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Flashcards in Lecture 8 Money Market Deck (22)
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1

Role of Money Markets

  • Money markets are a collection of markets each trading a different _________  financial security.
  • Trading takes place ____________ according to particular conventions.
  • The trading is facilitated by dealers who stand ready to _______ buy/sell quotes to potential customers.
  • It is interesting to note that if the two parties agree to _________ the usual conventions, they are free to do so.

Role of Money Markets

  • Money markets are a collection of markets each trading a different short term financial security.
  • Trading takes place over-the-counter (OTC) according to particular conventions.
  • The trading is facilitated by dealers who stand ready to offer buy/sell quotes to potential customers.
  • It is interesting to note that if the two parties agree to disregard the usual conventions, they are free to do so.

2

Role of Money Markets

  • Money markets are wholesale markets where trades are typically valued at more than $________.
  • Transactions on the money markets are called ‘________________’ because of their ___________ and ___________nature. There are____________ customer relationships.
  • ___________usually takes place through the clearinghouse Austraclear or the RBA’s Information and Transfer System (RITS).

Role of Money Markets

 

  • Money markets are wholesale markets where trades are typically valued at more than $1 million.
  • Transactions on the money markets are called ‘open market transactions’ because of their impersonal and competitive nature. There are no established customer relationships.
  • Settlement usually takes place through the clearinghouse Austraclear or the RBA’s Information and Transfer System (RITS).

3

Characteristics of
Money-market Instruments

 

The characteristics of money market instruments are as follows:

1. ______ default risk

2. _______ marketability/liquidity

3. _______ denominations

4. _______ per-dollar transaction costs.

 

Characteristics of
Money-market Instruments

The characteristics of money market instruments are as follows:

1. Low default risk

2. High marketability/liquidity

3. Large denominations

4. Low per-dollar transaction costs.

4

Why do money market instruments have these characteristics?

 

  • First, because investors are looking for ______, ________ investments, money market instruments are issued by economic units with the ________ credit standing.
  • Second, temporary investments need to be very _________  in case the money is needed ___________.
  • Third, it only costs $____ in fees to trade a ‘line’ of securities in Austraclear… this could be a transaction worth up to $________!

Why do money market instruments have these characteristics?

  • First, because investors are looking for safe, short-term investments, money market instruments are issued by economic units with the highest credit standing.
  • Second, temporary investments need to be very marketable in case the money is needed unexpectedly.
  • Third, it only costs $3 in fees to trade a ‘line’ of securities in Austraclear… this could be a transaction worth up to $100 billion!

5

T-notes

  • Treasury notes are issued to ________ the operations of the _________ Government.
  • T-notes issued recently have had maturities of ______ year or _________.
  • Because of government __________, no T-notes were issued in the years 2003 to 2009.
  • However, in 2009 and 2010, the issuance of T-notes recommenced. The volume of T-notes on issue may peak at approximately $___________.

T-notes

  • Treasury notes are issued to finance the operations of the Commonwealth Government.
  • T-notes issued recently have had maturities of one year or less.
  • Because of government surpluses, no T-notes were issued in the years 2003 to 2009.
  • However, in 2009 and 2010, the issuance of T-notes recommenced. The volume of T-notes on issue may peak at approximately $25 billion.

6

Bidding for T-notes

  • T-notes are auctioned by the ___________________________.
  • Bids, usually by ________ investors, are submitted competitively.
  • The bid with the _______ yield is accepted first.
  • Any remaining T-notes are sold to _________ bidders.

Bidding for T-notes

 

  • T-notes are auctioned by the Australian Office of Financial Management (AOFM).
  • Bids, usually by large investors, are submitted competitively.
  • The bid with the lowest yield is accepted first.
  • Any remaining T-notes are sold to subsequent bidders.

7

The cash market

  • The cash market is the market for cash held in the ________________ at the RBA.
  • This market allows commercial banks to borrow or lend excess ESA balances. The _________ interest rate is ___________.
  • Interbank borrowing and lending make up most cash market transactions.
  • When a transaction is made, the ESA of one bank is ________ and the ESA of the other bank is __________.

