Reading 50: Fixed-Income Markets for Corporate Issuers

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Book 3: Fixed Income

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59 Terms

1
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What are the two ways for Nonfinancial Companies to secure Short-Term Funding?

External Loan Financing

External Security-Based Financing

2
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Types of External Loan Financing

Lines of Credit

3
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Bank Lines of Credit

agreements between borrowers and banks to draw funds as required

4
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Uncommitted Line of Credit

bank offers a line of credit for a principal amount and charges a floating MRR + fixed credit spread

the bank can refuse to lend if circumstances change

5
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True or False: an uncommitted line of credit can only be offered secured.

false

an uncommitted line can be unsecured if the borrower has a strong cash balance with the bank

6
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Committed Line of Credit

same as an uncommitted line of credit but the bank has to lend when the borrower draws down funds

there is an extra commitment fee for the bank’s extra risk

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How much is the bank’s commitment fee?

typically 50 bp

8
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Renewal Risk

the risk that banks won’t extend the credit line beyond the commitment period

9
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Revolving Line of Credit

borrower has lots of freedom in terms drawing and paying down funds

essentially a credit card

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Which line of credit is the most flexible in negotiating terms?

uncommitted

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Which line of credit is the most reliable for borrowers?

revolving line of credit

12
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Factoring

transfer of credit granting and collection rights to a third party at a discount from their value in exchange for immediate cash

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What security is synonymous with External Security-Based Financing?

commercial paper

14
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Commercial Paper

short-term, unsecured debt securities

15
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What is the typical maturity of commercial paper?

less than three months

16
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What is commercial paper used to fund typically?

WC

17
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Rollover Risk

the risk that a company will not be able to sell CP to replace old CP

18
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Back Lines of Credit

lenders agree to provide funds for payments on CP when it matures if needed

19
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True or False: CP is sold at a discount

true in the united states

20
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Eurocommercial Paper (ECP)

smaller, less liquid international market of CP

21
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Bridge Financing

debt is that is temporary until permanent financing

22
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Checking Acconuts

provides transactions services and immediate availability of funds, typically pays no interest

23
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Operational Deposits

made by larger customers who require cash management, custody, and clearing services

24
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Savings Deposits

stated term and interest rate

25
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Certificate of Deposit

pays interest at a specified maturity of less than one year

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Nonnegotiable CD

cannot be sold before maturity and early withdrawal incurs a penalty

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Negotiable CD

can be sold in the open market before maturity as a means of early withdrawal

28
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Where do CDs trade in the open market?

domestic bond market and eurobond market

29
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Interbank Funds

funds that are loaned by one bank to another

30
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What is the maturity of Interbank Funds

1 day to 1 year

31
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Can interbank funds be unsecured?

yes

32
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What is are Interbank Funds based on?

Secured Overnight Funding Rate (SOFR)

a MRR

33
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How are Interbank Funds typically carried out?

repos

34
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Central Bank Funds Market

borrowing from excess reserves of other banks

35
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Which has a greater rate—the lender of last resort or the central bank fund rate?

lender of last resort

36
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Who issues more CP—financial institutions or non financial institutions

nonfinancial institutions

37
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How does ABCP work?

financial institution transfers collateral, short-term loans, to an SPE in return for cash and then the SPE sells the ABCP to investors

38
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Repurchase Agreement

an arrangement by which one party sells a security to a counterparty with a commitment to buy it back at a later date at prespecified higher price

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Repo Rate

the implied interest rate between the initial purchase and the premium purchase

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How do the initial purchases of the asset protect against the asset losing value?

initial margin

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Initial Margin

borrower must post extra collateral above the loan amount

the cash loan is at a discount to the collateralized assets

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Haircut

the discount applied to the MV of the collateral over the cash lent

cash is at the discount

43
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Variation Margin

if the collateral falls below its value times the initial margin, the lender will request for more collateral

44
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Overnight Repo

a repo for one day

45
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Term repo

agreement covering a longer period

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Which has a lower interest rate—bank loans or repos?

repos

47
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How actually retains the rights of the asset collateralized in a repo?

the cash borrower

check if this is true, GPT says it’s borrower of the asset

48
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General Collateral Repo

the collateral is a specific or general type of security

49
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Master Repurchase Agreement

the contract of the repo

50
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Special Trade

when a hedge fund or short seller specifies the security they wish to receive

51
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What are the main uses of repos

Financial intermediaries financing securities held in their trading activities

banks earning the repo rate

central banks enacting monetary policy

short sellers borrower securities they intend to short

52
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Reverse Repo

short sellers intending to trade the collateral received in a repo

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Netting Risk

being able to offset multiple obligations

54
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Tri-Party Repos

a third-party intermediary arranges and administers repo transactions

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How does Tri-Party Repos reduce credit risk?

they don’t

just acts as an arbiter in a sense

56
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Bilateral Repos

repo agreement struck between two parties

57
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Who faces for restrictive covenants—investment grade issuers or high yield issuers

high yield

58
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Who’s issues are more standardized—investment grade issuers or high yield issuers

investment grade

reduces rollover risk

59
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Who structures their debt to paid be paid off more early—investment grade issuers or high yield issuers

high yield