18 Questions
What is the primary use of negotiable Bank Certificates of Deposit (CDs) as mentioned in the text?
Funding loans for corporations
Which financial institution issued the first large CD in 1961, according to the text?
Citibank
What attracts investors to Commercial Paper (CP) according to the text?
Market interest rates
What is a characteristic of Commercial Paper (CP) mentioned in the text?
Maturity in no more than 270 days
How do nonbank corporations primarily use Commercial Paper (CP) based on the text?
To finance loans to customers
Why do firms rely on CP dealers mentioned in the text?
To match up buyers and sellers of CP
What does the primary market (PM) involve?
Selling securities to initial buyers publicly
How does the secondary market (SM) differ from the primary market?
It allows for the reselling of previously issued securities
What is one key function of the secondary market (SM)?
Guaranteeing liquidity for financial instruments
Who typically receives money in exchange in the secondary market?
Person who sold the security
What is one characteristic of the bond markets compared to stock markets?
Higher trading volume in bond markets
What is the role of an investment bank in the primary market (PM)?
Underwriting and guaranteeing prices for new securities
What is the main focus when determining the price of a security that an issuing firm sells in the secondary market?
Setting a price higher than the primary market price
What distinguishes over-the-counter (OTC) markets from organized exchanges in terms of trading?
Decentralized market structure
How do investors in the primary market typically acquire securities?
Directly from the issuers
What makes financial instruments more liquid and easier to sell according to the text?
Higher security prices in the secondary market
What is the key advantage of having securities listed on organized exchanges?
Centralized location for trading
In which market do investors purchase securities from other investors, as stated in the text?
Secondary market
Study Notes
Negotiable CDs
- Negotiable CDs are CDs sold in secondary markets, providing a source of funds for commercial banks from corporations, money market mutual funds, and government agencies.
- The amount outstanding of Negotiable Bank Certificates of Deposit is $2.4 trillion.
- Citibank issued the first large CD in 1961 to counter declining demand deposits.
Commercial Paper (CP)
- Commercial Paper (CP) is a short-term debt instrument issued by large corporations to finance loans to customers.
- CP is an unsecured promissory note with a maturity period of no more than 270 days.
- Non-bank corporations, such as General Motors Acceptance Corporation (GMAC), use CP to borrow money and make loans to consumers.
- There are around 600-800 firms issuing CP, depending on interest rates, and 30 CP dealers that match up buyers and sellers.
Primary and Secondary Markets
- Primary market (PM) refers to the sale of new issues of a security (bond or stock) to initial buyers by the corporation or government.
- Secondary market (SM) refers to the resale of previously issued securities.
- Investment banks underwrite securities, guaranteeing their price, and sell them to the public in the primary market.
- Secondary markets, such as the New York Stock Exchange (NYSE) and NASDAQ, provide a platform for the resale of securities.
Functions of Secondary Markets
- Secondary markets make financial instruments more liquid, allowing easier sale of securities to raise cash.
- Secondary markets determine the price of the security, influencing the issuing firm's ability to sell securities in the primary market.
- Conditions in the secondary market are more relevant to corporations issuing securities.
Exchanges and Over-the-Counter (OTC) Markets
- Secondary markets can be organized into two types: exchanges and over-the-counter (OTC) markets.
- Exchanges are centralized markets with a single location, such as the NYSE or CBOT.
- OTC markets are decentralized markets where non-listed securities are traded among participants.
Learn about the use and importance of Negotiable Bank Certificates of Deposit (CDs) in the financial market, including their role as a source of funds for commercial banks. Explore the history of CDs, their growth over the years, and their significance for corporations, money market mutual funds, and government agencies.
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