Debt Section 1: Money Market Debt

overnight

"LIBOR" stands for the London Interbank Offered Rate which is the rate on which most Eurodollar loans are based and is the European equivalent of the U.S. "Fed Funds" rate. One of the differences between the two rates is that Fed Funds are loaned __ - Euros can be loaned for longer periods.

dealers

Repurchase agreements are used by __ to reduce the carrying cost of Government securities held in their inventory.

federal reserve

A prime banker's acceptance is the highest quality bankers acceptance and is one which is eligible for trading by the __ trading desk in New York.

1

A money market instrument is issued with a maturity of __ year or less. Tax Anticipation Notes, Certificates of Deposit, and Commercial Paper are all money market instruments.

market value

All securities positions on customer account statements must be shown at __ - not face value. The amount of accrued interest earned on a debt instrument as of the statement date is not disclosed.

discount

Banker's Acceptances are time drafts on a bank used to finance imports and exports. BAs trade at a __ to their face amount until maturity. The trading market is rather thin.

discount

Banker's Acceptances, Commercial Paper, and Federal Funds are all issued __ to their face amount.

commercial

Banker's acceptances are issued by __ banks.

marginal

Because money market instruments are "safe," they can be margined - meaning that the brokerage firm can lend money against these securities held as collateral for the loan. Government securities, agency securities, investment grade money market instruments, investment grade corporate bonds and listed stocks are the __ securities.

250,000.00

Brokered CDs are sold by brokerage firms that are representing issuing banks. FDIC insurance of $__ maximum covers bank deposits - but only if the deposit is titled in the customer's name. If the CD is titled in the brokerage firm's name, then the insurance coverage would not apply.

customers

Brokered CDs qualify for FDIC insurance as long as the CD is titled in the __ name.

270

Commercial paper has a maximum maturity of __ days, it is not a funded debt.

corporate

Commercial paper is __ money market debt which is NOT eligible for Fed trading.

unfunded

Commercial paper is a short term money market instrument. Short term debts are said to be __ debts. Long term debts are said to be "funded" (as in a "long term funding").

prospectus

Commercial paper is an exempt security under the Securities Act of 1933. It does not have to be registered and sold with a __ if its maturity is 270 days or less. This makes it much less expensive for an issuer to market the securities, since the regulatory burden is much lower.

P

Commercial paper is rated by Moodys on a __-1,2,3, and NP ("Not Prime") scale.

funded debt

Corporate __ represents long term debt financing of a corporation with at least 5 years to maturity.

dollars, outside

Deposits denominated in __ held in a bank branch __ the U.S. are eurodollars. These are large dollar deposits, typically made by corporations, with a fixed term from 1 day to 5 years (considered short term). Foreign banks trade these deposits similar to the domestic trading of Fed Funds.

federal funds

Federal Funds are overnight loans of reserves from Fed member bank to Fed member bank. The interest rate charged on Fed Funds is the __ Rate. When the Federal Reserve Bank lends directly to a member bank, it does so at the discount rate.

fall

If interest rates rise after issuance, the value of the CD in the secondary market will __ (though not by much, since this is a short maturity). Most of these instruments are held to maturity, so the secondary market is very limited.

repo

In a repurchase agreement between 2 government dealers, a government securities dealer "sells" securities to another dealer, with an agreement to buy them back at a later date. The selling dealer obtains cash, and for this, agrees to pay interest to the buying dealer. The interest rate charged is known as the __ rate - the repurchase agreement interest rate.

loosening

In a repurchase agreement, the Fed buys government securities from a dealer (giving the dealer cash) with an agreement to sell them back at a later date. This injects cash into the banking system, __ credit.

sells

In a repurchase agreement, the initiating government securities dealer __ securities to another dealer to obtain cash, with an agreement to buy them back at a later date.

tightening

In a reverse repurchase agreement, the Federal Reserve drains reserves from dealer banks, __ credit. It does this by selling eligible securities to the banks, who buy them for cash. Thus the banks are drained of excess cash and credit levels are reduced.

overnight

Loans of Fed Funds are made __ so the duration of the loan is 1 day. This, along with an overnight repurchase agreement, is the shortest term money market instrument

yield basis

Money market instruments are original issue discount obligations quoted on a __ that are priced at a discount to par (with the exception of negotiable certificate of deposit that are priced at par plus accrued interest). The discount from par is the interest earned.

