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FINN 3053 > Chapter 5 > Flashcards

Chapter 5 Flashcards

1
Q

Short-term obligations issued by the US government

A

treasury bills

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2
Q

Markets that trade debt securities or instruments with maturities of less than one year

A

money markets

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3
Q

Short-term funds transferred between financial institutions usually for no more than one day

A

federal funds

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4
Q

agreements involving the sale of securities by one party to another with a promise to repurchase the securities at a specified date and price

A

repurchase agreements

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5
Q

Short-term unsecured promissory notes issued by a company to raise short term cash

A

commercial paper

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6
Q

bank-issued time deposits that specify an interest rate and maturity date and are negotiable (saleable on a secondary market)

A

negotiable certificates of deposit

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7
Q

time drafts payable to a seller of goods, with payment guaranteed by a bank

A

banker’s acceptances

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8
Q

allows the US gov to raise money to meet unavoidable short-term expenditure needs prior to the receipt of tax revenues

A

T-bills

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9
Q

What makes money market instruments safe? (3)

A
  • Low default risk
  • Low interest rate risk
  • Low price risk
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10
Q
  • Discount Yield
  • Single-Payment Yield
  • Bond Equivalent Yield
  • Effective Annual Rate
A

Measurements of yield

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11
Q
  • treasury bills
  • federal funds
  • repurchase agreements
  • commercial paper
  • negotiable certificates of deposit
  • banker’s acceptances
  • investors
A

Money Market Instruments

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12
Q

why money markets instruments are safe?

A

high liquidity:
- low trading costs
- quick to buy and sell

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13
Q

Interest rate quoted on annual basis, assuming 360-day year, as percent of face value

A

Discount Yield

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14
Q

Interest rate quoted on annual basis, assuming 360-day year, as percent of purchase price

A

Single-Payment Yield

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15
Q

To compare to non-money market bonds (fixed income)

A

Bond Equivalent Yield

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16
Q

The risk of late or nonpayment of principal or interest.

A

default risk

17
Q
  • issued weekly (4, 8, 13, 26 week matureity)
  • issued monthly (52-week maturity)
  • issued electronically
  • sold at a DISCOUNT
  • highly liquid
  • effectively zero risk
A

treasury bills

18
Q

treasury bills Auction process: quantity, not price

  • All pay the lowest price accepted by the Treasury
A

noncompetitive bids

(buy these treasury bills & dont care what the interest rate is)

19
Q

treasury bills Auction process: quantity conditioned on price

  • All pay the lowest price accepted by the Treasury
A

Competitive bids

(we will lend to you at this interest rate or above but not below)

20
Q

T-bill auction process Limits:

Noncompetitive bids: ___
Competitive bids: ___

A

$5 million per person; 35% of entire auction

21
Q

They break up the bills and sell to smaller investors

A

T-bills primary market: large institutions

22
Q
  • Quoted in discount yield method
  • One of the largest, most liquid markets in the world
  • Primary dealers use fedwire to ‘make the market’ → Fed uses these securities to influence interest rates
A

T bill

23
Q
  • quoted in single payment yield method
  • Used to meet reserve requirements
  • More recently used for ‘long term’ funding (when rate at 0%)
  • Rate is determined by supply and demand (Heavily manipulated by the FOMC)
  • fedwire
A

Federal Funds: Why do banks borrow from each other overnight?

24
Q
  • Longer than Fed Funds loans (maybe multiple weeks)
  • Uses Fedwire for most transactions
A

Repurchase Agreements

25
Q
  • Buyer agrees to sell the security back at a set time and price
  • Collateralized loan, effectively
A

Repurchase Agreements: Short term sale

26
Q

An agreement involving the purchase of securities by one party from another with the promise to sell them back.

A

Reverse repo

27
Q

___: One-day maturity repos

___: repos with longer maturities

A

Overnight repos; Term repos

28
Q

the securities used most often as collateral in repos are: (2)

A
  • T-bills
  • government agency securities (Fannie Mae)
29
Q

the loan is slightly smaller than the market value of securities pledged

A

what does it mean when collateral pledged in a repo has a “haircut” applied?

30
Q
  • <= 270 day maturity
  • No secondary market
  • sold in large denominations
  • Discount yield
  • may be rated, backed by a bank or asset
  • used by corporations mostly
A

commercial paper

31
Q
  • Issued by banks
  • 2 week to 52 week maturities
  • Liquid secondary market (held mostly by money market funds)
  • Single-Payment Yield
A

Negotiable Certificates of Deposit

32
Q
  • Time draft payable to a seller of goods
  • Guaranteed by bank
  • Small-to-zero secondary market (held by money market funds)
  • Sold on a discounted basis
A

Banker’s Acceptances

33
Q
  • Banks
  • Money Market Funds
  • Federal Reserve
  • Corporations
  • Brokers/Dealers
A

Who buys money market instruments?

34
Q

Unsecured, short-term loan issued by a bank or corporation in the international money market
- denominated in a currency that differs from the domestic currency of the market where it is issued

A

Eurocommercial Paper

35
Q

The rate offered for sale on eurodollar funds → standard rate by which loan rates are now priced

A

LIBOR (london interbank offered rate)

36
Q

Dollar-denominated deposits help offshore in US bank branches overseas and in other foreign banks are called ___ __ and the market in which they trade is called the ___ ___

A

Eurodollars deposits (eurodollar CDs); eurodollar market

37
Q
A

FINN 3053 (14 decks)

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