Debt: Money Market Debt Flashcards
Debt: Money Market Debt
CHARACTERISTICS OF MONEY MARKET INSTRUMENTS
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-Money Market
1)matures in 2) money market, why is it called this 3) traded in what size units between institutions 4) interest or offered at a discount 4.1) diffrence between basis and par is?
- Capital Market
5) the only difference between money market is 6) why called “capital market”
1) one year or less 2) turned into “money” very rapidly 3) 1-5MM 4) discount to par 4.1) interest income
5) duration= over one year 6))source of long term capital for the issuer
Debt: Money Market Debt
CHARACTERISTICS OF MONEY MARKET INSTRUMENTS
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-Open Market Operations
1) A critical player in the “Money Market” is who 2) what do they try and control 2.1) how do they do this 3) how do they increasing credit availability 4)decrease credit available 5) are all market instruments traded by the Fed
1) Federal Reserve 2) controls the amount of credit/ cash available to banks 2.1) buying and selling of money market instruments with bank dealers 3) Fed buys money market instruments, it puts cash into the banks 4) Fed sells money market instruments, draining cash from banks 5) No, only the safest [most actively traded and liquid instruments]
Debt: Money Market Debt
TYPES OF MONEY MARKET INSTRUMENTS
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-Treasury Bills
1)offered with what maturities 2) 1 year of maturity is called 2.1) a treasury bill with an original duration of 10 years that is now maturing in less than one year a money market instrument
- Commercial Paper
3) Commercial paper is the corporate money market instrument 4) Maximum Maturity 4.1) can it be over this, what would be required
5) eligible for Fed trading?
1) under one year [1 month, 3 months, 6 months, and 12 months] 2)money market 2.1) yes
3) yes 4) 270 days 4.1) yes, would need to register with the SEC [very costly for issuers ] 5) no
Debt: Money Market Debt
TYPES OF MONEY MARKET INSTRUMENTS
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-Banker’s Acceptance [BA]
1)instrument is used for what 2) why referred to as “time draft” 3) do exporter typically demand a draft 4) who is the BA 4.1) the bank holds on to the “locked up money” for a future payable date
- Banker’s Acceptance [BA]: Prime BA
5) can the bank who is the bearer of securities held to maturity or trade it 5.1) do banks typically hold to maturity and why 5.2) to be eligible to be Fed trading 5.3) if traded, is it traded at a discount to face value
1) finance imports and exports 2) Before a foreign exporter will ship goods to the U.S., he wants assurance that the funds are ready for payment when the goods arrive 3) yes 4) the bank 4.1) yes
5) yes 5.1) yes, the market to trade a BA is illiquid 5.2) maturity is less than 9 months 5.3) yes
Debt: Money Market Debt
TYPES OF MONEY MARKET INSTRUMENTS
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-Negotiable Certificate Of Deposit (CD)
1) These are “jumbo CDs” with a minimum face amount of 2) how is interest paid 2.1) maturity is usually 3) can it be traded in the secondary market 3.1 what is this called 4) why are they different than a normal bank CD 5) Up to $250k is insured under FDIC if
- Repurchase Agreement [REPO]
6) TO improve liquidity [get cash], the dealer will do what 7) are REPO’s eligible Fed securities 8) who is the biggest player of REPO’s 8.1) why do they participate 8.2) how does the fed inject cash in the money supply 8.3) what is it called if Fed sells paperback to the bank and what does it do 8.4) what is another name for this 9)The duration of repurchase agreements can range from
1) $100k 2) paid at maturity 2.1) under 1 year most 1-3 months 3) yes 3.1) negotiable 4) can redeem at a different bank other than the one that issued it 5) cd in name of client and covered up to $250k
6) sell some of those securities to another dealer with an agreement to buy them back at a later date at a price to give a fixed yield 7) yes 8) the fed 8.1) control the money supply 8.2) Fed buys paper from dealer/bank, bank gets cash which can be lent out 8.3) reverse repo, will tighten the cash supply, banks will not have the money 8.4) matched sale,” since the sale is matched to a later buy-back of the security 9)overnight” to many weeks
Debt: Money Market Debt
TYPES OF MONEY MARKET INSTRUMENTS
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-REPO Interest Rates Track The Federal Funds Rate
