Financial Institutions & Markets Exam #2

Front 1

Characteristics of Money Market Funds: _____ denominations, _____ default risk, _____ maturities

Back 1

large, low, short
* large denomination - in units of $1M to $10M
* low default risk - cash lent in money markets must be available for a quick return to the lender, money market securities can generally be issued only by high-quality borrowers with little risk of default
* short maturities - an original maturity of 1 year or less

Front 2

Some money market instruments are bought & sold on a discount basis. What are they?

Back 2

T-bills, commercial paper, banker's acceptance

Front 3

With discount yields, you use a _____-day year and calculate yield from _____ value.

Back 3

360, face

Front 4

the product of the periodic rate and the number of periods in a year

Back 4

bond equivalent yield

Front 5

What is this equation for:
[(Pf-Po)/Pf] (360/h)

Back 5

idy = discount yield

Front 6

What is this equation for:
[(Pf-Po)/Po] (365/h)

Back 6

ibey = bond equivalent yield

Front 7

Before you calculate effective annual return, you need to convert _____ to _____ first.

Back 7

discount yield, bond equivalent yield

Front 8

What is this equation for:
[1+i/(365/h)]^(365/h) - 1
where:
h = number of days to maturity
i = ibey (bond equivalent yield)

Back 8

Effective annual return

Front 9

Single-payment security holder receives a terminal payment consisting of _____ plus the _____ of the security.

Back 9

interest, face value

Front 10

Money market securities (ex: jumbo cds & fed funds) pay interest only once during their lives, at maturity. This is a _____.

Back 10

single-payment yield

Front 11

To compare single payment yields with other securities that pay interest based on a 365 day year (instead of 360), the nominal interest rate must be converted to a _____.

Back 11

bond equivalent yield

Front 12

short-term obligations of U.S. government

Back 12

treasury bills

Front 13

What are the maturities for T-bills?

Back 13

13 weeks or 26 weeks

Front 14

What denominations are T-bills issued in? (primary)

Back 14

They are issued in denominations of multiples of $1,000. The minimum allowable denomination for a T-bill bid is $1,000.

Front 15

A typical purchase in the newly issued T-bill market (primary) is a round lot of _____.

Back 15

$5 million

Front 16

The U.S. Treasury has a formal process by which it sells new issues of Treasury bills through its regular T-bill _____ Every week (usually on Thurs), the amount of new 13-week and 26-week T-bills the Treasury will offer for sale is announced. Bids may be submitted by government securities dealers, financial and nonfinancial corporations, and individuals and must be received by the Federal Reserve Bank by the deadline of 1 p.m on the Monday following the announcement.

Back 16

auctions

Front 17

The _____ market for T-bills is the largest of any U.S. money market security.

Back 17

secondary

Front 18

Secondary market T-bill transactions occur between _____ dealers & are conducted over the Federal Reserve's wire transfer service.

Back 18

primary government securities dealers

Front 19

Secondary T-bill market - At the heart of this market are those securities dealers designated as primary government securities dealers by the Federal Reserve Bank of New York (consisting of _____ financial institutions) who purchase the majority of the T-bills sold competitively at auction and who create an active secondary market. In addition, there are many (approximately 500) smaller dealers who directly trade in the secondary market. Primary dealers make a market for T-bills, by buying and selling securities for their own account and by trading for their customers, including depository institutions, insurance companies, pension funds, and so on.

Back 19

18

Front 20

Secondary T-bill markets is an _____ market (markets that do not operate in a specific fixed location - rather; transactions occur via telephones, wire transfers, and computer trading.

Back 20

over-the-counter (OTC)

Front 21

An individual wanting to purchase $50,000 of T-bills in the secondary market must contact his or her bank or broker. A bank or broker that is not a primary government securities dealer or a secondary market dealer must contact (via phone, fax, or wire) one of these dealers (ex: J.P. Morgan Chase) to complete the transaction.

Back 21

NOTE

Front 22

_____ is used for transactions in secondary markets between primary government securities dealer.

Back 22

Fedwire, the federal reserve's wire transfer service

Front 23

The normal settlement period for Treasury securities in the secondary market is the business day _____ the transaction day - "next-day" settlement.

Back 23

after

Front 24

T-bill yields are quoted as _____ yield.

