money markets Flashcards
how are the securities ranked?
by type of issuer, their
creditworthiness & general risk associated with investment.
trade credit is what?
is a short term debt financing instrument that is offered by suppliers of goods that gives
buyer of goods a specified period before the account
has to be paid
name the 3 other short term debt finanicng instruments and their uses
- Bank overdrafts = indirect finance
– major source especially for small companies - Short-term bank loans = indirect finance
– loan drawn down by borrower when approved
– regular payment schedule - direct financing via money markets -commercial bills
or bills of exchange (only for larger companies)
– Bank bills & non-bank bills
what does the official S/T money market trade?
trades in govt securities. Treasury bills (T-bills)
what is a treasury bill (note) (t-bill or t-note)?
it is a short term discount security issued by the government, the face value is payable at maturity.
-they are issued directly in money markets
definition of bill of exchange (commercial bills)
a negotiable instrument maturing within a given time period (usually 1-6 months), sold at a
discount to face value which market believes to be the obligation (debt) of a good creditworthy name
name the parties involved (potentially) in bank accepted bill issue
a) Drawer
b) Acceptor
c) Payee
d) discounter
e) Endorser
what role does the drawer of a bill play?
– Issuer of the bill = company (draws up the bill)
– Wants to borrow the funds= company S/T financing
– Secondary liability for repayment of the bill to holder (after
the acceptor)
what role does the acceptor of a bill play?
– Undertakes to repay the face value to the holder of the bill
at maturity
– Acceptor usually a bank or sometimes investment bank
– Gives the bill a high credit status easier to sell & at
lower yield
what role does the payee of a bill play?
– The party to whom the bill is specified to be paid
– Usually the drawer, but drawer could select other party as
payee e.g. subsidiary of company
what role does the discounter of a bill play?
– The party that purchases the bill in primary money market
(supplies the funds-investor)
– Discounts the face value & buys the bill
– The lender of the money
– May also be the acceptor of the bill
what role does the endorser of a bill play?
-any previous holder of bill but has sold it
-Has a contingent liability
• Once the bill has been drawn up by issuer & accepted by
a bank, it can be sold in the market place to the
discounter who provides the funds
advantages of bill financing
- Lower cost than other S/T borrowing forms (i.e. overdraft)
* Lower cost as direct finance avoids the cost of intermediation
what is a contingent liability
is a potential liability that may occur depending on the outcome of an uncertain future event
what is promissory note (P-Note) (also called commercial paper)?
they are discount securities issued by high rated companies without an acceptor or endorsement
what are the features of a P-note issue program
• Arrangers are major commercial banks, investment banks
• Needs a dealer(s) for program- lead manager organises
dealer panel
• Generally, rate on P-notes at margin to BBSW, LIBOR
what occurs with a underwritten P-note issue
-it guarantees the full issue of notes is sold
• Underwriter usually a commercial bank, investment bank
or merchant bank-takes fee about 0.02%
• can incorporate a roll-over facility,
effectively extending borrower’s line of credit beyond
short-term life of CP-note issue
What is a negotiable certificates of deposit (CD)?
it is a short term discount security, issued by a bank, typically with an initial term to maturity up to 180 days.
why do banks issue CDs
• Issue them to manage their liabilities & liquidity
who do they issue them to?
• Usually issued to international institutional investors in
wholesale money markets
what is a investment bank cash advance facility?
• Made to large corporations
• Generally for a term of a number of years but also
available short-term
what are inventory loans?
– floor plan finance- dealers encourage buyers to use
facility
what is Accounts Receivable Finance?
it is when a loan is taken against accounts receivable
what is factoring
- Company sells its accounts receivable to a factoring company
- Converts a future cash flow (receivables) into a current cash flow
what is it called when a factor company has a claim against its vendor if a receivable is not paid?
Recourse arrangement
what is a non recourse arrangement
when a factor company has no claim
against vendor company
a bond issued in a foreign country and held
internationally but is denominated in the domestic currency or
a debt security denominated in a currency other than country
of origin.
Part of the euro market - eurodollar • e.g. euroyen = • e.g. Eurokiwi = • e.g. Uridashis =
what is a Euronotes Issuance Facility (NIF)
– S/T P-notes sold
through tender process on an underwritten basis but drawn by
borrower under own name
what do Euronotes Issuance Facility (NIF) involve?
- involves tender panel- arranger & lead manager, & other
agents-make a market
what is a Euro Commercial Paper (ECP)?
- it is a CP note issued into the euromarkets e.g. in USD or euros
- needs issuer with high credit rating & good history
- typically more than USD 250 million