The cash market

  • The cash market is the market for cash held in the Exchange Settlement Accounts (ESA) at the RBA.
  • This market allows commercial banks to borrow or lend excess ESA balances. The relevant interest rate is the cash rate.
  • Interbank borrowing and lending make up most cash market transactions.
  • When a transaction is made, the ESA of one bank is debited and the ESA of the other bank is credited.

8

Repurchase agreements

  • A ____________ or _______ is an agreement involving the ________of a security with the condition that the seller will buy it _______ at a ___________ price.
  • The securities involved are CGS and semi-government bonds.
  • Repos are typically made for one day and usually no longer than a week.

Repurchase agreements

  • A repurchase agreement or REPO is an agreement involving the sale of a security with the condition that the seller will buy it back at a predetermined price.
  • The securities involved are CGS and semi-government bonds.
  • Repos are typically made for one day and usually no longer than a week.

9

Why Are Repos Used?

  1. From the point of view of the seller, the repo is a __________________.
  2. From the point of view of the buyer, ______________________.

Why Are Repos Used?

  1. From the point of view of the seller, the repo is a source of short-term funds.
  2. From the point of view of the buyer, repos are a short-term investment.

10

Commercial Bills

  • A bill of exchange is a ___________________________
  • A commercial bill is a _____________ issued to raise funds for general business purposes
  • A ___________________ that is issued by a corporation and incorporates the name of a _______________

Commercial Bills

  • A bill of exchange is a discount security issued with a face value payable at a future date
  • A commercial bill is a bill of exchange issued to raise funds for general business purposes
  • A bank-accepted bill is a bill that is issued by a corporation and incorporates the name of a bank as acceptor

11

Commercial Bills

Bank accept the bill: A bill issued by a corporation that also incorporates the name of the ___________________. By putting the name of the bank, the bill become _____________.

 

Bank Endorsed the Bill: When the bank was the ______________ and __________________ when selling it to the money market. Most of the endorsement today are electronic record transaction

Commercial Bills

Bank accept the bill: A bill issued by a corporation that also incorporates the name of the bank as a acceptor. By putting the name of the bank, the bill become more creditworthy.

Bank Endorsed the Bill: When the bank was the previous holder of the bill and signed the reverse of the bill when selling it to the money market. Most of the endorsement today are electronic record transaction

12

Commercial Bills (cont.)

Features of commercial bills—parties involved (bank- accepted bill) (cont.)

__________

  • Issuer of the bill (corporation)
  • Secondary liability for repayment of the bill (after the acceptor, if bank fail)

___________

  • Undertakes to repay the face value to the holder of the bill at maturity
  • Acceptor is usually a bank or merchant bank

Commercial Bills (cont.)

 

Features of commercial bills—parties involved (bank- accepted bill) (cont.)

Drawer

  • Issuer of the bill (corporation)
  • Secondary liability for repayment of the bill (after the acceptor, if bank fail)

Acceptor

  • Undertakes to repay the face value to the holder of the bill at maturity
  • Acceptor is usually a bank or merchant bank

13

Commercial Bills (cont.)

__________

  • The party to whom the bill is specified to be paid, i.e. the party who receives the funds
  • Usually the drawer, but the drawer can specify some other party as payee

___________

  • The party that discounts the face value and purchases the bill (____________________)
  • The provider or lender of the funds
  • May also be the acceptor of the bill (e.g. Bank)

Commercial Bills (cont.)

Payee

  • The party to whom the bill is specified to be paid, i.e. the party who receives the funds
  • Usually the drawer, but the drawer can specify some other party as payee

Discounter

  • The party that discounts the face value and purchases the bill (could be bank or third party)
  • The provider or lender of the funds
  • May also be the acceptor of the bill (e.g. Bank)

14

Commercial Bills (cont.)

___________

  • The party that was previously a holder of the bill
  • Signs the reverse side of the bill when selling, or discounting, the bill

________________________________

Commercial Bills (cont.)

Endorser

  • The party that was previously a holder of the bill
  • Signs the reverse side of the bill when selling, or discounting, the bill

Endorsement Create legal chain of ownership

15

Commercial Bills (cont.)

