Chapter 2.3 Money Markets Flashcards
1
Q
3 types of instruments
A
- Interest-bearing instruments
- Discount instruments
No interest, issued & traded at discount.
Redeemed at par value at maturity - Derivatives
Derive value from the value of another asset/variables [Eg. Futures, options, swaps]
2
Q
- Interest-bearing instruments
A
Face value + interest at maturity
- Money market deposits
- Certificates of deposit
- Repurchase agreement (Repo)
3
Q
A. Money market deposits
A
Short-term inter-bank lending
Eg. 2.0% - 2.2% ; 2.0% lend, 2.2% borrower pay
4
Q
B. Certificates of deposits
A
Certificate of receipts
- Specified term
- Interest at specified rate
- On specified date
5
Q
C. Repurchase agreement (Repo)
A
Sell financial instrument
- At agreed date & agreed $
- Buy back at later date for higher $
6
Q
- Discount Instruments
A
No interest
Issued & traded at discounted
Redeemed at par value at maturity
- Treasury bills
- Bank bills/acceptance credits
- Commercial paper
- Bill of exchange
7
Q
A. Treasury bills
A
- Debt instrument
- By government
- Range from 1 month to 1 year maturity
8
Q
B. Bank bills/acceptance credits
A
- Sold by & guaranteed by bank on behalf of company
- Up to 180 days of credit
- Negotiable
9
Q
C. Commercial paper
A
- Short-term
- Unsecured corporate debt
- Maturity up to 270 days
- Issued by largest organisation with good credit ratings
- Negotiable
10
Q
D. Bill of exchange
A
- IOU signed by a customer
- Can be sold to raise finance
- Only used for significant trading
- Negotiable
11
Q
Extra: What is IOU?
A
- I owe you
- Informal agreement rather than legally binding document
- No specific repayment term. Eg. Time of repayment
12
Q
- Derivatives
A
Derive value from the value of another assets/variables
Eg. Futures, options, swaps.
13
Q
Low risk to the highest risk
A
- Treasury bill (issued by gov.)
- Certificate of deposit
- Commercial paper (unsecured)
- Bills of exchange
