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.

certificates of deposit Signup and view all the answers

Match the following money market instruments with their description:

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 Signup and view all the answers

What is the main purpose of the interbank market?

To facilitate lending between banks for a short period Signup and view all the answers

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

True Signup and view all the answers

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

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

What is another name for Treasury Bills in the US?

T-Bills Signup and view all the answers

In Europe, Treasury Bills are known as Schatzwechsel.

False Signup and view all the answers

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

3, 6, or 12 months Signup and view all the answers

Treasury Bills are _______ securities.

discount Signup and view all the answers

Match the following debt securities with their characteristics:

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

What is the primary market for Treasury Bills?

All of the above Signup and view all the answers

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

False Signup and view all the answers

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

Debt securities Signup and view all the answers

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

Short-term financing of working capital Signup and view all the answers

Certificate of Deposit (CD) is a negotiable instrument

True Signup and view all the answers

What is the term of Commercial Paper in the US?

Typically 90 days, but rarely exceeds 270 days 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

temporary Signup and view all the answers

Match the following money market instruments with their descriptions

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 Signup and view all the answers

Tri-partite repo is a type of repo agreement

True Signup and view all the answers

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

Repo rate Signup and view all the answers

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

To represent a financial obligation issued by a depository institution 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