Money Market Debt/Structured Products Flashcards
What is money market debt?
- Obligation which matures in one year or less
- traded in large units ($1 - $5 million min between institutions
- issued at discount to par, maturing at par with income being interest
What is capital market debt?
Longer term obligations - over one year maturity
Who controls amount of credit available through open market operations?
The Federal Reserve
What happens when the Fed buys (under a REPO)?
When the Fed buys (under a REPO), it puts cash IN banks, increasing credit availability
What happens when the Fed sells (under a Reverse REPO)?
When the Fed sells (under a REPO), it drains cash FROM banks, decreasing credit availability
Which money market instruments are eligible for Fed. trading?
Only the safest
What types of treasury securities considered a money market instrument?
Any treasury security that is MATURING within one year
What is the minimum face value of a Jumbo CD?
$100,000
What is a repurchase agreement?
To improve liquidity, a dealer will sell some Gov’t securities to the fed with an agreement to buy them back at a later date at a fixed price and yield
- Repos are eligible Fed. Securities
What is the “Fed Funds Rate”
The rate for OVERNIGHT loans of reserves from bank to bank
What is an overnight repurchase agreement?
- Common between banks and the Fed
- Seller loses control of gov’t securities in return for cash
- No liquidity risk, but there is purchasing power risk
- If interest rates rise, collateral is returned to seller at pre-agreed price, but FMV has fallen
What are Fed Funds?
The shortest term money market instrument, only between member institutions of the Fed Reserve System
What are Eurodollars?
Deposits in DOLLARS held in banks OUTSIDE the US
How does ownership title of the CD affect whether the instrument is insured?
If it is in the CUSTOMERS name, it is INSURED by FDIC
If it is in the BROKER-DEALER name, it is NOT insured
Are there prepayment penalties on brokered CDs?
No - the only way for a holder to cash out before maturity is to sell the instrument in the market
What are brokered CDs?
- Issued by brokerage firms, NOT banks
- the customer statements on these must reflect current market price, NOT face value =
- a retail customer must be told several possible cons about brokered CDs, including
- subject to fluctuation
- secondary market is limited
- CD may be callable
What are Index linked structured products?
These securities derive their value from a basket of securities, an index, etc.
What must customers who invest in Market linked investment CD’s be disclosed?
- Market risk: redeemed prior to maturity, there could be a penalty
- Liquidity risk: usually redeemable on pre-set quarterly dates
- Credit risk: Only backed by full faith & credit of issuing bank
- Caps and floors on investment returns
- Participation rates: CD can only credit interest at a certain % of growth
- Tax issues: taxed as interest income
What procedure must be performed (required by FINRA) before selling a market linked CD?
A reasonable basis suitability determination to evaluate products risks and rewards relative to similar products
What are the main advantages of an ECN over a structured product?
No liquidity risk and tax efficiency
What is a reverse convertible note?
Created for customers wanting a high yield in a low rate environment, it is linked to the prive movements of an underlying stock (or index)
What are Auction rate securities (ARS)?
Derivative where the issuer is able to sell debt at short term interest rates, but doesn’t have to repay the principal. Long term funding is received at short term rates
The interest rate for ARS are reset weekly via Dutch Auctions, meaning what?
A dutch auction is an auction where bids are in terms of interest rates, and the amount of bonds for sale are auctioned from lowest interest rate bid up until the whole sale is filled
What is the clearing rate in a dutch auction?
This rate is the lowest rate purchasers are willing to buy all of the securities offered for sale in the auction. Interest rates higher than the clearing rate will not be filled
What are some reasons for auction rate failures?
More sellers than buyers
Interest rates in bids are to high
What are some basic characteristics of CMO’s?
- CMOs are backed by agency pass-through securities held in trust
- CMOs have investment grade credit ratings
- CMOs give the holder a limited form of call protection that is not present in regular pass-through obligations