MIG

Municipal short-term notes are rated by Moody's on an __-1,2,3, and SG ("Speculative Grade") scale.

par

Negotiable certificates of deposit (over $100,000 face amount) are issued at __ and mature at par plus accrued interest. If they are traded prior to maturity, they trade with the amount of accrued interest due.

interest rate risk

Overnight repurchase agreements are overnight sales of government securities, with an agreement to buy back the securities the next day at a pre-set price. The difference in prices is the interest earned for the 1 day loan. These are extremely safe and liquid. There is virtually no credit risk since the loan is backed by U.S. Government securities. This is the same as stating that there is no risk to "principal." Interest rate risk is present, however. Repurchase agreements are typically backed by long term government securities. The "seller" has an agreement to "buy back" the securities at a pre-agreed price on the next day. Therefore, if interest rates rise sharply that day, the dealer receives back securities that are now worth substantially less. Thus, the __ resides in the underlying long term government securities; not in the repurchase agreement itself.

government

Repurchase agreements are entered into between __ securities dealers.

interest rate

Repurchase agreements are used by the Federal Reserve to inject funds into the money supply. The agreement stipulates that the Fed buy government securities from the dealer's inventory, with an agreement to sell back those securities at a pre-agreed price (hence there is no price risk) at a pre-set future date. The dealer gets a temporary infusion of cash, which the dealer can use to buy other securities or (if the dealer is a bank) which may be loaned to someone else. Investors in repurchase agreements have an __ risk.

decreased

Step-Down Certificates of Deposit initial payments are made at an interest rate that is above the market rate and at a predetermined time, the interest rate is __ to a rate that is at, or below, the market

set

The Federal Funds rate is the interest rate charged by Federal Reserve member banks for overnight loans to each other. The discount rate is charged by the Federal Reserve itself to member banks that wish to borrow reserves directly from the Fed. Federal Reserve actions such as Open Markets Operations strongly influence the Federal Funds rate, but the Fed itself does not __ this rate. The Fed Funds Rate is lower than the discount rate. Lastly, the Fed Funds rate is computed every day and can change throughout the day.

municipal

The Federal Reserve trading desk can trade securities issued by the U.S. Government, Government Agencies, and prime Banker's Acceptances. Bond Anticipation Notes are __ issues. They are not eligible for Fed trading.

corporations

The Federal Reserve trading desk can trade securities issued by the U.S. Government, Government Agencies, and prime Banker's Acceptances. Commercial Paper, which is issued by __, is not eligible for Fed trading.

pro rated

There is no penalty for early withdrawal of funds on brokered CDs - however the amount of interest earned will be __ over the shorter life of the deposit.

municipal bonds

Trades of all of the following securities will settle in Fed Funds EXCEPT: A. Treasury Bills B. Treasury Notes C. Municipal Bonds D. Agency Bonds

prime commercial paper

Trades of all of the following will settle in Fed Funds EXCEPT: A. Prime Banker's Acceptances B. Treasury Bills C. Treasury Bonds D. Prime Commercial Paper

AAA

Treasury bills and Fed Funds are not rated because they have an implied __ rating - the safest of instruments.

lender

When a government dealer enters into a reverse repurchase agreement with the public, the dealer is buying government securities from the customer (who is the seller) with an agreement to sell them back at a later date. A dealer with excess cash will do this to earn extra interest income from the underlying government securities during the life of the agreement. This drains the dealer of cash, thus, the government dealer is the __ of the monies.

I, II, III

Which of the following securities will trade without accrued interest (trade "flat")? I Treasury Bills II Banker's Acceptances III Treasury Receipts IV Negotiable Certificates of Deposit