Fixed-Income Markets Issuance Trading and Funding Part 4

Question 1

Capital protected instruments

Answer 1

Offered different levels of capital protection and are only as good as the issuer of the instrument
guarantee certificate that offers full capital protection

Question 2

Yield enhancement instruments

Answer 2

Higher risk exposure and possibly a higher expected return
credit-linked note

Question 3

Characteristics of credit-linked note

Answer 3

Pays regular coupons, but its redemption value depends on a well-defined credit event
investors receive par value at maturity if the event does not occur
investor receives the par value minus nominal value if the event occurs
allows the issuer to transfer the credit risk to investors

Question 4

Participation instrument

Answer 4

A type of instrument that allows investors to participate in the return of an underlying instrument
floating-rate bond
do not offer capital protection

Question 5

Leveraged instrument

Answer 5

Structured financial instruments that offer higher returns for small investments
inverse floater

Question 6

Inverse floater coupon rate

Answer 6

C - (L x R)

C = maximum coupon rate if reference rate is 0
L = coupon leverage
R = reference rate on reset date

Question 7

Deleveraged inverse floaters

Answer 7

Inverse floaters with a coupon leverage greater than 0 but lower than one

Question 8

Leveraged inverse floater

Answer 8

Inverse floater with the coupon level is greater than 1

Question 9

Retail deposits

Answer 9

Demand deposits or checking account
savings account
money market account

Question 10

Demand deposit or checking account

Answer 10

Depositors have access to funds anytime
funds may be used to pay for transactions
little or no interest paid

Question 11

Savings accounts

Answer 11

Depositors have access to funds
pays an interest

Question 12

Money market account

Answer 12

Funds are available at short or no notice
offer money market rates of return

Question 13

Short-term wholesale funds

Answer 13

Central Bank funds
interbank funds
certificates of deposit

Question 14

Certificate of deposit

Answer 14

Savings instrument with a maturity date, a fixed interest rate, and can be issued in any denomination
negotiable and non-negotiable

Question 15

Non negotiable certificate of deposit

Answer 15

The interest and deposit or paid at maturity

Question 16

Negotiable certificate of deposits

Answer 16

Deposit rates are allowed to sell the deposits before maturity
large denomination ($1m; institutional investors)
small denomination (retail investors)

Question 17

Repurchase and reverse repurchase agreement

Answer 17

An agreement between two parties where the seller sells a security with a commitment to buy the same security back in the future

Question 18

Structure of repurchase and reverse repurchase agreement

Answer 18

Reverse Repo
Repurchase price
Repurchase date
repo rate

Question 19

Reverse repo

Answer 19

Repo (seller of security)
Reverse repo (purchaser of security)

Question 20

Repurchase price

Answer 20

The price at which the dealer repurchases the security

Question 21

Repurchase date

Answer 21

The date on which the dealer repurchases the security
Overnight repo (next day)
Term repo (more than a day)
Repo at maturity

Question 22

Repo rate

Answer 22

The interest rate negotiated between two parties

Question 23

Factors that affect the repo rate

Answer 23

The risk of the collateral
Term of the repurchase agreement
Delivery requirement
Supply and demand

Question 24

Credit risk if dealer cannot repurchase collateral

Answer 24

The investor keeps the collateral and retains any income
The investor is disadvantaged if the price falls below the repurchase price

Question 25

Credit risk if investor can not deliver the collateral

Answer 25

Dealer keeps cash
The dealer is disadvantaged if the price rises above the repurchase price
The lender carries greater credit risk
Repo margin = market value of security - amount lent to dealer