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Financial Markets Instruments Quiz
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Financial Markets Instruments Quiz

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Questions and Answers

What is the primary purpose of a repurchase agreement?

  • To sell a security with a commitment to buy it back at a specific price (correct)
  • To invest in a long-term security
  • To borrow at a fixed interest rate
  • To lend to another bank for a short period

    • Commercial paper is a long-term financing instrument.

    False

    What is the main difference between private and public money market instruments?

    Private money market instruments are issued by non-governmental entities, while public money market instruments are issued by governmental entities.

    Large-denomination negotiable ______________________ are a type of money market instrument.

    <p>certificates of deposit</p> Signup and view all the answers

    Match the following money market instruments with their description:

    <p>Call Money = Very short period borrowing between banks Commercial Paper = Short-term debt instrument issued by companies Repurchase Agreements = Sale of a security with a commitment to buy it back at a specific price Certificates of Deposit = Large-denomination negotiable instrument used by banks</p> Signup and view all the answers

    What is the main purpose of the interbank market?

    <p>To facilitate lending between banks for a short period</p> Signup and view all the answers

    EURIBOR is a benchmark interest rate used in the interbank market.

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

    What is the main advantage of using repurchase agreements as a short-term financing instrument?

    <p>Repurchase agreements provide a flexible and low-cost way to raise short-term funds.</p> Signup and view all the answers

    What is another name for Treasury Bills in the US?

    <p>T-Bills</p> Signup and view all the answers

    In Europe, Treasury Bills are known as Schatzwechsel.

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

    What is the typical maturity period for Treasury Bills at issuance?

    <p>3, 6, or 12 months</p> Signup and view all the answers

    Treasury Bills are _______ securities.

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

    Match the following debt securities with their characteristics:

    <p>Treasury Bills = issued by governments Long Term Loans = issued by households and corporations Debt Securities = issued to obtain liquidity</p> Signup and view all the answers

    What is the primary market for Treasury Bills?

    <p>All of the above</p> Signup and view all the answers

    Off-the-run issues of Treasury Bills are more liquid than on-the-run issues.

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

    What type of debt securities are issued to obtain liquidity for short-term or long-term needs?

    <p>Debt securities</p> Signup and view all the answers

    What is the primary purpose of Commercial Paper (CP)?

    <p>Short-term financing of working capital</p> Signup and view all the answers

    Certificate of Deposit (CD) is a negotiable instrument

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

    What is the term of Commercial Paper in the US?

    <p>Typically 90 days, but rarely exceeds 270 days</p> Signup and view all the answers

    A repo agreement is a ______ agreement where one party sells securities to another party with an agreement to repurchase them at a later date

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

    Match the following money market instruments with their descriptions

    <p>Commercial Paper = Short-term unsecured promissory note Certificate of Deposit = Financial obligation issued by a depository institution Repo Agreement = Temporary agreement to sell and repurchase securities Intercompany loans = Loans between two companies</p> Signup and view all the answers

    Tri-partite repo is a type of repo agreement

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

    What is the name of the rate often used in repo agreements

    <p>Repo rate</p> Signup and view all the answers

    What is the primary purpose of a Certificate of Deposit (CD)

    <p>To represent a financial obligation issued by a depository institution</p> Signup and view all the answers

    Study Notes

    Money Market Instruments

    • Repo rate is a type of interest rate, often quoted in ACT/360 format
    • General collateral and specific collateral are types of collateral used in repos
    • Haircut refers to the percentage discount on the value of collateral
    • Reverse repo is a transaction where a central bank sells securities to banks
    • Overnight repo, term repo, and open repo are types of repo transactions
    • Tri-partite repo involves a third party holding the collateral

    Commercial Paper

    • Commercial paper is a short-term unsecured promissory note issued by companies
    • Used for seasonal financing of working capital and bridge financing
    • Primary market is based on best effort arrangements with no guaranteed placement
    • Hardly any secondary trading occurs
    • Typical terms range from 90 days to 270 days in the US
    • Yields can be quoted on a discount basis or in interest-bearing form

    Certificates of Deposit (CDs)

    • A CD represents a financial obligation issued by a depository institution
    • Indicates a specific sum of money deposited at the issuing institution for a specific time period
    • Deposit insurance applies to small denominations
    • Can be negotiable or non-negotiable (resellable or not)
    • Large-denomination negotiable CDs have denominations of $10 million and more

    Other Money Market Instruments

    • Household debt instruments: consumer loans
    • Corporate debt instruments: intercompany loans, trade credit, straight loans, overdrafts, factoring, and forfaiting

    Public Money Market Instruments

    • Treasuries are known as Treasury Bills or T-Bills in the US and have various names in Europe
    • Maturities at issuance: 3, 6, and 12 months
    • Fungibility applies to treasuries
    • Primary market auctions are used to issue treasuries
    • American tender principle is used in auctions (bid price auction)

    Capital Market Instruments

    • Long-term loans: mortgage loans, credit lines, investment credit, revolving credits, and leasing
    • Debt securities are issued by borrowers to obtain liquidity for short-term or long-term needs
    • Wholesale market involves institutional investors, while retail market involves retail investors

    Wholesale Money Market Instruments

    • Private money market instruments: call money, repurchase agreements, commercial paper, and certificates of deposit
    • Public money market instruments: T-bills and CP issued by governmental entities

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    Related Documents

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    Description

    Test your knowledge of financial markets and instruments, including repo rates, commercial paper, and more.

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