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Overview of the Financial System > III. Financial Market Instruments > Flashcards

III. Financial Market Instruments Flashcards

1
Q

What are the money market instruments (stated in the module)?

A
  • U.S. Treasury Bills
  • Negotiable Bank Certificates of Deposit (CD)
  • Commercial Paper
  • Banker Acceptances
  • Repurchase Agreements
  • Federal (Fed) Funds
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2
Q

What are the capital market instruments (stated in the module)?

A
  • stocks
  • mortgages
  • mortgage-backed securities
  • corporate bonds
  • U.S. government securities
  • U.S. government agency securities
  • State and local government bonds
  • Consumer and bank commercial loans
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3
Q

_______ are short-term debt instruments of the U.S. government issued in 3-, 6-, and 12-month maturities to finance the federal government.

A

Treasury Bills or t-bills

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4
Q

How does a treasury bill differ from other types of investments?

A

they do not pay interest in a traditional way.

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5
Q

When and how will the interest in t-bill be acquired?

A

The interest will be received when the t-bill matures during the time he/she received its face value.

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6
Q

What is the known benefit of t-bills?

A

when you purchase one, you know exactly how much you will earn over the life of the investment.

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7
Q

______ is a situation in which the party issuing the debt instrument is unable to make interest payments or pay off the amount owed when the instrument matures.

A

default

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7
Q

T or F. Commercial paper is the most liquid of all the money market instruments as they are the most actively traded and also considered the safest because there is no possibility of default.

A

False. t-bills

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8
Q

The federal government is always able to meet its debt obligations because it can ______ or _____ to pay off its debt.

A

raise taxes; issue currency (paper money or coins)

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9
Q

T or F. Small amounts of treasury bills are held by banks, while the majority of them are held by households, corporations, and other financial intermediaries.

A

False. other way around

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10
Q

________ is a debt instrument sold by banks to depositors.

A

Certificate of deposit (CD)

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11
Q

_________ are fixed deposit receipts that can be sold in the secondary market.

A

ncds

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11
Q

T or F. NCDs are unstructured so that the security holder can sell them to a third party.

A

False. Unlike other CDs, this type is structured.

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12
Q

T or F. Most banks that offer negotiable CDs require that the security has a minimum face value which is generally $100,000 USD.

A

True

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13
Q

The terms related to NCDs normally provide for interest payments to be applied every ________, up to the point that it reaches maturity.

A

6 months

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14
Q

Who are the most common buyers of this type of CD, which may use the asset as a means of generating some amount of additional return?

A

Large institutions

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15
Q

The bank issuing a negotiable certificate of deposit guarantees the security and is likely to arrange for its sale on the ______.

A

secondary market.

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16
Q

What strategy should a new CD owner do to be able to enjoy a decent return in a relatively short amount of time?

A

Acquire the CD when it has no more than a year left to reach its fully maturity.

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17
Q

T or F. Since a negotiable certificate of deposit can only be sold once, it is best for an owner to offer the asset on a secondary market to generate quick cash in.

A

False. it can be sold repeatedly hence open for selling in a secondary market.

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18
Q

T or F. Before 1961, CDs were non-negotiable - they could not be sold to someone else but they could be redeemed from the bank before maturity without paying penalty.

A

False. they could not be redeemed from the bank before maturity without paying a penalty.

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19
Q

What did Citibank do in 1961 to make CDs more liquid and more attractive to investors?

A

They introduced the first negotiable CD in large denominations (over $100,000) that could be resold in the secondary market.

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20
Q

CDs are an extremely important source of funds for ____________________.

A

commercial banks, corporations, money market mutual funds, charitable institutions, and government agencies.

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21
Q

___________ is a short-term debt instrument issued by large banks and well-known corporations.

A

Commercial Paper

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22
Q

A promise of payment similar to a check

A

bank draft

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22
Q

_____ is a bank draft issued by a firm, payable at some future date, and guaranteed for a fee by the bank that stamps it “accepted”.

A

Bankers Acceptances

23
Q

What is the advantage to the firm of a banker’s acceptances?

A

the draft is more likely to be accepted when purchasing goods abroad because the foreign exporter knows that even if the company purchasing the goods goes bankrupt, the bank draft will still be paid off.

23
Q

These ______ are often resold in the secondary market at a discount and so are similar in function to treasury bills.

A

“accepted” drafts

24
Q

What benefit will the new owner of a banker’s acceptance be if it is traded as an asset?

A

If traded as an asset, it is usually sol at a slight discount from the face value of the document. This allows the new owner to make a modest profit when the instrument is presented for payment in the appointed date.

24
Q

A financial instrument used for acquiring a short-term loan. It also involves the sale and repurchase of an asset o security.

