money markets

Question 1

how are the securities ranked?

Answer 1

by type of issuer, their

creditworthiness & general risk associated with investment.

Question 2

trade credit is what?

Answer 2

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

Question 3

name the 3 other short term debt finanicng instruments and their uses

Answer 3

2. Bank overdrafts = indirect finance
   – major source especially for small companies
3. Short-term bank loans = indirect finance
   – loan drawn down by borrower when approved
   – regular payment schedule
4. direct financing via money markets -commercial bills
   or bills of exchange (only for larger companies)
   – Bank bills & non-bank bills

Question 4

what does the official S/T money market trade?

Answer 4

trades in govt securities.
Treasury bills (T-bills)

Question 5

what is a treasury bill (note) (t-bill or t-note)?

Answer 5

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

Question 6

definition of bill of exchange (commercial bills)

Answer 6

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

Question 7

name the parties involved (potentially) in bank accepted bill issue

Answer 7

a) Drawer
b) Acceptor
c) Payee
d) discounter
e) Endorser

Question 8

what role does the drawer of a bill play?

Answer 8

– 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)

Question 9

what role does the acceptor of a bill play?

Answer 9

– 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

Question 10

what role does the payee of a bill play?

Answer 10

– 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

Question 11

what role does the discounter of a bill play?

Answer 11

– 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

Question 12

what role does the endorser of a bill play?

Answer 12

-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

Question 13

advantages of bill financing

Answer 13

• Lower cost than other S/T borrowing forms (i.e. overdraft)

* Lower cost as direct finance avoids the cost of intermediation

Question 14

what is a contingent liability

Answer 14

is a potential liability that may occur depending on the outcome of an uncertain future event

Question 15

what is promissory note (P-Note) (also called commercial paper)?

Answer 15

they are discount securities issued by high rated companies without an acceptor or endorsement

Question 16

what are the features of a P-note issue program

Answer 16

• 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

Question 17

what occurs with a underwritten P-note issue

Answer 17

-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

Question 18

What is a negotiable certificates of deposit (CD)?

Answer 18

it is a short term discount security, issued by a bank, typically with an initial term to maturity up to 180 days.

Question 19

why do banks issue CDs

Answer 19

• Issue them to manage their liabilities & liquidity

Question 20

who do they issue them to?

Answer 20

• Usually issued to international institutional investors in

wholesale money markets

Question 21

what is a investment bank cash advance facility?

Answer 21

• Made to large corporations
• Generally for a term of a number of years but also
available short-term

Question 22

what are inventory loans?

Answer 22

– floor plan finance- dealers encourage buyers to use

facility

Question 23

what is Accounts Receivable Finance?

Answer 23

it is when a loan is taken against accounts receivable

Question 24

what is factoring

Answer 24

• Company sells its accounts receivable to a factoring company
• Converts a future cash flow (receivables) into a current cash flow

Question 25

what is it called when a factor company has a claim against its vendor if a receivable is not paid?

Answer 25

Recourse arrangement

Question 26

what is a non recourse arrangement

Answer 26

when a factor company has no claim

against vendor company

Question 27

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.

Answer 27

Part of the euro market
- eurodollar
• e.g. euroyen =
• e.g. Eurokiwi =
• e.g. Uridashis =

Question 28

what is a Euronotes Issuance Facility (NIF)

Answer 28

– S/T P-notes sold
through tender process on an underwritten basis but drawn by
borrower under own name

Question 29

what do Euronotes Issuance Facility (NIF) involve?

Answer 29

• involves tender panel- arranger & lead manager, & other
  agents-make a market

Question 30

what is a Euro Commercial Paper (ECP)?

Answer 30

• 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