Chapter 6 Flashcards
Who are the participants of the money market?
Banks, SARB, Government, Investors, Corporations
Who are the ultimate borrowers in the money market?
Government and the corporate sectors
Who are the investors in the money market?
Insurance companies, money market funds, collective investment schemes, Public Investment Corporation, Corporation for Public Deposits
For what purposes does the SARB issue debentures?
For monetary purposes
For what purposes does the SARB buy money market securities?
To provide liquidity to the banks (again for monetary purposes)
What is a commercial paper?
A fixed-maturity short-term unsecured single-name negotiable debt
PS: Single-name means issued by a single entity
What is a promissory note?
A written promise made by the issuer to the investor to repay debt under specific terms.
In what denominations are promissory notes issued?
R100 000 and R1 million
What are typical maturities of promissory notes?
3, 6, 9 and 12 months and every 6 months thereafter up to 60 months
What are call bonds?
A loan which may be terminated/called at any time
What are the denominations of a call bond?
R1 million, R5 million and R10 million
What is the typical maturities of call bonds
They are repayable on demand
Define the money market
The money market is a part of the financial markets for the issuing, buying and selling of debt instruments with maturities from 1 day to 1 year. The most common maturity is 3 months
Where are money market instruments traded?
Instruments are not traded on a formal exchange but OTC
What is the difference between the primary and secondary market?
The primary market is for the issue of new instruments
The secondary market is for the trading of already issued instruments
Why are the central banks key participants in the money market?
Because central banks control the supply of reserves available to banks through repo agreements or the outright purchase and sale of money market instruments.
What is a Bankers’ acceptance?
It is a bill of exchange drawn on and accepted by a bank.
What is the maturity of a Bankers’ acceptances?
Usually 90 days but can range from 30 - 270 days
What is the advantages of Bankers’ acceptances?
Issuer: Simplicity, Cheaper form of financing for the company than a overdraft.
Investor: Relatively high-quality investments. Liquid secondary market
What is the disadvantages of Bankers’ acceptances?
Issuer: Bank line of credit is required. More expensive than borrowing using commercial paper.
Investor: There is some form of credit risk. Large denominations
In what denominations are Bankers’ acceptances usually issued?
R100 000 and R1 million
What is a promissory note?
A written promise made by the issuer to the investor to repay a loan under specific terms.
What denominations are promissory notes usually issued in?
They are usually issued in multiples of R100 000 and R1 million
What is the advantages of promissory notes?
Issuer: Cheap form of financing. Maturity can be tailored
Investor: Wide range of maturities. Liquid secondary market
What are the disadvantages of promissory notes?
Issuer: If its not underwritten by a bank, the issuer may not be able to place all the paper with investors and raise the funds required. (Issuer might not be able to sell all the promissory notes)
Investor: Credit risk
What is a call bond?
A loan which may be terminated (called) at any time
What denominations are call bonds usually issued in?
Multiples of R1 million, R5 million and R10 million
What are the advantages of call bonds?
Issuer: It is a flexible form of financing
Investor: Immediately redeemable
What are the disadvantages of call bonds?
Issuer: Expensive
Investor: Credit risk
What are negotiable certificates of deposit (NCD)?
It is a negotiable fixed deposit receipt issued by a bank for a specified period at a stated rate.
In what denominations are NCDs usually issued?
R1 million
What is the typical maturity range of NCDs?
<1-5 years
What are the advantages of NCDs?
Issuer: Cheaper than instruments in the inter-bank market
Investor: Maturities can be tailored
What are the disadvantages of NCDs?
Issuer: More expensive than retail deposits
Investor: Large denominations. Even though banks are considered to be issuers of good quality there is still credit risk
What are treasury bills?
It is a short-term debt obligation from the government payable on a certain future date
In what denominations are treasury bills usually issued?
R10 000 and for amounts not less than R100 000
What is a typical maturity range for T bills?
91 days, 182 days, 273 days, 364 days
What are the advantages of treasury bills?
Issuer: Main vehicle for central bank accommodation policy
Investor: Free of domestic credit risk.
What are the disadvantages of T Bills?
Investor: They have a lower yield due to lower risk
What are repurchase agreements?
It is an agreement under which funds are borrowed through the sale of short-term securities with a commitment by the seller to buy the security back at a specific price and date
What are the advantages of Repurchase agreements?
Issuer: Can be used to borrow short-term funds
Investor: If the collateral is treasury bills, investors earn a risk-free rate higher than the treasury bill without sacrificing liquidity
What are the disadvantages of repurchase agreements?
Issuer: Investors may require credit risk mitigation
Investor: Credit risk ( the amount of the collateral is less than the amount of the load )
What are reserve bank debentures?
It is an unsecured fixed interest certificate of debt issued by the SARB
What denominations are reserve bank debentures usually issued in?
They are usually issued in multiples of R 1 million
What are the usual maturities of reserve bank debentures?
7, 14, 28, 56 days or at the discretion of SARB
