RO1 P.32 + Flashcards
WHAT ARE THE FOUR MAIN MONEY MARKET INSTRUMENTS?
1 - treasury bills
2 - commercial bills
3 - Certificates of deposit
4 - others including repos, bills of exchange etc.
what are the main features of treasury bills?
Issued by government for short term cash needs.
- In UK managed by the DMO
- routinely issued in weekly auctions
- maturities of 1,3, 6 or 12 months.
- sometimes they are randomly issued in addition to the weekly auctions with maturity of 1-364 days.
- participants must purchase minimum of £500,000 of nominal bills.
- no interest they are issued at a price less than their par.
- Treasury bill prevailing rate is often used as the risk free rate when measuring risk premium for other financial instruments.
What are the key features of certificates of deposit?
CD’s are receipts from banks for deposits placed with them.
- pay interest usually linked to LIBOR.
- They have fixed maturity so cannot be encashed early although they can be traded on the money markets.
What are the main features of commercial bills
- similar to treasury bills but issued by companies.
- usually only by companies with high credit ratings.
- they are issued at a value below their par.
- maturity normally between 30 and 90 days.
- they are unsecured.
What are the two main types of money market funds.
1 - short term money market fund
2 - standard money market fund
what determines if a fund is a short term or standard money market fund?
The maturity and life of the fund assets.
- short term have a weighted av. maturity of no more than 60 days and weighted av. life of no more than 120 days.
- standard are extended to 6 months and 12 months.
What factors would you consider when assessing whether a money market fund is suitable for a client?
- how the returns compare with other cash based investments.
- what charges are made and how they impact the returns.
- how long it will take to realise the assets if the client needs access to the funds.
- What are the underlying assets and degree of risk the client is exposed to.
- how experienced the fund management team is.
What are the main features of a fixed interest security.
- Negotiable - after making original loan to the borrower by buying a security the lender can then sell the entitlement to the interest and capital repayment to a third party.
- Fixed interest - the borrower is committed to pay an interest rate for the duration of the loan.
- Long Term - they typically run for between 2-30 years.
- Debt instrument - these are financial instruments representing debt.
Also known as Bonds, loan stock, debentures and loan notes. .
What is a mid market price
The price quoted in the financial times for trading of bonds.
the mid point between the buying and the selling price. Investor will pay higher price on purchase and receive a lower price on sale.
What is the clean price.
Clean price ignores the value of accrued interest, interest on a bond is calculated daily and must be added or subtracted from the clean price to arrive at the purchase price.
What happends when a bond is CUM Dividend. ?
Think of come with! its when the bond is purchased and the full six months interest comes with the bond.
- therefore the buyer has to pay the clean price plus the cost of any interest that has accrued in the period they didnt own the bond. From date of last interest payment upto the settlement date.
What happens when a bond is Ex dividend?
interest is paid to the registered holder seven working days before the interest payment sdate.
If bond is purchased after that time then its purchased ex dividend.
Buyer then pays the clean price minus any interest that they are due.
What is the dirty price
This is the actual price paid by the buyer.
what are the four main markets of bonds?
Goverment sector
Corporate sector
Sterling loans to foreign borrowers
euro bond market.
What is a eurobond?
its an international bond, denominated in a currency other than the country its issued in.
Example, British company issues a bond in america but denominated in Japanese yen. This would be a eurobond because yen is not the normal currency of america.
They are named according to the currency that they are issued. ie. eurobond issued in dollars would be a eurodollar bond.