A

Repurchase agreement

24
Q

T or F. Repurchase agreement functions a great deal like any cash loan transaction but adds on the basic approach that is involved with executing a forward contract.

A

True

25
Q

What is called the interest rate of the loans under the Federal Market which is a closely watched barometer of the tightness of credit market conditions in the banking system and the stance of monetary policy?

A

Fed Funds Rate

25
Q

Under the repurchase agreements, the _________ identified in the dual transaction also functions as the maturity date of the loan.

A

settlement date

25
Q

Y or N. Is it possible to structure a repurchase agreement as an overnight transaction, effectively completing the entire cycle within a 24-hour period?

A

Yes

26
Q

What are the usual types of security (collateral) used for repo agreements?

A

T-bills or any other government-issued bonds.

26
Q

Typically overnight loans between banks of their deposits at the Federal Reserve.

A

Federal (Fed) Funds

27
Q

T or F. Federal funds are loans made by the federal government/federal reserve.

A

False. These loans are not made by the federal government/Federal Reserve but rather by banks to other banks.

28
Q

What is one reason why a bank might borrow in the federal funds market?

A

It might find it does not have enough deposits at the Fed to meet the amount required by regulators.

29
Q

________ are equity claims on the net income and assets of a corporation.

A

Stocks

30
Q

The amount of new stock issues in any given year is typically quite small, less than ___ of the total value of shares outstanding.

A

1%

30
Q

______ are loans to household firms to purchase housing, land, or other real structures, where the structure or land serves as collateral for the loans.

A

Mortgages

30
Q

T or F. The mortgage market is the smallest debt market in the United States.

A

False. It is the biggest debt market, with the amount of residential mortgages outstanding more than quadruple the amount of commercial and farm mortgages.

31
Q

what type of mortgage is used to purchase residential housing?

A

residential mortgage

31
Q

Who are the primary lenders in the residential mortgage market?

A

Savings and loan associations and mutual savings banks

31
Q

The majority of commercial and farm mortgages are made by ______?

A

commercial banks and life insurance companies.

32
Q

What are the three government agencies under the Federal government that play an active role in the mortgage market?

A
  • Federal National Mortgage Association (FNMA or Fannie Mae)
  • Government National Mortgage Association (GNMA or Ginnie Mae)
  • Federal Home Loan Mortgage Corporation (FHMLC or Freddie Mac)
32
Q

Why are mortgages not sufficient enough to trade as securities in the secondary market?

A

Mortgages have different terms and interest rates hence, not sufficiently liquid to trade as securities.

33
Q

GNMA developed the concept of ____________ through a program that guarantees interest and principal payments on bundles of standardized mortgages.

A

pass-through mortgage-backed security

33
Q

____________ are issued not only by the government agencies but also by private financial institutions.

A

mortgage-backed security

34
Q

________ are long-term bonds issued by corporations with very strong credit ratings.

A

Corporate bonds

34
Q

A type of corporate bond that has an additional feature of allowing the holder to convert them into a specified number of shares of stock at any time up to the maturity date.

A

Convertible bonds

35
Q

Who are the principal buyers of corporate bonds?

A
  • insurance companies
  • other large holders: pension funds and households.
36
Q

T or F. The U.S. Government securities are the most widely traded bonds in the United States, and they are the most liquid security traded in the money market.

A

False. It is the most liquid security traded in the capital market.

36
Q

These are long-term bonds issued by various governments to finance such items as mortgages, farm loans, or power-generating equipment.

A

U.S. Government Agency Securities

36
Q

These long-term debt instruments are issued by the U.S. treasury to finance the deficits of the federal government.

A

The U.S. Government Securities

37
Q

Who are the government agencies that issue the U.S. Government Agency Securities?

A

Ginnie Mae, the Federal Farm Credit Bank, and the Tennessee Valley Authority

37
Q

Also known as municipal bonds, are long-term debt instruments issued to finance expenditures on schools, roads, and other large programs.

A

State and local bonds

38
Q

What is the important feature of the state and local bond?

A

their interest payments are exempt from federal income tax and generally from state taxes in the issuing state.

39
Q

What role do the commercial banks play in the state and local government bonds?

A

With their high-income tax rate, they are the biggest buyers of these securities, owning over half the total amount.

39
Q

Rank the biggest buyers of state and local government bonds

A
  1. commercial banks
  2. wealthy individuals
  3. insurance companies
39
Q

These are loans to consumers and businesses made principally by banks but, in the case of consumer loans, also by finance companies.

A

Consumer and bank commercial loans

40
Q

T or F. There are no secondary markets in the Consumer and bank commercial loans, which makes them the least liquid of the capital market instruments.

A

True.

Overview of the Financial System (7 decks)

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