3.11 Essentials

Banker's Acceptance

- short term time draft with a specified payment date drawn on an bank - postdated check or line of credit - payment date between 1-270 days - used typically to finance international trade

commercial paper

promissory notes - raise cash to finance accounts receivable and seasonal inventory overages - have interest rates lower than bank loan rates - mature from 1-270 days - is a discount from face value - typically done with companies who have excellent credit - quoted on a discount yield basis -Commercial paper is short-term, unsecured corporate debt. It is issued and traded at a discount of face value and does not pay periodic interest. Like all zeroes, it is quoted on a discounted yield basis.

nonnegotiable cds

unsecured time deposits that banks offer and issue - minimum face values of 100,000 but most are issued at one mission or more

Retail money market funds have

- a floating nav of $1 per share

Which of the following statements regarding negotiable CDs are TRUE? 1-The issuing bank guarantees them. 2-They are callable. 3-Minimum denominations are $1,000. 4-They can be traded in the secondary market.

Ans: 1 and 4 Negotiable CDs are issued primarily by banks and backed by the issuing bank. The minimum denomination is $100,000. These are sometimes referred to as jumbo CDs.

Which of the following are characteristics of negotiable (sometimes referred to as jumbo) CDs? 1-Issued in amounts of $100,000 to $1 million. 2-Always FDIC insured to face value. 3-Always mature in 1 to 2 years. 4-Trade in the secondary market.

Ans: 1 and 4 Which of the following are characteristics of negotiable (sometimes referred to as jumbo) CDs? Issued in amounts of $100,000 to $1 million. Always FDIC insured to face value. Always mature in 1 to 2 years. Trade in the secondary market.

Which of the following are characteristics of commercial paper? 1-Registered with the SEC 2-Short-term debt instrument. 3-Issued by commercial banks. 4-Unsecured debt.

Ans: 2 and 4 Commercial paper represents the unsecured debt obligations of corporations needing short-term financing. Because commercial paper is issued with maturities of less than 270 days, it is exempt from SEC registration under the Act of 1933.

A money market mutual fund would be least likely to invest in which of the following assets? a- BA b- T notes c- T bills d- repurchase agreements

Ans: b A money market mutual fund typically invests in money market instruments, or those with a maturity date not exceeding 397 days. Treasury notes have maturity dates of 2-10 years.

money market mutual fund

MMF - for retail customers and are designed to have a stable nav of 1/share - they are not guaranteed nor protected by fdic insurance

negotiable cds

mature in one year or less - can be traded in the secondary market

institutional funds and nav

must have a floating nav