Finance 300: Chapter 11, 12 & 13
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Discount Papers
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Treasury Bills- backed by full faith, Commercial Papers- short term corporate debt and Bankers' Acceptance- finances self liquidating transactions in non US entity
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Interest at Maturity
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CD- borrowing by banks from investors Federal Funds- borrowing by banks from banks Repo- borrowing financial assets as collaterol
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Book Entry:
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t-bills, no physical securities are issued, paperless, entry into bureau of publi debt
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Treasury Bills Schedule
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issued on auction bassis (4 week, 13 week, 26 week) on Mondays and Thursdays. Maturing on Thursdays
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Competitive Bid
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quoted on bank yield basis. Limited to 35% of one issue at auction. Goes through TAAPS
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Noncompetitive Bid
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noncompetitive or quantity bid, up to $5 million, can be submitted through treasury direct
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Winner's Curse
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curse of winner in any auction because price paid was highest bid price- which is probably higher than consensus value
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Call Market
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Not continuous, is an auction. Does not have order flow problems. CAnnot revise your own bid though
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On-the-run
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Most recently auctions treasury issue of any given maturity. More liquid, smaller bid-ask spreads.
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Off-the-run
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more recent auction and issue for same term to maturity
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Commercial Papers
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short term promissory note, fixed maturity, quoted on discount
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traditional commercial paper
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unsecured commercial paper, no specific collateral
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asset-backed commercial paper
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specific collateral, issued through special purpose vehicle (SPV)
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Ratings
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evaluation of firm's credit-worthiness from outside source. generally A (AAA,AA,A) is the best and D is the worst.
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Bank Lines of Credit
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eliminate risk issuer will be unable to sell new paper, this paper states the bank will pay off the issue when it comes due if issuer fails to do so. BANK INSURANCE
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rolling
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issuer sells new paper to generate funds to pay off maturing one.
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run
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corporation can no longer pay off maturity paper because it cannot sell a new issue
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directly placed paper
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sold directly to investor from issuer (investment companies, MMF, pension funds, etc)
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dealer placed paper
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underwritten by securities firm, who sells it to the market
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Buy back
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purchase of commercial paper by corporation or the corporations own paper
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Euro-commercial paper (ECP)
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paper issued through dealers in London. Available in uros, yen, guilders, australian, kiwi, sterlings, etc. -maturity is 35 days -doesn't need to be backed -many dealers
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Bankers Acceptance
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dates back to 12th century self liquidating, commercial transactions
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CD
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debt instruments, small denominations of them
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nonnegotiable CD
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held to maturity and subjet to monetary penalties if underlying deposit is withdrawn prior to maturity date
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negotiable CD
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negotiable and may be sold in secondary market
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money market CD
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CD with maturity of less than 1 year pay interest upon maturity
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term cd
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maturity of more than one year generally
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variable rate cd
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roll date, accrued is paid. varies
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retail market
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dealers do business with customers
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inside market
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dealers trade with each other
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Euro CD
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less liquid, riskier, sovereign risk
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sovereign risk
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risk changes social, political, and economic enviornment
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lock-up CD
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CDS issued in london understanding they will not be traded in secondary market
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Federal Funds
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at 12 federal reserve banks, borrow directly, entere into repo, members can borrow and lend to each other.
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LIBOR
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london inter bank offered rate- most creditworthy international bank
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Repo
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Like a pawn shop for securities, short term financing
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margin/\"haircut\"
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margin protects against default
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open repo
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continuing contract the therm of repo is unspecified
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specific issues market
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looking to reverse in a specific secruity
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matched book
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repurchases securities out for the same period then reverses them in
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mismatched book
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dealer who anticipates a decrease in interest rates for longer terms and borrows for shorter terms.
