Chapter 6

Question 1

Who are the participants of the money market?

Answer 1

Banks, SARB, Government, Investors, Corporations

Question 2

Who are the ultimate borrowers in the money market?

Answer 2

Government and the corporate sectors

Question 3

Who are the investors in the money market?

Answer 3

Insurance companies, money market funds, collective investment schemes, Public Investment Corporation, Corporation for Public Deposits

Question 4

For what purposes does the SARB issue debentures?

Answer 4

For monetary purposes

Question 5

For what purposes does the SARB buy money market securities?

Answer 5

To provide liquidity to the banks (again for monetary purposes)

Question 6

What is a commercial paper?

Answer 6

A fixed-maturity short-term unsecured single-name negotiable debt

PS: Single-name means issued by a single entity

Question 7

What is a promissory note?

Answer 7

A written promise made by the issuer to the investor to repay debt under specific terms.

Question 8

In what denominations are promissory notes issued?

Answer 8

R100 000 and R1 million

Question 9

What are typical maturities of promissory notes?

Answer 9

3, 6, 9 and 12 months and every 6 months thereafter up to 60 months

Question 10

What are call bonds?

Answer 10

A loan which may be terminated/called at any time

Question 11

What are the denominations of a call bond?

Answer 11

R1 million, R5 million and R10 million

Question 12

What is the typical maturities of call bonds

Answer 12

They are repayable on demand

Question 13

Define the money market

Answer 13

The money market is a part of the financial markets for the issuing, buying and selling of debt instruments with maturities from 1 day to 1 year. The most common maturity is 3 months

Question 14

Where are money market instruments traded?

Answer 14

Instruments are not traded on a formal exchange but OTC

Question 15

What is the difference between the primary and secondary market?

Answer 15

The primary market is for the issue of new instruments

The secondary market is for the trading of already issued instruments

Question 16

Why are the central banks key participants in the money market?

Answer 16

Because central banks control the supply of reserves available to banks through repo agreements or the outright purchase and sale of money market instruments.

Question 17

What is a Bankers’ acceptance?

Answer 17

It is a bill of exchange drawn on and accepted by a bank.

Question 18

What is the maturity of a Bankers’ acceptances?

Answer 18

Usually 90 days but can range from 30 - 270 days

Question 19

What is the advantages of Bankers’ acceptances?

Answer 19

Issuer: Simplicity, Cheaper form of financing for the company than a overdraft.
Investor: Relatively high-quality investments. Liquid secondary market

Question 20

What is the disadvantages of Bankers’ acceptances?

Answer 20

Issuer: Bank line of credit is required. More expensive than borrowing using commercial paper.
Investor: There is some form of credit risk. Large denominations

Question 21

In what denominations are Bankers’ acceptances usually issued?

Answer 21

R100 000 and R1 million

Question 22

What is a promissory note?

Answer 22

A written promise made by the issuer to the investor to repay a loan under specific terms.

Question 23

What denominations are promissory notes usually issued in?

Answer 23

They are usually issued in multiples of R100 000 and R1 million

Question 24

What is the advantages of promissory notes?

Answer 24

Issuer: Cheap form of financing. Maturity can be tailored

Investor: Wide range of maturities. Liquid secondary market

Question 25

What are the disadvantages of promissory notes?

Answer 25

Issuer: If its not underwritten by a bank, the issuer may not be able to place all the paper with investors and raise the funds required. (Issuer might not be able to sell all the promissory notes) Investor: Credit risk

Question 26

What is a call bond?

Answer 26

A loan which may be terminated (called) at any time

Question 27

What denominations are call bonds usually issued in?

Answer 27

Multiples of R1 million, R5 million and R10 million

Question 28

What are the advantages of call bonds?

Answer 28

Issuer: It is a flexible form of financing Investor: Immediately redeemable

Question 29

What are the disadvantages of call bonds?

Answer 29

Issuer: Expensive Investor: Credit risk

Question 30

What are negotiable certificates of deposit (NCD)?

Answer 30

It is a negotiable fixed deposit receipt issued by a bank for a specified period at a stated rate.

Question 31

In what denominations are NCDs usually issued?

Answer 31

R1 million

Question 32

What is the typical maturity range of NCDs?

Answer 32

<1-5 years

Question 33

What are the advantages of NCDs?

Answer 33

Issuer: Cheaper than instruments in the inter-bank market Investor: Maturities can be tailored

Question 34

What are the disadvantages of NCDs?

Answer 34

Issuer: More expensive than retail deposits Investor: Large denominations. Even though banks are considered to be issuers of good quality there is still credit risk

Question 35

What are treasury bills?

Answer 35

It is a short-term debt obligation from the government payable on a certain future date

Question 36

In what denominations are treasury bills usually issued?

Answer 36

R10 000 and for amounts not less than R100 000

Question 37

What is a typical maturity range for T bills?

Answer 37

91 days, 182 days, 273 days, 364 days

Question 38

What are the advantages of treasury bills?

Answer 38

Issuer: Main vehicle for central bank accommodation policy Investor: Free of domestic credit risk.

Question 39

What are the disadvantages of T Bills?

Answer 39

Investor: They have a lower yield due to lower risk

Question 40

What are repurchase agreements?

Answer 40

It is an agreement under which funds are borrowed through the sale of short-term securities with a commitment by the seller to buy the security back at a specific price and date

Question 41

What are the advantages of Repurchase agreements?

Answer 41

Issuer: Can be used to borrow short-term funds Investor: If the collateral is treasury bills, investors earn a risk-free rate higher than the treasury bill without sacrificing liquidity

Question 42

What are the disadvantages of repurchase agreements?

Answer 42

Issuer: Investors may require credit risk mitigation Investor: Credit risk ( the amount of the collateral is less than the amount of the load )

Question 43

What are reserve bank debentures?

Answer 43

It is an unsecured fixed interest certificate of debt issued by the SARB

Question 44

What denominations are reserve bank debentures usually issued in?

Answer 44

They are usually issued in multiples of R 1 million

Question 45

What are the usual maturities of reserve bank debentures?

Answer 45

7, 14, 28, 56 days or at the discretion of SARB