CTP Chapter 5 Flashcards
A debt instrument issued by a bank to raise funds. Banks raise funds in the money markets through time deposits, banker’s acceptances, and repurchase agreements (repos), collectively referred to as bank obligations or bank paper. Examples of time deposits include savings accounts, certificates of deposit (CDs), and negotiable CDs. Negotiable CDs are high-value time deposits issued by banks and other financial institutions that are bought and sold on the open market.
bank obligation
An investment that has most of the features of standard commercial paper (CP), but is secured against specific assets—usually short-term trade receivables from a single company or a range of companies. This may be classified as either single-seller, if it is backed by assets from a single institution, or multi-seller, if it is backed by assets purchased from a number of issuers
asset-backed commercial paper (ABCP)
A cross-border financing instrument that can be used to finance the import, export, or domestic shipment of goods, as well as the storage of properly titled goods. These are used frequently in conjunction with letters of credit (L/Cs) requiring a time draft drawn on a bank. It is created when one company signs an unconditional written order directing a bank to pay a certain sum of money on demand or at a definite time to another company, usually to finance the shipment or temporary storage of goods. The unconditional written order, also known as a time draft, is stamped as accepted by the bank.
banker’s acceptance (BA)
A type of time deposit account that pays the bearer some stated rate of interest (either fixed or variable) over its maturity. It may be issued in any denomination, with maturities generally ranging from one month to five years. In the United States, they are covered by the Federal Deposit Insurance Corporation up to the current deposit limits.
certificate of deposit (CD)
Tradable promissory notes that allow the issuer to raise funds in the short-term money market. In the United States, maturity can range from overnight to 270 days for publicly traded and up to 397 days for private-placement, but most paper issued matures in less than 45 days. It does not usually pay interest during its term. Instead, it is issued at a discounted price and the face value is paid at maturity.
commercial paper (CP)
A form of risk that refers to the likelihood that the payments owed to investors will not be made under the original terms. It is related to how a change in the credit quality of a company, including its ability to make payments in a timely manner, would affect the value of a security or portfolio of investments. Issuers of money market instruments with higher default risk must offer investors a higher yield to compensate for the increased risk. This increased yield represents a risk premium (i.e., the incremental yield above an otherwise comparable security).
default/credit risk
An investment-industry-owned corporation that works through its subsidiaries to provide clearing, settlement, and information services for equities, corporate and municipal bonds, government and mortgage-backed securities, money market instruments, and over-the-counter derivatives. It was formed in 1999 as a holding company to combine the Depository Trust Company (DTC) and the National Securities Clearing Corporation (NSCC), both of which are now subsidiaries of the DTCC.
Depository Trust and Clearing Corporation (DTCC)
A deposit denominated in US dollars held in a financial institution outside of the United States. It may be issued as a negotiable certificate of deposit or as a nonnegotiable time deposit, both of which are interest-bearing.
Eurodollar
A note with a variable interest rate. The adjustments to the interest rate are made periodically and are tied to a certain money market reference rate. They typically have a maturity of one year or longer.
floating-rate note (FRN)
A range of short-term promissory notes, generally referred to as Treasury bills or government-issued promissory notes, issued by national, provincial, and local government agencies and authorities, as well as other government entities, in order to raise funds in the short-term money market
government paper
A type of risk that is typically divided into two areas: funding liquidity risk and asset liquidity risk. Funding liquidity risk relates to an organization’s ability to raise the necessary cash to meet its obligations as they come due. It is often linked to the ability to raise capital (both short- and long-term) in a timely manner, and it typically is managed by holding marketable securities or open (i.e., available) lines of credit. See also asset liquidity risk
liquidity risk
The accounting act of recording the price or value of a security, portfolio, or account to reflect its current market value rather than its book value.
mark to market
A measure of the ability of a security to be bought and sold. Along with maturity, it is one of the primary determinants of liquidity. The existence of an active secondary market ensures that short-term securities suitable for liquidity management purposes are readily marketable
marketability
The part of the global financial market that deals with financial instruments that are easily converted to cash (i.e., highly liquid) and have very short maturities, typically one year or less. In addition, most money market instruments are debt-type securities, which are also known as fixed-income securities
money market
A commingled pool of money market instruments, typically established and managed by financial institutions, in which fund investors have an ownership interest. The funds may be offered in the domestic currency or, where allowed by local regulators, in a foreign currency.
money market fund (MMF)