The flow of funds (non-bank bills)

1. Alternatively, a bill can be ______________________________

2. The bank is both _______________ of the bill

3. Funds are lent to ____________

4. At maturity date the ______________________________

Commercial Bills (cont.)

The flow of funds (non-bank bills)

1. Alternatively, a bill can be drawn by the bank and accepted by the borrower

2. The bank is both drawer and discounter of the bill

3. Funds are lent to borrower as payee

4. At maturity date the borrower, as acceptor of the bill, is liable to pay face value to the holder of the bill

16

Commercial Bills (cont.)

Advantages of commercial bill financing

  • _________ cost than other _________ financing, i.e. __________, fully-drawn advances
  • Borrowing cost (yield) determined at issue date (not affected by _________ changes)
  • ____________ may be extended by ‘rollover’ at maturity

Note: The current interest rate will be use for rollover facility

Commercial Bills (cont.)

Advantages of commercial bill financing

  • Lower cost than other short-term financing, i.e. overdraft, fully-drawn advances
  • Borrowing cost (yield) determined at issue date (not affected by interest rate changes)
  • Term of loan may be extended by ‘rollover’ at maturity

Note: The current interest rate will be use for rollover facility

17

Promissory Notes

_____________ or _______________, they are ____________, ________________ with a  ______________ at maturity but sold today by the issuer for less than face value

Characteristics:

1. _____________________

2. ____________________________

3. Only corporation with __________  rating can issue P note.

4. This is an ________________ issued my major corporation in major financial market

Promissory Notes

Also called P-notes or commercial paper, they are discount securities, issued in the money market with a face value payable at maturity but sold today by the issuer for less than face value

Characteristics:

1. There is no acceptor or endorser

2. They are unsecured instruments

3. Only corporation with excellent credit rating can issue P note.

4. This is an international security, issued my major corporation in major financial market

18

Negotiable Certificates of Deposit

  • Short term ___________________________ to manage their liabilities and liquidity.
  • Maturities range up _____________.
  • ___________________ in the wholesale money market
  • The ________________________________________________
  • Calculations—use discount securities formulae

Negotiable Certificates of Deposit

  • Short term discount security issued by banks to manage their liabilities and liquidity.
  • Maturities range up to 180 days
  • Issued to institutional investors in the wholesale money market
  • The short-term money market has an active secondary market in CDs
  • Calculations—use discount securities formulae

19

Example: CDs

Bank credit card holders use Credit Card More often during the festival time (e.g. Xmas), so the bank need more money to repay these account.

Therefore bank might issue CD to attract institutional investor.

Example: CDs

Bank credit card holders use Credit Card More often during the festival time (e.g. Xmas), so the bank need more money to repay these account.

Therefore bank might issue CD to attract institutional investor.

20

Money-market Participants

The main participants are:

  • _____________________
  • _______________
  • _______________________
  • __________________

Money-market Participants

The main participants are:

  • Commercial banks
  • The RBA
  • The Commonwealth government
  • Corporations

21

The interrelationship
of Money-market Interest Rates

  • Because money market securities are all very ________, their yields tend to move _________ together over time.
  • Whilst spreads between the yields do arise from time to time, __________ are eventually removed by portfolio adjustments made by sophisticated traders.

The interrelationship
of Money-market Interest Rates

  • Because money market securities are all very similar, their yields tend to move closely together over time.
  • Whilst spreads between the yields do arise from time to time, abnormalities are eventually removed by portfolio adjustments made by sophisticated traders.

22

Promissory Notes (cont.)

Underwritten Issues:

  • Underwriting  ___________________ is purchased and _____________________
  • Underwriter is _______________________________________
  • The underwrite commitment virtually assure the borrower of a ______________________________ of the p note (up to 3 years)
  • It can ______________

Note :Issues may also be non-underwritten

Promissory Notes (cont.)

Underwritten Issues:

  • Underwriting guarantees the full issue of notes is purchased and typical fee is 0.1% per annum
  • Underwriter is usually a commercial bank, investment bank or merchant bank
  • The underwrite commitment virtually assure the borrower of a line of credit extending beyond the short term life of the p note (up to 3 years)
  • It can involve significant cost

Note :Issues may also be non-underwritten