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8 Cards in this Set
- Front
- Back
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What is a term deposit?
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Term deposit:
- pays a fixed interest rate - Fixed period - interest rate paid periodically or at maturity - principal repaid at maturity |
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What is a negotiable certificate of deposit?
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Certificate of Deposit:
- Discount security issued by bank - Investor purchases CD at less than face value. - The investor would receive full face value back at maturity. - difference between the buy and sell price is the return for the investor. |
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Why might the A negotiable certificate of deposit be a better investment choice than a term deposit?
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- A CD is highly liquid
- A CD can be easily sold - A term deposit may pay a higher rate of return. |
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Why might a bank borrow a large amount of foreign currency liability?
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- Financial institutions with a good credit rating are
easily able to borrow in the international capital markets. - Allows diversification of funding sources. - May be able to obtain funds at a lower cost - Increases profile - Part of liability management to meet cash flows |
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Why do bank invest in Government securities when they result in a low rate of return?
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- primary source of liquidity (easily converted into cash)
- Invest short term surplus (cash doesn't pay return) - Augment investment earnings. - Use as collateral for future borrowings. - Use for repurchase agreements. - Improve quality of balance sheet. - Manage the interest rate sensitivity of the overall balance sheet. |
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What is meant by off-balance sheet business of banks?
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- those transactions not recorded on balance sheet.
- A contingent liability that will only be recorded on the balance sheet if some specified condition or event occurs. |
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What are the four main categories of off balance sheet business?
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1. Direct Credit substitutes:
- support client obligations e.g. financial guarantee. 2. Trade and performance related items: - support non-financial obligations e.g. performance guarantee. 3. Commitments: - A financial commitment of the bank to advance funds e.g. underwrite debt. 4. Foreign exchange, interest rate and other market rate related contracts: - principally derivative products such as futures, forwards, options and swaps. |
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What is balance sheets restructuring and what are some examples of the areas of advice than an investment bank might provide?
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- The structure of a balance sheet is not fixed.
- A cope must consider the most effective funding of its assets. - This will change as the asset structure of the business changes. ULTIMATELY THE BANK TELLS THEM HOW THIS CAN BE ACHIEVED. e.g. branching into USA. Bank may advise to use funding in USD to match currencies on both sides of the balance sheet. |