Back 24

discount

Front 25

the price dealers are willing to pay T-bill holders to purchased their T-bills for them

Back 25

bid

Front 26

the discount yield based on the current purchase price that is available to investors (potential T-bill buyers)

Back 26

asked, calculated from the settlement date, two days after the quote date

Front 27

percentage difference in the ask and bid yields

Back 27

spread

Front 28

Short term funds transferred between FIs, usually for a period of one day

Back 28

federal funds

Front 29

Fed funds are short-term, _____ loans.

Back 29

unsecured

Front 30

The overnight (or one day) interest rate for borrowing fed funds is the _____ rate.

Back 30

federal funds

Front 31

The federal funds rate is normally [[higher/lower]] than T-bill rate.

Back 31

higher

Front 32

In the equation for federal funds rate:
iff = [(Pf-Po)/Po] (360/h)
where iff is a _____

You can then convert the rates to an ibey, then EAR.

Back 32

ispy -> single payment yield

Front 33

A repurchase agreement is essentially a collaterized _____ loan.

Back 33

fed funds

Front 34

an agreement involving the sale of securities by one party to another with a promise to repurchase the securities at a specified price and on a specified date in the future

Back 34

repurchase agreement (repo)

Front 35

an agreement involving the purchase (buying) of securities by one party from another with the promise to sell them back at a given date in the future

Back 35

reverse repurchase agreement (reverse repo)

Front 36

Because treasury securities back most repurchase agreements, they are low credit risk investments and have _____ interest rates than uncollaterized fed funds.

Back 36

lower

Front 37

What is this an equation for:
iRA = [(Pf-Po)/Po] (360/h)

Pf includes _____ (repurchase price of the securities = selling price plus interest paid on the repo)
where: iRA is an _____

Back 37

yield on a repurchase agreement

ispy (single-payment yield), interest

Front 38

The largest (in terms of dollar value outstanding) of the money market instruments

Back 38

commercial paper

Front 39

Commercial paper denominations?

Back 39

$100,000
$250,000
$500,000
$1 million

Front 40

Maturities of commercial papers:

Back 40

Maximum of 270 days, generally range from 1-270, the most common are between 20-45 days

Front 41

The 270 day maximum maturity for commercial paper is a SEC rule that says that securities with a maturity of more than 270 days must go through the time-consuming and costly _____ process to become a public debt offering (ex: corporate bond).

Back 41

registration

Front 42

Icp (yield on commercial paper) os a _____.

Back 42

idy (discount yield)

Front 43

bank-issued time deposit that specifies an interest rate and maturity date and is negotiable in the secondary market

Back 43

negotiable certificate of deposit (CD)

Front 44

A negotiable CD is a _____ instrument, meaning that whoever holds the CD when it matures receives the principal and interest.

Back 44

bearer

Front 45

Negotiable CDs have denominations that range from _____ to _____. The most common denomination is _____.

Back 45

$100,000
$10 mil
$1 mil

Front 46

Negotiable Cd maturities rance from _____ to _____, with most having a maturity of _____ to _____ months.

Back 46

two weeks, one year
one, four

Front 47

The secondary market for negotiable CDs is not very _____.

Back 47

active

Front 48

an unsecured short-term promissory note issued by a corporation to raise short-term cash, often to finance working capital requirements

Back 48

commercial paper

Front 49

a time draft payable to a seller of goods, with payment guaranteed by a bank

Back 49

banker's acceptance

Front 50

Banker's acceptance are commonly used for _____ trade transactions.

Back 50

international

Front 51

Because banker's acceptances are payable to the bearer at maturity, they can and are traded in _____ markets.

Back 51

secondary

Front 52

The risk of default on banker's acceptances is very _____, therefore, interest rates on banker's acceptances are _____.

Back 52

low, low

Front 53

Banker's acceptances are sold on a _____ basis.

Back 53

discounted

Front 54

Money Market Participants
1. U.S. _____
2. Federal _____
3. _____ Banks
4. _____ Market _____ Funds
5. _____ & _____
6. _____
7. Other _____ Institutions
8. _____

Back 54

1. Treasury
2. Reserve
3. Commercial
4. Money, Mutual
5. Brokers, Dealers
6. Corporations
7. Financial
8. Individuals

Front 55

There are _____ primary government security dealers. There are also money and security brokers, as well as other brokers and dealers.

