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6 Cards in this Set
- Front
- Back
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Explain the importance of the typical characteristics of money market securities.
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Money market securities are liquid, short-term, high quality debt securities issued by high quality borrowers and are used to store liquidity by investors around the world.
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What can cause interbank borrowing rates to significantly vary from RBA's target cash rate?
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RBA sets a target cash rate on a monthly basis (first Tuesday of every month). while this immediately impacts all money market rates, the actual interbank borrowing rate can vary significantly on a daily basis or on an intra-day basis depending on the liquidity position in the overall banking system. A liquidity Freeze created by unwillingness of lenders to lend money, as observed during the recent GFC, can result in a wide disconnect between cash rate and the interbank borrowing rate. The interbank borrowing rate can also be very volatile in such situations.
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Why is a REPO like a secured loan?
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The borrower of the money 'sells' a government security to the lender along with an agreement to repurchase it at a future time at a predetermined higher price that is based on the REPO rate. Thus, the lender of the money owns the security until the money is paid back with interest, so the security serves as collateral for the loan.
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How and why do banker's acceptances frequently arise in international trade transactions?
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Often when people trade across borders, they trust the guarantee of an international bank more then they trust the importers agreement to pay them in the future. Thus, exporters often ask importers to obtain a 'letter of credit' from a well-known bank that will agree to pay the importers obligation. when the exporter complies with all terms of the transactio, the bank 'accepts' the obligation to make payment to complete the transaction if the importer does not. Because the bank's credit is good, the banker's acceptance can be sold easily in the money markets and when it comes due, the bank will pay, if necessary, if the importer does not.
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Suppose Salami Brothers engages in a REPO with a bank. In the agreement, Salami Brothers sells $9,987,950 worth of money-market securities to the bank and agrees to repurchase for 10,000,000 in 30 days.
A) Is this transaction a loan, and if so, who is the borrower and who is the lender? defend your answer. B) Is the loan collateralised? what is the collateral? who holds the collateral during the term of the agreement? |
This is a reverse-repurchase agreement because the bank agrees to purchase securities under an agreement to resell. The bank is buying the securities owned by Salami Bros. Technically it is not a loan, but a bank purchase with agreement to resell, but the effect is the same as a loan to a customer.
The Bank holds the securities during the contract period. techinically it is a purchase/resale, but is a type of short-term collateralised loan. |
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What types of firms issue commercial paper? what are the characteristics critical to being able to issue commercial paper?
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Large high-credit rated businesses issue commercial paper as an inexpensive source of short-term direct borrowing. commercial paper is an alternative to prime rate borrowing from a commercial bank and, typically, the rates are lower than rates charged by banks. most investors, in an attempt to protect their principal, only want paper issued by firms highly rated by rating agencies. Rating agencies will quickly write down or remove their ratings for commercial paper if the financial conditions of a company decease. the number of companies issuing commercial paper in the economic boom of the late 1990s, shrunk considerably by 2001 as rating agencies pulled their commercial paper ratings.
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