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Questions and Answers
What is the primary purpose of a repurchase agreement?
What is the primary purpose of a repurchase agreement?
Commercial paper is a long-term financing instrument.
Commercial paper is a long-term financing instrument.
False
What is the main difference between private and public money market instruments?
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.
Large-denomination negotiable ______________________ are a type of money market instrument.
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Match the following money market instruments with their description:
Match the following money market instruments with their description:
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What is the main purpose of the interbank market?
What is the main purpose of the interbank market?
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EURIBOR is a benchmark interest rate used in the interbank market.
EURIBOR is a benchmark interest rate used in the interbank market.
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What is the main advantage of using repurchase agreements as a short-term financing instrument?
What is the main advantage of using repurchase agreements as a short-term financing instrument?
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What is another name for Treasury Bills in the US?
What is another name for Treasury Bills in the US?
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In Europe, Treasury Bills are known as Schatzwechsel.
In Europe, Treasury Bills are known as Schatzwechsel.
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What is the typical maturity period for Treasury Bills at issuance?
What is the typical maturity period for Treasury Bills at issuance?
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Treasury Bills are _______ securities.
Treasury Bills are _______ securities.
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Match the following debt securities with their characteristics:
Match the following debt securities with their characteristics:
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What is the primary market for Treasury Bills?
What is the primary market for Treasury Bills?
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Off-the-run issues of Treasury Bills are more liquid than on-the-run issues.
Off-the-run issues of Treasury Bills are more liquid than on-the-run issues.
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What type of debt securities are issued to obtain liquidity for short-term or long-term needs?
What type of debt securities are issued to obtain liquidity for short-term or long-term needs?
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What is the primary purpose of Commercial Paper (CP)?
What is the primary purpose of Commercial Paper (CP)?
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Certificate of Deposit (CD) is a negotiable instrument
Certificate of Deposit (CD) is a negotiable instrument
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What is the term of Commercial Paper in the US?
What is the term of Commercial Paper in the US?
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A repo agreement is a ______ agreement where one party sells securities to another party with an agreement to repurchase them at a later date
A repo agreement is a ______ agreement where one party sells securities to another party with an agreement to repurchase them at a later date
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Match the following money market instruments with their descriptions
Match the following money market instruments with their descriptions
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Tri-partite repo is a type of repo agreement
Tri-partite repo is a type of repo agreement
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What is the name of the rate often used in repo agreements
What is the name of the rate often used in repo agreements
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What is the primary purpose of a Certificate of Deposit (CD)
What is the primary purpose of a Certificate of Deposit (CD)
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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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Description
Test your knowledge of financial markets and instruments, including repo rates, commercial paper, and more.