Back 55

24

Front 56

Some examples of other financial institutions that participate in money markets are property-_____ & _____ insurance companies, and non-_____ finance companies.

Back 56

casualty, life, bank

Front 57

dollar-denominted deposits held offshore in U.S. bank branches overseas and in other (foreign) banks

Back 57

eurodollar deposits

Front 58

The market in which eurodollar deposits trade is the _____ market.

Back 58

Eurodollar

Front 59

Large banks in London have organized an interbank Eurodollar market used by banks around the world as a source of _____ funding; rate paid on these funds is known as the _____ (LIBOR).

Back 59

overnight, London Interbank Offered Rate

Front 60

The fed funds rate is generally [LOWER/HIGHER] than the LIBOR (London Interbank Offered Rate).

Back 60

lower

Front 61

Eurodollar certificates of deposit -
Most have a maturity of _____ to _____. They are not subject to _____ requirements.

Back 61

one week, six months,
reserve

Front 62

The rate on Eurocommercial Paper is generally about _____-_____% above the LIBOR.

Back 62

1/2 - 1%

Front 63

Treasury Notes and Bonds have a minimum denomination of _____.

Back 63

$1,000

Front 64

A treasury bond's coupon payment is exempt from _____ and _____ taxes.

Back 64

state, local

Front 65

The most recent auctioned issue of a given maturity is referred to as the _____ issue or the _____ issue.

Back 65

on-the-run, current

Front 66

Securities that are replaced by the on-the-run issue are called _____ issue.

Back 66

off-the-run

Front 67

Issues that have been replaced by several on-the-run issues are said to be _____ issues.

Back 67

well off-the-run issues

Front 68

Dealers of treasury notes and bonds profit from the _____.

Back 68

spread

Front 69

Once issue, T-notes and T-bonds trade in very active _____ markets, OTC market

Back 69

secondary

Front 70

The U.S. Treasury sells T-notes and T-bonds through competitive and noncompetitive Treasury _____.

Back 70

auctions

Front 71

a Treasury security in which periodic coupon interest payments can be separated from each other and from the final principal payment.

Back 71

STRIP

Front 72

With stripped treasury bonds, one security represents the _____ payment only, a second security represents the _____ payments.

Back 72

principal, interest

Front 73

STRIPS were originally created by securities firms in the early _____.

Back 73

1980s

Front 74

In 1985, the Treasury created the _____ (Separate Trading of Registered Interest and Principal Securities) program.

Back 74

STRIPS

Front 75

Strips are not issued by the U.S. _____, but are created and sold by various _____ institutions.

Back 75

Treasury, financial

Front 76

STRIPS [ARE/ARE NOT] backed by the U.S. government.

Back 76

are

Front 77

STRIPS trade in an active _____ market.

Back 77

secondary

Front 78

With Inflation-Indexed Treasury Bonds, the principal value will increase by the amount of the U.S. _____ rate. They also have a _____ coupon rate.

Back 78

inflation, lower

Front 79

Government National Mortgage Association (Ginnie Mae) uses proceeds to purchase _____ that are insured by the Federal Housing Administration (FHA) and by the Veteran's Administration (VA); bonds are backed by the mortgages that are purchased with the proceeds and by the federal government. This is a type of federal agency bond.

Back 79

mortgages

Front 80

A type of federal agency bond-
Federal Home Loan Mortgage Association (Freddie Mac) uses proceeds to purchase _____ mortgages; bonds are not backed by the federal _____, but have a very low degree of _____ risk.

Back 80

conventional, government, credit

Front 81

A type of federal agency bond -
Federal National Mortgage Association (Fannie Mae) is a federally chartered corporation owned by individual _____; uses the proceeds to purchase _____ mortgages; bonds are not backed by the federal government, but have a very low degree of _____ risk.

Back 81

investors, residential, government, credit

Front 82

Municipal Bonds are issued by _____ and _____ governments.

Back 82

state, local

Front 83

A municipal bond's interest payments are exempt from _____ income taxes and most _____ and _____ income taxes.

Back 83

federal, state, local

Front 84

The minimum denomination for municipal bonds is typically _____.

