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Finance > Lecture 4- AIDs > Flashcards

Lecture 4- AIDs Flashcards

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1
Q

What is the net interest rate margin?

A

Difference between the average interest rate earned and the average interest rate paid by ADIs on their funds

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2
Q

What are the five types of AIDs in Australia

A
  • Australian- owned banks
  • Foreign subsidiary banks (retail and wholesale)
  • Branches of foreign banks (wholesale- minimum deposit of $250k)
  • Building societies (retail banking services, thrifts)
  • Credit unions (Thrifts, provide retail banking services)
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3
Q

What are the main sources of funding for ADIs?

A

1) Retail deposits
2) Domestic financial markets:
- Money market: Negotiable certificate of deposit
- Bond market: unsecured bonds
3) International financial markets:
- Medium term bonds
- Long term bonds: covered bonds
4) Equity
5) Securitisation

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4
Q

How did the sources of funding from AIDs change as a result of the GFC?

A

Decrease in funding from financial markets and more domestic retail deposits

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5
Q

What are the benefits of retail deposits?

A

1) They are safe- deposits of up to $250k guaranteed by government
2) They are liquid
3) They pay interest

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6
Q

What are the three types of deposit accounts and what are their features?

A

1) “At call” account= used for day to day transactions, no/ limited interest rate, only small proportion of deposits held in these accounts
2) Savings account= They enable depositors to store funds and to earn interest. Will earn lower IR, but offer payment services through cards
3) Fixed- term accounts: Pay a fixed interest for a fixed term- however return will be forfeited if accounts are drawn

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7
Q

What is the main type of instrument offered by AIDs in the short term domestic wholesale market?

A

NCD: Negotiable Certificate of Deposit

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8
Q

What is an NCD

A

Negotiable certificate of deposit

  • a wholesale deposit that has a fixed term and interest rate
  • Cannot be drawn before maturity, but can be traded in market (liquidity provided)
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9
Q

How is the FV of an NCD calculated?

A

F= P(1+rate x time)

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10
Q

How do we calculate the value of a NCD when sold?

A

P= FV
(1+(rate x period))
where the period is the time remaining until maturity

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11
Q

What are the two types of overseas wholesale funds?

A

1) Unsecured medium term bonds and

2) Long term covered bonds- where collateralised by bank assets

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12
Q

What is a key feature of internationally wholesale funds?

A

They are denominated in their local currency- to reduce risk when converting amounts

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13
Q

What do ADIs mostly use funds for?

A

Providing loans and securities

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14
Q

How are interest rates determined for personal and business loans

A

Personal- variable rates

Business- prime rate + credit risk

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15
Q

What are the purposes of ADIs issuing securities

A
  • Liquidity- to sell quickly for a fair price if money is needed to make loans or if there is a significant withdraw
  • Secure low risk interest earning investments
  • Trade in markets
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16
Q

What types of home loans are given to investors

A

Interest only loans

17
Q

Are interest rates for houses standard?

A

Yes- they are standardised products- they have standard features and interest rates for ALL borrowers- (usually standard variable rate) point of difference is the amount that is being borrowed

18
Q

What are the requirements for loans to ensure low loan losses

A
  • Secured by a mortgage
  • No more than 80% of value
  • Made to borrowers with capacity to repay
  • Documentary evidence to support claims
19
Q

What is a mortgage?

A

The right for a lender to take position of and sell an asset if a borrower defaults on payments

  • Helps lenders to avoid adverse selection and shifts risk from lender to borrower
  • For borrowers- reduces the interest rate
20
Q

What is the LVR?

A

Loan to valuation ratio- in Australia, for ever $1 of property, the maximum that will be lent is $0.8

21
Q

What are the other types of loans to households?

A

1) Secured loans
- personal loans- for car loan, usually with fixed interest rate
- overdraft- overdrawn an account to a certain limit
- margin loans
2) Unsecured
- Credit card
- Some personal

22
Q

What are the nature of loans made to businesses?

A

Small= Generally standardised and usually secured

Large business= determined case by case- including loan structure and security provisions

23
Q

What is bill acceptance?

A

A promise by a bank to redeem a commercial bill if the borrower defaults on this payment

24
Q

Why do people want bank accepted bills?

A

Acceptance improves the credit standard so it can be traded in the money market (as they are unsecured)
Borrowers pay an acceptance fee (which has fallen since the BFC)

25
Q

What does ‘bps’ means?

A

Basis percentage point.

100 bps= 1%

26
Q

What is a bill facility?

A

An agreement by the acceptor (bank) to rollover bills on their maturity date for an agreed period

27
Q

What are the payments made during the term of the bill facility?

A

When rolling over: the difference between

The FV of the last facility and the PV of the new facility (which will always be lower as the bills are discounted)

28
Q

What does the securitisation of housing loans involve?

A

Involves ADI assigning cash flows from illiquid assets (home loans) to securities (mortgage- backed securities) which are sold to investors

29
Q

Who is the securitisation conduct by?

A

Special purpose vehicles- who issue mortgage backed securities- loans become that of the investors in the MBS, and they receive borrower repayments

30
Q

What is mortgage originators?

A

Non- bank lenders who offer a range housing of loans with funds that are raised through the issue of mortgage- backed securities

31
Q

What is the role of the originator?

A

To originate or commence the loan (find the person wanting to borrowing the funds)

32
Q

Who issues MBS funds?

A

Invesmtnet bank and the borrower’s repayments less fees flow through to the investors in the MBSs

33
Q

What is the difference between originators and securitisation?

A

Main difference is securitisation- loans already exist- originators- commencement of loans via the funds that have been raised

Finance (10 decks)

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