Unit 2 Flashcards
(32 cards)
What is a performance bond?
A form of guarantee used e.g. at the start of a new contract, to provide cover for the failure in the performance of a contract.
What is negative working capital?
When current liabilities are greater than current income or assets.
Benefit of diversification in borrowing profile.
Greater range of lenders = reduce any issues when refinancing.
Value date v finality of cheque.
Value date = date from which the cheque became valid.
Finality = date on which the credit has been finalised/ cashed so cannot be cancelled by the ordering party.
What is overtrading?
When a company expands their operations too quickly without the resources to support the growth.
What is herstatt risk?
The risk present when only one side of the FX trade has been settled but the receivable leg has not yet been paid. Can be reduced using continuous linked settlement.
What is clearing?
The process of recording transactions between members of a clearing channel.
What is settlement?
The actual transfer of value from one settlement account to another account.
How do net settlement systems work?
At the end of each period all positions between participants are netted off and participating banks settle with each other across settlement accounts.
What type of transactions are net settlement systems used for?
- high volume, low value transactions.
- cheque clearings
- BACs (UK), ACH (US)
How does real time gross settlement eliminate credit risk?
Clearing payment singly and bilaterally as the payments occur.
What is a hybrid clearing and settlement system? (Give examples)
- systems which settle on a net basis but at pre defined periods throughout the working day.
- can provide intraday finality.
E.g. CHIPS, CLS
How does SWIFT work?
Sends payment orders between banks using SWIFT codes.
What is BIC and why is it useful?
- BIC = bank identifier codes
- Owned and administered by SWIFT
- used to identify a bank and send a secure payment quickly
What is a BIC comprised of?
First 4 letters = bank code
Next 2 letters = country code
Next 2 letters = banks location
Next 3 (optional) = bank branch
What is a bank draft?
A cheque drawn on the bank.
What is a paper based giros?
A credit transfer system through which payment instructions are transmitted through the bank or the postal giro system.
Mainly for low value consumer to business payments.
How does a bill of exchange work?
The customer (drawer) instructs the bank (drawee) to pay the seller (beneficiary) on a specific date (maturity).
On the maturity date the bank will pay the seller and debit the customers bank account.
What is a promissory note?
A writer unconditional promise by the buyer to pay money to the seller either on demand or on a specific date.
Used for trade related transactions between counter parties that are well acquainted.
Does not have the legal standing of a bill of exchange.
What is the advantage of electronic payment instructions over physical?
Facilitates straight through processing (STP) whereby data is transmitted through systems with minimum human intervention.
What are examples of urgent high value electronic payment systems?
- CHAPS (UK)
- CHATS(HK)
- Fedwires
- CHIPS (USA)
What is ACH?
- Automated clearing house
- electronic systems designed for non urgent, low value bank transfers or giros.
- may require transfers to be initiated days in advance of remittance.
- varies depending on country, method of clearing, bank and credit standing of customer.
-one off transfers, bulk orders, standing orders, DDs.
What is a standing order?
An instruction given by the account holder to the bank to pay a beneficiary a specified amount of money on a periodic basis.
What is a direct debit?
Collection method where the payment is initiated/ pulled by the beneficiary subject to the payers prior consent in a formal agreement.
