The Money Market Flashcards
Bankers’ Acceptance
In order to facilitate foreign trade (import/export), corporations use these to act like a line of credit or a postdated check. The BA is a time draft that will be cleared by the issuing bank on the day it comes due to whomever presents it for payment. The maturity dates on BAs range from as little as one day to a maximum of 270 days.
Negotiable Certificates of Deposit
A time deposit with a fixed interest rate and a set maturity ranging from 30 days to 10 years or more. A negotiable CD, unlike a traditional CD, may be exchanged or traded between investors. The minimum denomination is $100,000. Many are issued in denominations exceeding $1,000,000, but the FDIC only insures the first $250,000.
Commercial Paper
A way to obtain short-term funds. An unsecured promissory note issued by a corporation. Corporations will sell commercial paper to finance such things as short-term working capital or to meet their cash needs due to seasonal business cycles. Commercial paper maturities range from one day to a maximum of 270 days. It is issued at a discount to its face value and has an interest rate that is below what a commercial bank would typically charge of the funds. Typically issued in book entry form. Two types: direct paper and dealer paper. With direct paper, the issuer sells the paper directly to the public without the use of a dealer. Dealer paper is sold to dealers who then resell the paper to investors.
Repurchase Agreement
A fully collateralized loan made between a dealer and a large institutionalized investor. These loans are usually collateralized with U.S. government securities that have been sold to the lender. The borrower agrees to repurchase the securities from the lender at a slightly higher price (i.e. interest).
Reverse Repurchase Agreement
The institutional investor initiates the transaction by selling the securities to the dealer and agrees to repurchase them at a later time. In this case, the borrower is the institution, not the dealer.
Fixed Repurchase Agreement
The borrower agrees to repurchase the securities at a fixed price on a specified date.
Open Repurchase Agreement
The date of the repurchase is not fixed, and the open repurchase agreement becomes a demand note for the lender and may be called in.
The Discount Rate
The interest rate that the Federal Reserve Bank charges on loans to member banks. A bank may borrow money directly from the Federal Reserve by going to the discount window and the bank will be charged the discount rate. However, this is discouraged and this rate is largely symbolic.
Broker Call Loan Rate
The interest rate that banks charge on loans to broker dealers to finance their customers’ margin purchases. The loan is callable or payable on demand by the broker dealer.