Back 84

$5,000

Front 85

Municipal Bonds sell in a secondary market less active than the one for _____ bonds.

Back 85

Treasury

Front 86

2 types of municipal bonds:
1. _______ bonds - backed by the full faith and credit of the issuer
2. _______ bonds - sold to finance a specific revenue-generating project and are backed by cash flows from that project.

Back 86

general obligation, revenue

Front 87

a type of revenue bond issued by municipalities on behalf of a corporation to help build the economic economic base of the municipality; the municipality gives its approval for the sale of the bonds but assumes no legal liability for repayment.

Back 87

industrial development bonds (IDBs)

Front 88

For corporate bonds, the minimum denomination is ______.

Back 88

$1,000

Front 89

Corp. Bonds
______ - legal contract that specifies the rights and obligations of the bond issuer and the bond holders.

Back 89

indenture

Front 90

Corp Bonds -
______ bond - coupons are attached to the bond and the holder (bearer) at the time of the coupon payment gets the relevant coupon paid on presentation to the issuer

______ bond - the bond's holder's (or owner's) identification information is kept in an electronic record by the issuer and the coupon payments are mailed or wire-transferred to the bank account of the registered owner.

Back 90

bearer, registered

Because of the lack of security with bearer bonds, they have largely been replaced by registered bonds in the U.S.

Front 91

Corp Bonds -
______ Bonds - the entire issue matures on a single date (most corp. bonds)

______ bonds - the issue contains many maturity dates, with a portion of the issue being paid off on each date

Back 91

term, serial

Front 92

Secured bonds - ______ bonds - bonds issued to finance specific projects, which are pledged as collateral for the bond issue.

Back 92

mortgage

Front 93

Bonds backed solely by the creditworthiness of the issuing firm, unsecured by specific assets or collateral, are called ______. ______ debentures are also unsecured, and they are junior in their rights to mortgage bonds and regular debentures (riskiest).

Back 93

debenture, subordinated debenture

Front 94

a requirement that the issuer retire a certain amount of the bond issue each year.

Back 94

sinking fund provision

Front 95

Protective covenants are protecting ______.

Back 95

bondholders

Front 96

A provision on a bond issue that allows the issuer to force the bond holder to sell the bond back to the issuer at a price above the par value (or at the call price).

Back 96

call provision

Front 97

______ bonds are bonds that can be exchanged for issuer's common stock, yield lower than non______ bond.

Back 97

convertible (x2)

Front 98

Bond rated as speculative or less than investment grade by bond-rating agencies. These bonds are ______ risk, ______ yield. Some are issued as this type of bond, some were downgraded because of poor performance.

Back 98

Junk bond, high, high.

Front 99

Treasury securities - bonds are quoted as a % of ______ value, but the numbers after the period are not in hundred, but ______.

Back 99

face value, 32nds

Ex: 100.29 = 100 29/32% of face value

Front 100

Bond Market Indexes are managed by major ______ banks. There are many bond market indices & you can always find the appropriate index to compare a bond's performance with.

Back 100

investment

Front 101

Bond Market Participants - suppliers & demanders of long-term funds

major issuers - ______, ______, and ______ governments

major purchasers - ______, ______, government units, and ______ investors

Back 101

federal, state, local
households, businesses, foreign

Front 102

______ don't have to be sold in Europe (name is misleading). They are issued and sold outside the country of the currency in which they are denominated. They are traded in OTC markets, mainly in London and Luxembourg.
Ex: dollar denominated bond issued in Japan, yen denominated bond issued in U.S.

Back 102

Eurobonds

Front 103

Foreign bonds are issued by firms and governments outside of the issuer's ______ country and are usually denominated in the currency of the country in which they are ______.

Ex: Japanese company issues $1 denominated bonds in the U.S.

Back 103

home, issued

Front 104

Sovereign bonds are ______-issued debt. They have historically been issued in ______ currencies, in either U.S. dollars or euros.

Back 104

government, foreign

Front 105

______ Bonds are bonds issued by less-developed countries, backed by U.S. ______-coupon bonds. The principal of the bonds is guaranteed, but coupon payments typically are not.

Back 105

Brady, zero

Front 106

The ______ rate is the rate for immediate delivery at the current exchange rate.

