Fixed Income Markets for Corporate Issuers

Question 1

What are “uncommitted lines of credit”?

Answer 1

Sources of bank credit that a bank can refuse to honor.

Uncommitted credit lines are made up to a certain principal amount for a predetermined maximum maturity.

Question 2

What are “committed (regular) lines of credit”?

Answer 2

Bank commitments to extend credit; the commitment is considered a short-term liability and is usually in effect for 364 days of the year.

Question 3

What are “revolving credit agreements”?

Answer 3

The most reliable form of short-term bank borrowing facilities; they are in effect for multiple years (e.g., three to five years) and can have optional medium-term loan features.

Also known as revolvers.

Question 4

What are secured loans?

Answer 4

Loans that are collateralized by an asset of the borrower.

Question 5

What is a “Factoring Arrangement”?

Answer 5

When a company sells its accounts receivable to a lender (known as a factor) that assumes responsibility for the credit-granting and collection process.

Question 6

What is “Commercial Paper”?

Answer 6

Short-term, negotiable, unsecured promissory note that represents a debt obligation of the issuer.

Question 7

What is “Bridge Financing”?

Answer 7

Interim financing that provides funds until permanent financing can be arranged.

Question 8

What is “Rollover Risk”?

Answer 8

The possibility that an issuer will be unable to refinance maturing (typically short-term) debt at economical terms or at all.

Question 9

What is a “Backup Line of Credit”?

Answer 9

A type of credit enhancement provided by a bank to an issuer of commercial paper to ensure that the issuer will have access to sufficient liquidity to repay maturing commercial paper if issuing new paper is not a viable option.

Question 10

What are “checking accounts”?

Answer 10

Bank deposits with no stated maturity available for transactional purposes that pay little or no interest.

Also known as a “demand deposit”.

Question 11

What are “operational deposits”?

Answer 11

Bank deposits generated by clearing, custody, and cash-management activities.

Question 12

What are “Saving Deposits”?

Answer 12

Bank deposits typically held for non-transactional purposes that often have a stated term.

Question 13

What is a “Certificate of Deposit” (CD)?

Answer 13

An instrument that represents a specified amount of funds on deposit with a bank for a specified maturity and interest rate.

CDs are issued by various denominations and can be negotiable or non-negotiable.

Question 14

What is an “Interbank Market”?

Answer 14

The market of loans and deposits between banks for maturities ranging from overnight to one year.

Question 15

What is a “Central Bank Funds Market”?

Answer 15

The market in which deposit-taking banks that have an excess reserve with their national central bank can lend money to banks that need funds for maturities ranging from overnight to one year.

Called the “Federal Funds Market” in the U.S.

Question 16

What is the “Central Bank Funds Rate”?

Answer 16

The interest rate at which central-bank funds are bought (borrowed) and sold (lent) for maturities ranging from overnight to one year.

Called the Federal Funds Rate in the US.

Question 17

What is “Asset-backed Commercial Paper”?

Answer 17

A secured form of CP issuance; loans or receivables are sold to a special purpose entity that issues the asset-backed commercial paper and makes interest and principal payments to investors from asset cash flows.

Question 18

What is a “Repurchase Agreement” (REPO)?

Answer 18

A form of collateralized loan involving the sale of a security with a simultaneous agreement by the seller to buy back that same security from the purchase at an agreed-on price and future date.

Question 19

What is a “Repurchase Price”?

Answer 19

The price at which the party who sold the (repurchase agreement) security at the inception of the repurchase agreement buys back the security from the cash-lending counterparty.

Question 20

What is the “Repurchase Date”?

Answer 20

The date when the party who sold the security at the inception of a repurchase agreement buys back the security from the cash-lending counterparty.

Question 21

What is a “Repo Rate”?

Answer 21

The interest rate on a repurchase agreement.

Question 22

What are “Term Repos”?

Answer 22

Repos with a maturity longer than 1 day.

Question 23

What is a “General Collateral Repo”?

Answer 23

Rather than involving a specific security, a repo that instead references a specific group of securities as eligible collateral (such as government bonds of a specific maturity).

Question 24

What is a “General collateral repo rate”?

Answer 24

The interest rate on a general collateral repo.

Question 25

What is a “Haircut”?

Answer 25

The difference between the market value of the security used as collateral and the value of the loan.

Also called “Repo Margin”.

Question 26

What is a “Master Repurchase Agreement”?

Answer 26

A legal document governing all repo trades between two parties.

Question 27

What is a “Reverse Repurchase Agreement”?

Answer 27

A repurchase agreement viewed from the perspective of the cash-lending counterparty.

Question 28

What is a “Triparty Repo”?

Answer 28

A repurchase agreement in which the transacting parties agree to use a third-party agent that provides access to a larger collateral pool and multiple counterparties, as well as valuation and safekeeping of assets.