Chapter 13 Flashcards
4(2) CP Program
- private placement
- max 397 days
- $250K +
- no restriction on use of proceeds
- institutional investors and qualified institutional buyers (QIBs)
3(a)3 CP Program
- private placement CP
- proceeds: working capital ONLY
- max 270 days
- minimum amt of $100K
- accredited investors
3 basic cost components for lines of credit
- all-in rate
- commitment fees
- compensating bals
assumptions made when determining the basic components of interest rates
- US Treasuries are “risk-free,” with no default risk
- No liquidity risk for US Treasuries
- Both corp. and municipal bonds have default and liquidity risk
- Maturity risk increases with the issue’s time to maturity
holding period yield
return investor earns, holding the investment
2 yields commonly quoted for ST investments (both annualize holding period year to aid in comparison to other ST investment)
- money market yield (MMY)
- bond equivalent yield (BEY)
money market yield (MMY)
bond equivalent yield (BEY)
- is the nominal yield quoted on a 365-day basis
- enables comparison of alternative investments quoted and priced differently
rating agency: standard ratings
not completely equivalent, S&P’s rating of A-1 is roughly equivalent to Moody’s “Prime-1 rating”… A-2 is comparable to Prime-2, A-3r to Prime-3 rating
Not Prime falls at the bottom of the rating scale.
Treasury bill (T-bill)
- a money mkt instrument
- uses a 360-day year basis to annualize the holding period yield
inverted yield curve
- downward sloping yield curve
- investors prefer LT securities (issuers prefer ST borrowing)
- anticipating rate hikes
- increase demand for LT securities increases their price, and decreases yields– thus pushing down the LT end of the curve
active investment strategy
- investor must be prepared to sell holdings when their prices rise
- depends on interest rates falling or on relative creditworthiness improving
- in-house or outside investment mgr. is responsible for ST investment decisions
- must be able to forecast ST cash needs and imminent interest rate changes
credit rating agencies (CRAs)
(aka Nationally Recognized Statistical Rating Orgs (NRSROs))
- assign credit ratings for issuers of short- and long-term debt obligations and debt instruments
- credit rating = assessment of potential for downside/loss on the investment
- provide opinion on obligor’s overall capacity to meet fin. obligation
- use confidential, non-public information when making rating decisions
board-approved investment policy should include (12 things)
- Investment objectives (risk and rtn.)
- Ok and prohibited investment vehicles/classes
- Minimum/acceptable security ratings
- Max. maturity (individual securities)
- Max. weighted avg. maturity/duration (portfolio)
- Max. % of portfolio allowed for investment in individual securities, companies, instrument classes, geographic areas or investments in the same industry
- Policies/guidelines for foreign securities investments
- Specific responsibilities to implement policy
- Methods to monitor compliance/internal controls
- KPIs (measure, evaluate, report)
- Responsibilities/reporting for custodians, external investment mgrs, broker-dealers, others
- Exception mgmt/approval processes
revolving credit agreement (revolver)
- With > 1 yr on a multiyear revolver, can be a LT liability on borrower’s BS.
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