Back 106

spot

Front 107

The rate at which a currency can be exchanged in the future is known as the ______ exchange rate.

Back 107

forward

Front 108

The cross-exchange rates can be figured by comparing ______ exchange rates.

Back 108

U.S.

Front 109

3 types of exchange rate systems
1. ______ floating system - no government imposed boundaries (allows market to determine exchange rate)
2. ______ float - a system with no boundaries in which exchange rates are market determined but are still subject to government intervention (allows currency to float freely, but government can step in sometimes)
3. ______ exchange rate system - pegged to another currency or a unit of account and maintained within specific boundaries (lose flexibility in monetary policy)

Back 109

freely, dirty, pegged

Front 110

The value of the foreign currency may change relative to the ______ dollar.

Back 110

U.S.

Front 111

Use forward transaction to avoid loss (______ with forwards).

Back 111

hedging

Front 112

On-balance-sheet hedging - Match ______ (use same units) & ______ (lend money in same proportion).

Back 112

assets, liabilities

Front 113

Off-Balance-Sheet hedging - use ______ to offset risk (hedging with forwards). You enter into an agreement today, but trade will occur in the future.

Back 113

forwards

Front 114

Largest ______ banks are major players in foreign exchange trading and dealing.

Back 114

commercial

Front 115

To reduce its foreign exchange net exposure to zero and this avoid FX risk, FIs must match foreign currency assets to liabilities in a given currency, and match buys and sells in its trading book in that foreign currency.

Back 115

Note

Front 116

Foreign currency exchange rates between two countries adjust to reflect changes in each country's price levels (or inflation rates and implicitly interest rates) as consumers and importers switch their demands for goods from relatively high-inflation (interest)-rate countries to low inflation (interest)-rate countries.

Back 116

Purchasing Power Parity (PPP)

Front 117

The forward exchange rate is determined by the spot exchange rate and the interest rate differential between the two countries.

Back 117

Interest Rate Parity

Front 118

With interest rate parity, the return on U.S. investment = hedged return on ______ investment

Back 118

foreign

Front 119

Balance of payment accounts:
- summarize transactions between citizens of one country with other countries
- use ______-entry accounting methods such that debit entries must be matched with offsetting credit entries - the balance of payments must always balance -> sum of current account and capital account must always be zero.

Back 119

double

Front 120

______ accounts summarize foreign trade in goods and services, net investment income, and gifts, grants, or aid given to other countries.

Back 120

Current

Front 121

______ accounts measure investment capital flows into and out of a country.

Back 121

Capital

Front 122

Valuation of Mortgages - The market price (Pm) of mortgages should equal the ______ of their future CFs.

Back 122

present value

Front 123

Federally insured mortgages
- guarantor can be either the FHA or the VA
- borrowers must meet various requirements specified by those government agencies to qualify for FHA and VA mortgage loans from a FI
-maximum mortgage amount is limited by ______

Back 123

law

Front 124

mortgages held by financial institutions that are not federally insured (but generally they are required to be privately insured if the borrower's down payment is less than 20% of the property's value.

Back 124

conventional mortgages

Front 125

a mortgage that locks in the borrower's interest rate and thus the required monthly payment over the life of the mortgage, regardless of how market rates change

Back 125

fixed-rate mortgage

Front 126

a mortgage in which the interest rate is tied to some market interest rate, thus, the required monthly payments can change over the life of the mortgage

Back 126

adjustable-rate mortgage

Front 127

Mortgage maturities are typically ______ years, recently ______ years.

Back 127

30, 15

Front 128

Mortgage that requires a fixed monthly interest payment for a three-to five-year period. Full payment of the mortgage principal (the balloon payment) is then required at the end of the period

Back 128

balloon-payment mortgages

Front 129

Collateral-
FI will place a ______ against a property that remains in place until the loan is fully paid off.

Back 129

lien

Front 130

Down Payment - Borrowers who put up less than ______% are required to purchase private mortgage insurance (PMI).

Back 130

20

Front 131

Discount Points (or just points)-
fees or payments made when a mortgage loan is ______ (at closing)

*money you have to pay up front to buy down your mortgage - 1 pt. = 1%

Back 131

issued

Front 132

An amortization schedule shows how the fixed monthly payments are split between ______ and ______.

