Los 50: Fixed Income Markets for Corporate Issuers Flashcards
(22 cards)
How do Non-financial companies raise external funds for investment in short term assets?
Loan Based Financing
Uncomitted Lines of Credit: A bank extens to offer credit for a principal amount, usally charging an MRR plus credit spread
Commited Line of Credit: A bank commits an offer of credit for a specifc time period that they cannot then refuse to lend
Revolving line of credit: Banks lend for a longer term, sometimes years
How do companies with weaker credit get access to these credit facilities?
They have to pledge assets as collateral
What is factoring?
Transferring Credit granting and collection of recievables to a lender, at a discount from face value
What is security based short term funding?
Instead of getting a loan to get, we will be issuing short term debt in the market
Especially large corporates
How do Large Corporates with High Credit Ratings issue debt?
They issue short term unsecured debt securities called Commercial Paper (with maturity of these less than 3 months)
What is CP used for?
This is used to fund working capital e.g. inventory, and funding recievables, or short term cash fluctuations
What is Bridge Financing?
Interim funding until more permanent funding e.g. bond issue can be readied
How does CP get paid?
CP get’s paid with a new issue as it gets rolled over (Leaves you susceptible to rollover risk)
How do investors manage rollover risk
Require the company that could have rollover risk to have a committed line of credit (which is a backup from the credit)
How is CP issued?
It’s issued as a pure discount security
If it’s issued outside the E
How do Banks fund their short term banking
Deposits
Interbank Funds
Central Bank Funds Market
What are types of commercial and retail deposits?
Checking Accounts: Provide Transaction Services and Immediate Availability of funds but no interests
Operational Deposits: Made by Large Customers who require cash management, custody and clearing
Saving Deposits: Holdings Money, but for non transactional purposes
What is a Certificate of Deposit?
This is a savings account that have a pre-determined maturity and interest rate.
They have Maturities shorter than one year
What are the types of certificates of deposit?
Non-negotiables CDs - Cannot be sold before maturity, and early withdrawal of funds incurs a penalty
Negotiable - can be sold in the open market before maturity, so the original depositer of the money can sell on the CD
All have small denomination CDs (retail investors), or large denomination CDs (larger institutional funds)
Where are CD sold?
What is the interbank market?
- Financial institutions loan unsecured money, for a year or less.
- Most of them are overnight borrowing - because their customers want to do transactions, so banks borrow to do the transactions.
- It is based on the MRR
What is the Central bank funds rate?
Banks with excess reserves held at the central funds, lend to other banks at the central bank funds rate which is influenced by monetary policy
Or you can borrow from the Central Bank itself called Discount Window Lending (where you have to post collateral)
What is secured borrowing in the interbank market?
It is usually done in repurchase markets?
What is commercial Paper for Banks
Issuing Unsecured notes to meet short-term borrowing needs
FIs issue 60% of CPs
What is Asset Backed Commercial Paper
Banks issued secured form of commerical paper, where Interest and Principal paid, will come from cash flows from assets that banks have
