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Investment > Lecture 2 > Flashcards

Lecture 2 Flashcards

1
Q

What are money market instruments for?

A

Institutions meeting short-term cashflow needs

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2
Q

What is the difference between money market & capital market?

A

Capital market = more than 1 year (e.g. bonds, shares)

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3
Q

True or false: any large entity can borrow in money markets

A

False - only high-quality entities with low default risk

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4
Q

What are the main categories of money market instrument?

A
  • Single payment securities
  • Discount instruments
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5
Q

How do single-payment securities work?

A

Add interest to face value on maturity

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6
Q

How do discount instruments work?

A

Sold at a discount, pay out face value

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7
Q

What are T-bills an example of?

A

Discount instruments

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8
Q

What are repos an example of?

A

Single-payment securities

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9
Q

What are federal funds?

A

Money market instruments, funds transferred between institutions for <1 day

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10
Q

What is commercial paper?

A

Unsecured notes issued by companies

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11
Q

What are CDs?

A

Negotiable certificates of deposit

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12
Q

What are banker’s acceptances typically used for?

A

Importing & exporting

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13
Q

What are repurchase agreements (repos)?

A

Collateralised loans using temporary transfer of assets as security

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14
Q

How do the BoE & ECB use repos?

A

Control liquidity & set interest rates

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15
Q

What are the characteristics of money market instruments?

A
  • High denominations
  • Low default risk
  • Low interest rates
  • Short maturity
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16
Q

What money market instruments have an active secondary market?

A

T-bills

17
Q

What money market instruments have a limited secondary market?

A
  • Commercial paper
  • CDs
  • BAs
18
Q

What money market instruments have no secondary market? Why?

A

Repos - too short term

19
Q

What does LIBOR stand for?

A

London Interbank Offered Rate

20
Q

What is LIBOR used for?

A

Rate paid on Eurodollar deposits

21
Q

What is the PV of an annuity starting in one year?

A

c/r- c/r(r+1)^n

22
Q

What is the PV of a perpetuity starting in one year?

A

c / r

Investment (9 decks)

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