Section 1 - Cash and Cash equivalents Flashcards
What is a treasury bill?
short term (less than one year to maturity) government securities that are issued at a discount.
These securities are issued to manage the amount of cash in the baking system. They are usually considered to be default-risk-free.
what is LIBOR (London Inter-bank offer rate)
the rate at which banks lend to one another for the short term. Banks quote rates not just for sterling but for all the major currencies used in the london market
what is LIBID (london inter-bank bid)
the rate at which banks are prepared to accept short term deposits
what are LIBID and LIBOR used for?
mainly as reference rates for corporate borrowing and lending
what is a certificate of deposit?
tradable time deposits issued by depositing institutions such as commercial banks.
what are the maturities of a CD normally?
one moth to one year in the uk (although can be for periods greater)
What denominations are CDs issued in and what is their minimum value?
denominations of £10,000
minimum value of £100,000
what can be done with CDs in terms of ownership and what does this mean
they are negotiable which means they can be sold from one investor to another
as a result the rates of interest on CDs have usually been lower than on equivalent fixed term deposits, although the difference can be very small.
what is the price of a CD based on
the future value of the deposit paid to the investor when the deposit matures. It will mature with a fixed interest (similar to a zero coupon bond)
what is a commercial paper?
A short term promissory note that can be issued by both financial firms and creditworthy corporations
what are commercial papers issued at a discount to?
their par value
what is the maturity generally of a commercial paper?
Usually between 7 days and a year
what is a commercial paper in terms of cost
generally negotiable, although the issuer may be willing to replay the note under certain circumstances.
But is usually held to maturity
are commercial papers secured
no - and so the credit rating of the issuing firm is crucial in assessing risk
What is a floating rate note?
- issued at par
- have a coupon that is linked to a pre-specified market rate
- the coupon is recalculated at regular intervals (every three or six months) throughout the lifetime of the issue.
