Bank Drafts and Letters of Credit

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).

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.