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Book 3: Fixed Income
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What are the two ways for Nonfinancial Companies to secure Short-Term Funding?
External Loan Financing
External Security-Based Financing
Types of External Loan Financing
Lines of Credit
Bank Lines of Credit
agreements between borrowers and banks to draw funds as required
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
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
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
How much is the bank’s commitment fee?
typically 50 bp
Renewal Risk
the risk that banks won’t extend the credit line beyond the commitment period
Revolving Line of Credit
borrower has lots of freedom in terms drawing and paying down funds
essentially a credit card
Which line of credit is the most flexible in negotiating terms?
uncommitted
Which line of credit is the most reliable for borrowers?
revolving line of credit
Factoring
transfer of credit granting and collection rights to a third party at a discount from their value in exchange for immediate cash
What security is synonymous with External Security-Based Financing?
commercial paper
Commercial Paper
short-term, unsecured debt securities
What is the typical maturity of commercial paper?
less than three months
What is commercial paper used to fund typically?
WC
Rollover Risk
the risk that a company will not be able to sell CP to replace old CP
Back Lines of Credit
lenders agree to provide funds for payments on CP when it matures if needed
True or False: CP is sold at a discount
true in the united states
Eurocommercial Paper (ECP)
smaller, less liquid international market of CP
Bridge Financing
debt is that is temporary until permanent financing
Checking Acconuts
provides transactions services and immediate availability of funds, typically pays no interest
Operational Deposits
made by larger customers who require cash management, custody, and clearing services
Savings Deposits
stated term and interest rate
Certificate of Deposit
pays interest at a specified maturity of less than one year
Nonnegotiable CD
cannot be sold before maturity and early withdrawal incurs a penalty
Negotiable CD
can be sold in the open market before maturity as a means of early withdrawal
Where do CDs trade in the open market?
domestic bond market and eurobond market
Interbank Funds
funds that are loaned by one bank to another
What is the maturity of Interbank Funds
1 day to 1 year
Can interbank funds be unsecured?
yes
What is are Interbank Funds based on?
Secured Overnight Funding Rate (SOFR)
a MRR
How are Interbank Funds typically carried out?
repos
Central Bank Funds Market
borrowing from excess reserves of other banks
Which has a greater rate—the lender of last resort or the central bank fund rate?
lender of last resort
Who issues more CP—financial institutions or non financial institutions
nonfinancial institutions
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
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
Repo Rate
the implied interest rate between the initial purchase and the premium purchase
How do the initial purchases of the asset protect against the asset losing value?
initial margin
Initial Margin
borrower must post extra collateral above the loan amount
the cash loan is at a discount to the collateralized assets
Haircut
the discount applied to the MV of the collateral over the cash lent
cash is at the discount
Variation Margin
if the collateral falls below its value times the initial margin, the lender will request for more collateral
Overnight Repo
a repo for one day
Term repo
agreement covering a longer period
Which has a lower interest rate—bank loans or repos?
repos
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
General Collateral Repo
the collateral is a specific or general type of security
Master Repurchase Agreement
the contract of the repo
Special Trade
when a hedge fund or short seller specifies the security they wish to receive
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
Reverse Repo
short sellers intending to trade the collateral received in a repo
Netting Risk
being able to offset multiple obligations
Tri-Party Repos
a third-party intermediary arranges and administers repo transactions
How does Tri-Party Repos reduce credit risk?
they don’t
just acts as an arbiter in a sense
Bilateral Repos
repo agreement struck between two parties
Who faces for restrictive covenants—investment grade issuers or high yield issuers
high yield
Who’s issues are more standardized—investment grade issuers or high yield issuers
investment grade
reduces rollover risk
Who structures their debt to paid be paid off more early—investment grade issuers or high yield issuers
high yield