Fin.1

Question 1

List 6 kinds of Money Market Cash instrument

Answer 1

1. Time Deposits (Yiield)
2. Treasury Bills
3. Certificates of Deposits
4. Banker’s Acceptances
5. Bills of Exchanges
6. Repo & stock lending

Question 2

Time Deposit

Answer 2

fixed interest term deposits that are not negotiable / liquidated before maturity. Interest & capital are paid on maturity.

Question 3

Certificate of Deposits

Answer 3

Receipts from banks for deposits that have been placed with them; Can be traded in secondary market (negotiable); Most between 1 and 3 months’ maturity; Interest is paid on maturity except for CDs lasting more than 1 year where interest is paid annually or semiannually.

Question 4

Treasury Bills

Answer 4

Most liquid & transparent debt market. Bid-offer spread is very narrow. Weekly auction on each Monday - 91-day, 182-day bills, 52-week bills (3, 6m, 1 y)

Question 5

Banker Acceptances

Answer 5

Written promise issued by a borrower to a bank to repay borrowed funds. Negotiable % can be sold in secondary market. Aka bank bill, trade bill, commercial bills. Typical transactions: import & export of goods between 2 overseas countries

Question 6

Repo

Answer 6

A transaction in which 1 party sells securities to another at the same time and as part of the same transaction commits to repurchase identical securities on a specified date at a specified price. The seller delivers securities and receives cash from the buyer. On maturity the original seller receives bank collateral & returns the cash plus repo interest

Question 7

Treasury

Answer 7

Treasury looks after the bank’s money. It’s responsible for the bank capital, liquidity and balance sheet.

Question 8

Liquidity Management in Treasury function?

Answer 8

Liquidity refers to the ease of converting assets in cash without incurring financial loss. It involves carrying out stress tests to determine whether the bank has sufficient liquidity, or to assess the pricing of assets and liabilities management and funding purposes.

Question 9

Capital Management in Treasury’s function?

Answer 9

Capital Management - injecting capital where and when it is required, perhaps when businesses are expanding or covering losses.

Question 10

Funding in Treasury’s function?

Answer 10

Funding - issuing bonds (loan agreements) when extra funding is required.

Question 11

Examples of Treasury (Sovereign) securities

Answer 11

US Treasury securities
UK gilts (Gilt-edged stock)
German government bonds (Bunds)
Japanese government bonds (JGB)
French government bonds (OAT)

Question 12

Agency Securities

Answer 12

Debt securities issued by government securities. Eg, FNMA (Federal National Mortgage Assoc), GNMA (Government National Mortgage Assoc)

Question 13

Mortgage-backed Securities

Answer 13

securities backed by a pool of mortgages

Question 14

Asset-backed Securities

Answer 14

Asset-backed - securities backed by a portfolio of assets like credit card receivables

Question 15

3 groups of corporate debt issues

Answer 15

(a) Commercial Papers - maturity >1 year & traded in Money Market
(b) Medium-term Notes (MTN) - 1-5 year sector like Floater
(c) Corporate Bonds - >5 years maturity

Question 16

On The Run

Answer 16

US Treasuries have periodic auctions - the treasury of a given tenor, say 30 years, which has most recently been auctioned is the on-the-run security, while all older treasuries of that tenor are off-the-run.

Question 17

Treasury Inflation-Protected Securities (TIPS)

Answer 17

The principal is adjusted to the Consumer Price Index (CPI). When the CPI rises, the principal adjusts upward. If the index falls, the principal adjusts downwards. The coupon rate is constant, but generates a different amount of interest when multiplied by the inflation-adjusted principal, thus protecting the holder against the official inflation rate (as asserted by the CPI). TIPS are currently offered in 5-year, 10-year and 30-year maturities.

Question 18

STRIPS

Answer 18

“An acronym for ‘separate trading of registered interest and principal securities’. Are T-Notes, T-Bonds and TIPS whose interest and principal portions of the security have been separated, or ““stripped””; these may then be sold separately (in units of $100 face value) in the secondary market.”

Question 19

Prime Brokerage

Answer 19

A bundled package of services offered by investment banks to hedge funds and other professional investors needing the ability to borrow securities and cash to be able to invest on a netted basis and achieve an absolute return. The prime broker provides a centralized securities clearing facility for the hedge fund so the hedge fund’s collateral requirements are netted across all deals handled by the prime broker.

Question 20

Value At Risk (VaR)

Answer 20

For a given portfolio, probability and time horizon, VaR is defined as a threshold value such that the probability that the mark-to-market loss on the portfolio over the given time horizon exceeds this value (assuming normal markets and no trading in the portfolio) is the given probability level.Eg. if a portfolio of stocks has a one-day 5% VaR of $1 million, there is a 5% probability that the portfolio will fall in value by more than $1 million over a one day period, assuming markets are normal and there is no trading.

Question 21

Credit Spread (Bond)

Answer 21

The yield spread between different securities due to the different credit quality. The credit spread of a particular security is often quoted in relation to the yield on a credit risk-free benchmark security or reference rate, typically either U.S. Treasury bonds or LIBOR

Question 22

Senior debt of Corporate bond

Answer 22

Debt that takes priority over other unsecured or ““junior”” debt owed by the issuer. Senior debt has greater seniority in the issuer’s capital structure than subordinated debt. In the event the issuer goes bankrupt, senior debt theoretically must be repaid before other creditors receive any payment

Question 23

subordinated debt (Corporate Bond)

Answer 23

It has a lower priority than other bonds of the issuer in case of liquidation during bankruptcy, and ranks below the liquidator, government tax authorities and senior debt holders in the hierarchy of creditors.
Distressed securities
Distressed securities are securities of companies or government entities that are either already in default, under bankruptcy protection, or in distress and heading toward such a condition.

Question 24

Distressed securities

Answer 24

securities of companies or government entities that are either already in default, under bankruptcy protection, or in distress and heading toward such a condition.

Question 25

Municipal Bond

Answer 25

a bond issued by a local government, or their agencies eg. states, cities, counties, schools, public utility districts etc. Usually exempted from federal income tax