Bank Drafts and Letters of Credit
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Questions and Answers

What is the main difference between a repurchase agreement and a reverse repurchase agreement?

  • There is no difference
  • The interest charge is higher in a reverse repurchase agreement
  • Reverse repurchase agreements are riskier
  • The party selling securities and the party buying securities are reversed (correct)
  • Which of the following is true about Money Market Deposit Accounts (MMDAs)?

  • MMDAs are managed by banks or brokerages (correct)
  • They are not insured by the PDIC
  • MMDAs are riskier than Money Market Mutual Funds (MMMFs)
  • MMDAs typically pay lower interest than regular savings accounts
  • How do Money Market Mutual Funds (MMMFs) differ from Money Market Deposit Accounts (MMDAs)?

  • MMMFs offer higher interest rates than MMDAs (correct)
  • MMMFs are not managed by financial institutions
  • MMDAs pool funds from numerous investors
  • MMMFs are typically insured by PDIC
  • In a repurchase agreement, who commits to repurchase the securities at a later date?

    <p>The borrower</p> Signup and view all the answers

    What are Negotiable Certificate of Deposits (NCDs) mainly used for?

    <p>Short-term financing for corporations</p> Signup and view all the answers

    What is the key characteristic of Certificate of Deposits (CDs) that differentiates them from regular savings accounts?

    <p>Higher interest rates</p> Signup and view all the answers

    What type of mutual fund combines features of both growth and income funds?

    <p>Balanced funds</p> Signup and view all the answers

    Which type of fund invests specifically in a basket of securities that make up a market index?

    <p>Index funds</p> Signup and view all the answers

    What is the main feature of a Certificate of Assignment?

    <p>Allows the buyer to force liquidation of the security</p> Signup and view all the answers

    What does a Certificate of Participation entitle the holder to?

    <p>A share in a pledged revenue stream</p> Signup and view all the answers

    Eurodollar Certificate of Deposits are denominated in which currency?

    <p>Dollars</p> Signup and view all the answers

    What is the main characteristic of an Index Fund?

    <p>Invests in a basket of securities mirroring a market index</p> Signup and view all the answers

    What is a time draft issued by a bank?

    <p>An obligation for the bank to pay a specified amount on a specified date</p> Signup and view all the answers

    In a commercial letter of credit, who is the beneficiary?

    <p>The seller</p> Signup and view all the answers

    What differentiates a sight draft from a time draft?

    <p>Sight draft is payable immediately, while time draft is payable on a specified future date</p> Signup and view all the answers

    What does a negotiable certificate of deposit specify?

    <p>An interest rate and maturity date that are negotiable and salable</p> Signup and view all the answers

    Who opens a commercial letter of credit?

    <p>Issuing bank</p> Signup and view all the answers

    What is the main purpose of a certificate of deposit?

    <p>To receive interest payments along with the principal upon maturity</p> Signup and view all the answers

    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.

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