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Questions and Answers
What is the main difference between a repurchase agreement and a reverse repurchase agreement?
What is the main difference between a repurchase agreement and a reverse repurchase agreement?
Which of the following is true about Money Market Deposit Accounts (MMDAs)?
Which of the following is true about Money Market Deposit Accounts (MMDAs)?
How do Money Market Mutual Funds (MMMFs) differ from Money Market Deposit Accounts (MMDAs)?
How do Money Market Mutual Funds (MMMFs) differ from Money Market Deposit Accounts (MMDAs)?
In a repurchase agreement, who commits to repurchase the securities at a later date?
In a repurchase agreement, who commits to repurchase the securities at a later date?
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What are Negotiable Certificate of Deposits (NCDs) mainly used for?
What are Negotiable Certificate of Deposits (NCDs) mainly used for?
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What is the key characteristic of Certificate of Deposits (CDs) that differentiates them from regular savings accounts?
What is the key characteristic of Certificate of Deposits (CDs) that differentiates them from regular savings accounts?
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What type of mutual fund combines features of both growth and income funds?
What type of mutual fund combines features of both growth and income funds?
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Which type of fund invests specifically in a basket of securities that make up a market index?
Which type of fund invests specifically in a basket of securities that make up a market index?
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What is the main feature of a Certificate of Assignment?
What is the main feature of a Certificate of Assignment?
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What does a Certificate of Participation entitle the holder to?
What does a Certificate of Participation entitle the holder to?
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Eurodollar Certificate of Deposits are denominated in which currency?
Eurodollar Certificate of Deposits are denominated in which currency?
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What is the main characteristic of an Index Fund?
What is the main characteristic of an Index Fund?
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What is a time draft issued by a bank?
What is a time draft issued by a bank?
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In a commercial letter of credit, who is the beneficiary?
In a commercial letter of credit, who is the beneficiary?
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What differentiates a sight draft from a time draft?
What differentiates a sight draft from a time draft?
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What does a negotiable certificate of deposit specify?
What does a negotiable certificate of deposit specify?
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Who opens a commercial letter of credit?
Who opens a commercial letter of credit?
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What is the main purpose of a certificate of deposit?
What is the main purpose of a certificate of deposit?
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Study Notes
Repurchase Agreements
- A repurchase agreement is a legal contract where a borrower sells securities to a lender with a commitment to repurchase the securities at a later date.
- The repurchase price includes the contract price plus a stated interest charge.
Reverse Repurchase Agreements
- A reverse repurchase agreement is an agreement where one party buys securities from another with a promise to sell back at a given date in the future.
Money Market Deposit Accounts
- MMDAs are PDIC-insured deposit accounts managed by banks or brokerages.
- They are a safe and liquid place to store money for upcoming investments or from recent sales.
- MMDAs typically pay higher interest than regular savings accounts but lower than MMMFs.
Money Market Mutual Funds
- MMMFs are investment funds that pool funds from numerous investors and invest in money market instruments.
- They offer a low-risk investment option with a potential for regular income.
Types of Mutual Funds
- Growth funds: invest in assets expected to reap large capital gains, typically equity securities.
- Income funds: invest in stocks that regularly pay dividends and in notes and bonds that regularly pay interest.
- Balanced funds: combine the features of growth and income funds.
- Sector funds: invest in specific industries, such as healthcare, financial services, utilities, or extractive industries.
- Index funds: invest in a basket of securities that make up a market index, such as the S&P 500 index.
- Global funds: invest in securities issued in many countries, providing diversification.
Certificate of Assignment
- A certificate of assignment is an agreement that transfers the right of the seller over a security in favor of the buyer.
- The underlying security carries a promise to pay a certain sum of money on a fixed date, like a promissory note.
- The buyer has an option to force the liquidation of the underlying security to ensure repayment.
Certificate of Participation
- A certificate of participation is an instrument that entitles the holder to a proportionate equitable interest in the securities held by the issuing firm.
- It also provides an entitlement to a pro-rata share in a pledged revenue stream, usually lease payments.
Eurodollar Certificates of Deposit
- Eurodollar CDs are dollar-denominated, negotiable, large time deposits in banks outside the United States.
Drafts
- A draft is an order by the drawer to the bank to pay a specified sum of money on a specified date to a named person or to the bearer.
- A time draft is different from a sight draft, which is an order to pay immediately.
Commercial Letter of Credit
- A commercial letter of credit is a contractual agreement between a bank, on behalf of the buyer, authorizing another bank to make payment to the seller.
- The issuing bank makes a commitment to honor drawings made under the credit.
Certificate of Deposit (CD)
- A CD is a receipt issued by a commercial bank for the deposit of money.
- It is a time deposit with a definite maturity date and a definite rate of interest.
- A CD stipulates that the bearer is entitled to receive annual interest payments and the principal upon maturity.
Negotiable Certificate of Deposit
- A negotiable CD is a bank-issued time deposit that specifies an interest rate and maturity date and is negotiable (salable/saleable).
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Description
Learn about bank drafts, including drafts before acceptance and time drafts, as well as the concept of a commercial letter of credit. This quiz covers the differences between time drafts, sight drafts, and letters of credit in banking.