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Chapter 2 (part II) (Short- term funding (Wholesale funding (Certificate…

- - - - Interbank line of credit (interbank deposit is unsecured)
    - - Negotiate CD holders can sell the CD in an open market prior to maturity date
      - Non- negotiate CD holder will receive deposit and interest at maturity (withdrawal penalty is imposed)
      - specified amount of funds on deposit for a specified maturity and interest rate
      - maturities are mostly shorter than one year
  - - - Repo margin = market value of the collateral - purchase price by the buyer (value of the loan)
      - worry more about risk on the seller side
    - - The higher quality of collateral => the lower the repo margin
      - The higher the creditworthiness of the counterparty => the lower the repo margin
      - Repo margin is lower if the collateral is in short supply/ high demand
      - The longer the repurchase agreement => the higher the repo margin (value of the loan is low)
- - - - less liquid to trade than sovereign bonds
      - exposed to default risk of the issuing firms
    - - US: discount basis. Investors receive the interest by getting a discount on the par value when the commercial paper is issued (trading at discount)
      - Euro: interest- bearing basis. Investors receive interest by getting an additional payment to the par value (par value + interest at maturity)
      - Investors will receive higher proportional profit when using USCP (example: exhibit 9 p.75)
  - - - short- term: maturity of 5 years or less
      - intermediate- term: 5- 12 years
      - long- term: maturity longer than 12 years
    - - Term maturity: bond's notional principal is paid off in a lump sum at maturity
      - Sinking fund: bond issue being paid off every year (bonds retired are designated by a random drawing?)
      - Serial maturity: maturity dates spread out during a bond's life (a stated number of bonds mature and are paid off each year before maturity)
    - - callable
      - putable: give the bondholders the rights to sell the bonds back to issuers prior to maturity (risk that the issuer needs to issue a new bond)
      - convertible