Fii Exam
7.2
What are the characteristics of money market instruments? Why must a financial claim possess these characteristics to function as a money market instrument?
The three fundamental characteristics of money market instruments are: (a) low default risk, (b) short-term to maturity, and (c) high marketability. These characteristics give money market instruments their characteristic of being low risk.
7.3
What types of firms issue commercial paper? What are the characteristics critical to being able to issue commercial paper?
Large high-credit rated businesses issue commercial paper as an inexpensive source of shortterm direct borrowing. Commercial paper is an alternative to prime rate borrowing from a commercial bank and, typically, the rates are lower than rates charged by banks. Most investors, an in attempt to protect their principal, only want paper issued by firms highly rated by rating agencies. Rating agencies will quickly write down or remove their ratings for commercial paper if the financial conditions of a company decease. The number of companies issuing commercial paper in the economic boom of the late 1990s, shrunk considerably by 2001 as rating agencies pulled their commercial paper ratings.
7.4
Describe the steps in a typical banker’s acceptance transaction. Why is the banker’s acceptance form of financing ideal in foreign transactions?
See Figure 7.2, page 210. Banker’s acceptance provides two basic services: (a) financing, and (b) services and expertise specifically related to an international transaction. It is the latter that makes banker’s acceptances an attractive means of financial international transactions.
7.5
Explain how repo transactions provide short-term loans to banks. In what sense is a repo a collateralised loan?
The corporate treasurer purchases government securities for the amount of the investment from a bank for a specified time period. The business would have idle cash deposit balances that it
What are the characteristics of money market instruments? Why must a financial claim possess these characteristics to function as a money market instrument?
The three fundamental characteristics of money market instruments are: (a) low default risk, (b) short-term to maturity, and (c) high marketability. These characteristics give money market instruments their characteristic of being low risk.
7.3
What types of firms issue commercial paper? What are the characteristics critical to being able to issue commercial paper?
Large high-credit rated businesses issue commercial paper as an inexpensive source of shortterm direct borrowing. Commercial paper is an alternative to prime rate borrowing from a commercial bank and, typically, the rates are lower than rates charged by banks. Most investors, an in attempt to protect their principal, only want paper issued by firms highly rated by rating agencies. Rating agencies will quickly write down or remove their ratings for commercial paper if the financial conditions of a company decease. The number of companies issuing commercial paper in the economic boom of the late 1990s, shrunk considerably by 2001 as rating agencies pulled their commercial paper ratings.
7.4
Describe the steps in a typical banker’s acceptance transaction. Why is the banker’s acceptance form of financing ideal in foreign transactions?
See Figure 7.2, page 210. Banker’s acceptance provides two basic services: (a) financing, and (b) services and expertise specifically related to an international transaction. It is the latter that makes banker’s acceptances an attractive means of financial international transactions.
7.5
Explain how repo transactions provide short-term loans to banks. In what sense is a repo a collateralised loan?
The corporate treasurer purchases government securities for the amount of the investment from a bank for a specified time period. The business would have idle cash deposit balances that it