Question Tag: Short-term securities

i) Bankers’ Acceptances
A banker’s acceptance is an instruments produced by a nonfinancial corporation
but in the name of a bank. It is document indicating that such-and-such bank shall
pay the face amount of the instrument at some future time. The bank accepts this
instrument, in effect acting as a guarantor. To be sure the bank does so because it
considers the writer to be credit-worthy. Bankers’ acceptances are generally used
to finance foreign trade, although they also arise when companies purchase goods
on credit or need to finance inventory. The maturity of acceptances ranges from
one to six months.

ii) Commercial Paper
Commercial paper refers to unsecured short-term promissory notes issued by
financial and nonfinancial corporations. Commercial paper has maturities of up to
270 days (the maximum allowed without SEC registration requirement). Dollar
volume for commercial paper exceeds the amount of any money market
instrument other than T-bills. It is typically issued by large, credit-worthy
corporations with unused lines of bank credit and therefore carries low default
risk.
Unlike some other types of money-market instruments, in which banks act as
intermediaries between buyers and sellers, commercial paper is issued directly by
well-established companies, as well as by financial institutions. Banks may act as
agents in the transaction, but they assume no principal position and are in no way
obligated with respect to repayment of the commercial paper. Companies may also
sell commercial paper through dealers who charge a fee and arrange for the
transfer of the funds from the lender to the borrower.

iii) Repos-Repurchase Agreements
Repurchase agreements—also known as repos or buybacks—are Treasury
securities that are purchased from a dealer with the agreement that they will be
sold back at a future date for a higher price. These agreements are the most liquid
of all money market investments, ranging from 24 hours to several months. In fact,
they are very similar to bank deposit accounts, and many corporations arrange for
their banks to transfer excess cash to such funds automatically.

iv) Term deposit
A term deposit is a cash investment held at a financial institution. Your money is
invested for an agreed rate of interest over a fixed amount of time, or term. Term
deposits can be invested into a bank, building society or credit union. When the
money is deposited, the customer understands that the money is there for the predetermined period which usually ranges from 1 month to 5 years and the interest
rate is guaranteed not to change for that nominated period of time. Typically, the
money can only be withdrawn at the end of the period – or earlier with a penalty
attached.
Term deposits are popular with investors who prefer capital security and a set
return as opposed to the fluctuations of, say, the share market. Many investors also
use term deposits as a part of their investment mix.

(4 points well explained @ 2 marks each = 8 marks)