: Their place in the priority of credits is ahead ordinary shares, but after common and subordinated
creditors

34
Q

Preference shares’ commercialization in Spain

A

Spanish financial institutions commercialized these FA as bonds with quarterly or semiannual coupon
payments. Preference shares have a limited liquidity, but no maturity. Thus, their interest rate risk is
high.

35
Q

Securitization of assets

A

Method of financing firms based on the sale or transfer of certain assets (loans, or even the
rights of future payments) to a a third party who in turn finances the purchase by issuing
securities that are placed among investors.

36
Q

In Spain, the securitization method is as follows:

A

The entity that needs financing –the grantor- sells assets to a securitization fund (SF), which does not
have legal status and is managed by a fund management entity. In turn, the Fund will issue securities,
which will be backed by the assets acquired. When the guarantee consists of mortgages granted by
credit institutions, the securities issued are purchased by a mortgage securitization fund (MSF), which
issues mortgage securitization bonds (MSB). When the guarantee consists of other assets, these are
acquired by a fund of securitization of assets (FSA), which will issue commercial paper or securitization
bonds

37
Q

Securitization process

A
  1. Assets attraction (i.e. mortgages)
  2. Selling of assets and creation of a Securitization Fund
  3. Securities issue (and placement)
38
Q

MORTGAGE SECURITIZATION ASSETS

A

So, in simpler terms, it’s like a company (Grantor) giving away a bunch of mortgages to another group (third party) but still keeping the job of handling payments and looking after the loans. The investments (MBS) created from these mortgages generate income for investors.

They are fixed income securities that constitute the transfer to a third party of a part or all
of one or more mortgage loans in A portfolio. The transfer entity (GRANTOR) retains the
custody and administration of the assigned mortgage loans

39
Q

securatization of assets characteristic

A
  • Issuers: Banks, Savings Banks, CECA, Cooperative Credit Entities and Financial Credit Entities
  • They may transmitted by the buyer. The issuer registers their transmission.

*Have to be inscribed at the Mercantile Registry
*The transfer of a part or all of the mortgage loan can be at any time.
*Securitization mortgage assets transfer the risks associated to the corresponding loans in proportion to the
percentage of transfer of the loan
*Securitization mortgage assets are typically bought by SMF

(a) maturity should not exceed the maturity of the original mortgage loan from which the transfer
is made
(b) interest rate can not exceed the interest rate of the original mortgage loan from which the
transfer is made

40
Q

Most relevant characteristics:

A
  1. The MSF is configured as a separate patrimony so that securitized portfolio is outside the scope of
    the creditors of the credit entity
  2. The securities issued are backed by securitized assets and not by the solvency of the grantor entity.
  3. The financial risk of the securities issued is always subject of valuation by rating agencies
  4. The holders of the bonds issued assume the non-payment risk of the assets grouped in it.
  5. The early redemption risk of the fund’s assets is transferred to the holders of the securities. At each
    payment date, bondholders can support partial repayment
  6. These securities (MSB and ASB) are traded in an organised market (in Spain, AIAF)
41
Q

Corporate debt (short, medium and long-term) may be traded in different markets in
Spain:

A

Stock Exchanges[organized]

● Individual Markets (non-organized)

● AIAF Market [organized]

● SEND [organized]

  • SENAF
  • MARF
42
Q

AIAF is Spain’s benchmark market for

A

Corporate Debt and Private Fixed
Income. It forms part of Bolsas
a regulated market

43
Q

Securities traded in AIAF

A

Private Debt (Lesson 2)
§ Commercial Paper
§ Medium and Long Term Bonds
§ (Mortgage, Loans…) Covered Bonds, Mortgage Backed Bonds (Securitization)
§ Other bonds from securitization processes
… Preference Shares

q Public Debt
§ Treasury Bills
§ Medium and Long Term Government Bonds

44
Q

Types of securities traded on AIAF

A

*COMMERCIAL PAPER
*DOMESTIC BONDS (issuer is a Spanish resident)
*MORTGAGE BONDS (CÉDULAS HIPOTECARIAS)
*PREFERENCE SHARES
*ASSET BACKED SECURITIES (BONOS DE TITULIZACIÓN HIPOTECARIA)
*COVERED BONDS (CÉDULAS TERRITORIALES)
what cant be traded? shares!

45
Q

SEND (Sistema Electrónico de Negociación de Deuda)

A

Electronic platform for fixed income trading aimed at retail investors.
Corporate debt assets which can be traded on SEND include
preferred shares, plain vanilla bonds and debentures, subordinated
bonds, tax credit bonds, covered bonds (cédulas) …
SEND Public Debt: Treasury Bills and Government Bonds

46
Q

SENAF (Sistema Electrónico de Negociación de Activos Financieros)

A

BME’s electronic trading platform for Spanish Public Debt, …and specific
securities registered on AIAF.

47
Q

AIAF MARKET

A

Governing body: AIAF, S.A.
Features:
* development of securities admission criteria
* oversight
* arbitration of disputes between members of the market
* compensation and liquidation
* establishment of information granting criteria

Financial Markets and Institutions (5 decks)

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