Money Market Debt Flashcards
Brokered CD’s
The secondary market is limited, the market value of a CD will decline if interest rates rise. Held until maturity, and they qualify for FDIC insurance as long as the CD is titled in the customer’s name.
Repurchase Agreement
The initiating Gov’t dealer SELLS securities to another dealer to obtain cash.
Used to reduce carrying cost of gov’t securities held in inventory
Initiated by federal reserve to loosen credit.
The interest rate charged is most similar to Fed Funds rate. There is no liquidity risk only interest rate risk.
Initiated by Gov’t securities dealers, Federal Reserve Banks, and Commercial Banks.
Reverse Repurchase Agreement
The Gov’t dealer BUYS back the securities from a dealer and pays them cash.
Tightens Credit.
Fed Funds rate declining means
The Federal Reserve Open Market Operations desk has been performing system wide repurchase agreements
Step Down Certificate of Deposit (CD)
Starts with a high introductory rate then steps down to the market rate of interest at specified intervals. At maturity it is redeemed at par.
Shortest Money Market Maturity
Fed funds
Brokered CD’s
Any call features affect the maturity
How it is titled determines whether it will be covered by FDIC.
Can mature up to 5 years and can be callable. If interest rates drop then the issuer can call the CD forcing the investor to reinvest at lower rates (reinvestment Risk)
Issued in denom of 100k minimum, trades in the secondary market, and are issued by banks.
How are Money Market discounts quoted
Original issue discounts quoted on a yield basis prices at a discount to par.
The discount from par is the interest earned. ADR’s are NOT a money market instrument.
Commercial paper
To smooth out cash flow corporations will issue Commercial paper. This is an unsecured IOU issued that is exempt from registration with a 270 day maturity.
Prime BA’s
It is sufficient quality to be traded by the federal reserve. All BA’s are negotiable (tradeable) and the securities trade at a yield basis (Discount to face value)
Eurodollars
U.S. Dollar deposits held in foreign branches of U.S. banks or foreign banks
What is the “effective” fed funds rate?
Rates that are offered by select commercial banks across the U.S.
The rate that banks borrow money from each other
Which Money Market Instruments trade flat?
Treasury bills
BA’s
Commercial paper
Long term negotiable certificates of deposit are subject to which of the following risks?
Interest Rate Risk
Call Risk
Reinvestment Risk
Marketability Risk
