Ch.5 Money Markets

Question 1

Who are the primary participants in MM’s?

Answer 1

government entities, securities dealers, commercial banks, and other NFPs corps

Question 2

What is a central securities depository?

Answer 2

CSD’s are companies that hold securities in certified or non certified form, to enable book entry transfer of securities.

Question 3

What are the major categories of investment risk?

Answer 3

Default risk - payments to investors are not made to terms
Liquidity risk - not sold quickly enough, resulting in loss
Price/Interest rate risk - losses associated with interest rate changes.

Question 4

What is repurchase agreement?

Answer 4

REPO!! bank or securities dealer sells government securities it owns with a promise to buy back a later date at a higher price.

Question 5

What is CP

Answer 5

Commercial paper - trade-able promissory notes issued by a company…not a bank. unsecured obligation or debt of the issuing company. Does not exceed 397days, no interest. issued at a discount and paid in full at maturity.

Question 6

What is bank paper?

Answer 6

The same thing as bankers acceptance or bank obligations. Time deposits, CDs and negotiable certificates of deposits.

Question 7

What is FRN?

Answer 7

Floating Rate Notes - iisued by both companies and banks, they are notes ussually issued at a minimum of one year or longer. the coupon rates change based off libor.

Question 8

What is meant by the phrase “breaking the buck”?

Answer 8

When the net asset value(NAV) falls below one dollar or Euro etc.
Not having enough cash to buy/sell requests by investors
Historically, they don’t fall below. Usually MMF are considered to be as good as cash.

Question 9

Describe the commercial book entry system

Answer 9

CBES

• Operated by the US treasury.
• automated system for purchasing, holding, and transferring marketable Treasury securites.
• FI’s use this system mostly