1) can REPO have a fixed maturity or payable on demand 2) how does the interest rate between buyer and seller work 3) What is Federal Funds Rate, and do REPOs typically track this for interest rate 4) why are the interest rate on repurchase agreements lower than for loans of “Fed Fund
- Overnight REPO
6) Overnight repurchase agreements are common for transactions between 7)the seller loses control of the underlying government securities in exchange for what 8) the buyer get what 9) there is virtually no liquidity risk why 10) why doe they have Purchasing Power Risk
1) can be both 2) it’s negotiated between parties and is not posted 3) yes, the rate for overnight loans of reserves from bank to bank 4) REPO are secured, whereas loans of Federal Funds are unsecured
6) banks and the Federal Reserve 7)cash the government securities covered under the agreement as collateral 9) agreement is fully collateralized and the short duration (overnight), 10)i f interest rates rise [during the one day] collateral is returned to seller at pre-agreed price, but it’s market value has now fallen [intrest rates go up prices go down]
Debt: Money Market Debt
TYPES OF MONEY MARKET INSTRUMENTS
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-Federal Funds / Effective Fed Funds Rate
1)shortest term money market instrument? 2) available only to who 3) the idea of federal funds 4) A bank with excess reserves can do what 5) what is the rate banks charge for borrowing 6) are these overnight loans 7) can interest rate be volatile, why 7)effective fed funds rate gives an indication of what
1) yes 2) member institutions of the Federal Reserve System 3) Cash reserves held on deposit by member banks are called 4) lend them to a bank that is deficient 5) Federal Funds Rate 6) yes 7) yes, can change as demand for reserves change 7) daily demand for reserves and is daily average of many banks rates
Debt: Money Market Debt
TYPES OF MONEY MARKET INSTRUMENTS
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-Eurodollars
1) Eurodollars, what is it 2) These are large or small-dollar deposits 3) typically made by who 4) fixed-term from 1 day to 5 years? 5) Do foreign banks trade these deposits similar to the domestic trading of Fed Funds? 6) Domestic banks with a reserve deficiency can do what 6.1) Basically REPOs and Eurodllers are the same except what
- LIBOR
7) what is LIBOR and what does it stand for 7.1) how is the LIBOR average determined
1) Deposits denominated in dollars held in a bank branch outside the U.S. 2) large 3) corporations 4) yes 5) yes 6)borrow “Euros” as a substitute for Fed Funds 6.1) REPO are short, Eurodollars can be longer periods
7) The interest rate charged on Eurodollar loans between major international banks, the London Interbank Offered Rate 7.1) average offered rate for Eurodollar loans of 5 major banks centered in London.
Debt: Money Market Debt
LONG TERM CERTIFICATES OF DEPOSIT
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-Long Term CDs
1) usually the term is less than one year, can it be longer
- Brokered CDs
2) who are they issued by and how does this work
1) yes 2) brokerage firms, they buy them from banks and split them into smaller units and sell them to retail customers
Debt: Money Market Debt
LONG TERM CERTIFICATES OF DEPOSIT
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-CD Risk Disclosures [for maturity over 1 year]
3) CDs Subject To Market Risk [if sold]
4) Pre-Maturity Sale Price May Be Less Than Purchase Price
5) Limited Secondary Market [if sold prior to maturity]
6)Callable CD Subject To Reinvestment Risk
7)Step-Up/Step-Down CD Yield May Not Reflect Current Market Rate
8)FDIC Insured Only If Titled In The Customer’s Name
3)sale of the instrument prior to maturity is subject to market price fluctuations by then-prevailing market interest rates 4) pre-maturity sale price of a long term CD may be less than the original purchase price (if market interest rates have risen); 6) issuer will do if market interest rates fall, customer reinvests the proceeds, at the lower current market interest rate; 7) product could have a teaser rate, higher interest rate for a while, then fall, does not reflect the YTM 8) if it’s in the broker-dealers name, it would not be insured
Debt: Money Market Debt
LONG TERM CERTIFICATES OF DEPOSIT
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-CDs Priced At Market Value On Customer Account Statements
1) long term CDs must be shown priced at current market value, not what
-No Prepayment Penalty
2) why
1) face value
2) The only way for a holder to “cash-out” prior to maturity is to sell the instrument in the secondary market.