Back 132

principal, interest

Front 133

______ mortgages exceed mortgage conforming limits (>$417,000).

Back 133

Jumbo

Front 134

Mortgages to borrowers who do not qualify for prime mortgages are known as ______ mortgages (mortgages to borrowers who have weakened credit histories).

Back 134

subprime

Front 135

Mortgages that are considered more risky than a prime mortgage and less risky than a subprime mortgage.

Back 135

Alt-A Mortgages (Alternative A-paper)

Front 136

Adjustable rate mortgages that offer the borrower several monthly payment options

Back 136

option ARMs

Front 137

Option ARM
______ Payment Option - payment changes annually, with a payment cap

- initial interest rate period usually holds only for the first 1 to 3 months; after that, negative amortization - amount owed increases and the borrower is charged additional interest at the rate on the loan times the new, larger principal balance

Back 137

minimum

Front 138

Option ARM
- ______-Only Payment - pay only the interest on the loan during the initial period of the loan; after that the mortgage must amortize so that the mortgage will be paid off by the end of its original term
- after 10 ears from the start of the loan, the interest-only option typically goes away

Back 138

interest

Front 139

Option ARM
- 30 yr fully amortizing payment - pays both ______ & ______ on the loan
- payment is calculated each month based on the prior month's fully indexed rate, loan balance, and remaining loan term

Back 139

principal, interest

Front 140

Option ARM
- 15 year fully amortizing payment - puts the mortgage on an ______ amortization schedule

Back 140

accelerated

Front 141

Second mortgages - interest rate ______ than first mortgage

Back 141

higher

Front 142

loans that let customers borrow on a line of credit secured with a second mortgage on their homes

Back 142

home equity loan

Front 143

Reverse-Annuity Mortgages (RAM)
- borrower receives regular monthly payments from a ______ rather than making them
- when RAM matures (or the borrower dies), the borrower (or the borrower's estate) sells the property to retire the debt

Back 143

financial institution

Front 144

______ Sales occurs when a FI originates a mortgage and sells it with or without recourse to an outside buyer. (Remove them from balance sheet, could give a chance for better asset diversification)

Back 144

Mortgage

Front 145

Creating mortgage-backed securities is known as ______.

Back 145

securitization

Front 146

Mortgage ______ securities:
- FIs pool the mortgages and other assets they originate and offer investors an interest in the pool
- Interest and principal payments on the mortgages are sent to the FI, which then transfers (passes through) the payments to the owners of the MBSs after deducting fees or service and for guaranteeing payments to the owners.

Back 146

pass-through

Front 147

Ginnie Mae Mortgage-Backed Securities:
-FIs issue securities that are backed by FHA and VA mortgages
- Ginnie Mae guarantees ______ payment of principal and interest to investors who purchase these securities - timing insurance
- minimum denominations of ______

Back 147

timely, $25,000

Front 148

Fannie Mae Mortgage-Backed Securites:
- Fannie Mae issues mortgage-backed securities and uses the funds to purchase mortgages.
-FNMA holds mortgages on its ______.
- receives a fee for guaranteeing timely payment of principal and interest to the holders of the MBSs
-mortgages may be collaterized by ______ or ______ insured mortgages.

Back 148

balance sheet, conventional, federally

Front 149

Freddie Mac Participation Certificates (PCs) - performs a similar function to that of FNMA, except that its major securitization role has historically involved ______.

Back 149

thrifts

Front 150

Government agencies in the business of guaranteeing timely principal & interest payments include:
1.
2.
3.

Back 150

Ginnie Mae
Fannie Mae
Freddie Mac

Front 151

Who are each of the following owned by:
Ginnie Mae (GNMA)
Fannie Mae (FNMA)
Freddie Mac (FMAC) or (FHLMC)

Back 151

government
stockholder
stockholder

Front 152

______ allows firms that plan to offer multiple issues of stocker over a 2 year period to submit 1 registration statement
(adv: save costs, more flexibility when you sell shares)

Back 152

shelf registration

Front 153

tombstone ad - isn't really an ______

Back 153

advertisement

Front 154

ADRs (American Depository Receipts) invest in foreign stocks ______.

Back 154

indirectly