Chapter 03

Question 1

Money mkt deposit accts (MMDAs): key features

Answer 1

• liquid balances
• covered by deposit insurance
• max 6 xfers/ pre-auth. debits a month per month (after 6, FI may convert to DDA or charge fees)
• unlimited in-person teller transactions

Question 2

Bank Identification Code (BIC)

Answer 2

SWIFT is most common

Question 3

Int’nl Bank Acct Number (IBAN)

Answer 3

mostly europe, middle east, Caribbean

Question 4

Bank/account identification

Answer 4

varies between banks and countries (no universal standard, although some have been set– none 100% globally accepted)

Question 5

Bank/account identification

Answer 5

varies between banks and countries (no universal standard, although some have been set– none 100% globally accepted)

Question 6

Commercial paper (CP)

Answer 6

• unsecured, discounted, ST promissory notes, issued by cos. or commercial bank hold cos. - credit rating agencies rate for default (influences interest rate)

Question 7

municipal securities (“munis”)

Answer 7

• bonds/notes issued by city, county, or state govt. entities (e.g. sub-soverign securities) - generally interest expense has some income tax exemption benefits - credit rating agencies rate for default (influences interest rate)

Question 8

municipal securities (“munis”)

Answer 8

• bonds/notes issued by city, county, or state govt. entities (e.g. sub-soverign securities) - generally interest expense has some income tax exemption benefits - credit rating agencies rate for default (influences interest rate)

Question 9

Examples of “fiduciary svcs” FIs could provide to corp customers

Answer 9

1. Est./maintain empl. pension or benefit plans
2. Trustee for bond/stock issuance
3. Monitor bond indenture compliance
4. Transfer agent (records stock/bond purchases/sales)
5. Registrar (maintain current stock/bondholders list for dividend/interest pmt. remittance).
6. Paying agent (FI rcvs. $ from stocks/bonds issuer to pay dividends (stockholders) and principle/int. (bondholders)
7. Custody svcs (e.g. securities safekeeping; buy/ sell/ rcv/ deliver, per custody agreement)

Question 10

Services typically provided by investment banks…

Answer 10

typically through investment banking arm of commercial bank’s holdco…

• securities underwriting
• facilitate M and A, divestitures, corp reorg
• broker/fin. advise (institutional clients)

Question 11

Securities “underwriting”

Answer 11

purchase all/part of securities block issued by a corp.

• investment bank = intermediary btwn. issuer and investing public)
• investment banking syndicate = invest. bank invites other IBs in the invest. underwriting process (shares risk)
• (lead bank = “lead underwriter”)

Question 12

2 main types of securities underwriting

Answer 12

1. full- invest. bank/syndicate owns entire issuance (all risk)

• price risk - not sell entire bk of securities @ anticipated mkt price
• marketability risk - not all securities will sell.

2. best-efforts- invest. bank for advises firm, markets the issuance for corp, for a fee (i.e. invest. bank does NOT underwrite– just helps place shares through group/ brokerage firms.)

Question 13

Securities “distribution” by an investment bank

Answer 13

sale of the securities

• full-svc invest. banks offer both:
  
  • underwrite/ distrib. (“sell side of house”)
  • invest. advisory/ mgmt (“buy side of house”)
• keep separate – not share material non-public info (MNPI), even internally

Question 14

Brokerage firms: what do they specialize in? two types of brokerage firms?

Answer 14

sale of securities by executing distribution of an investment bank’s intermediation function (e.g. IPO or new securities/debt from an already public firm) two types:

1. institutional brokers - clients mostly LRG. institutions (hedge funds, large corps)
2. retail brokers - typically smaller invest. accts and transactions for individuals
   
   • discount brokerages - let investors trade at lower prices w/ little/no advice.
   • full svc - plus analysis/advice (fees)

Question 15

Captive finance company

Answer 15

type of industrial bank (special purp. FI)

subsidiary of lrg. industrial corp, solely finances customers’ purchases of corp’s products

parent extends credit to customers w/ min. risk

Question 16

Special purpose fin institutions

Answer 16

1. Factor - a nonbank financial intermediary; purchases AR at a discount (provides corp w/ ST financing) 2. Industrial bank - a FI w/ limited scope (sells “investment shares,” accepts deposits, installment loans); no cking accts, locally chartered 3. Insurance co - significant investors in commercial real estate and bond mkt; they now compete w/ banks for ST/med-term loans, mortgages, leases, CDs, etc.) 4. Asset-based lenders - issues loans secured by borrower’s pledged collateral (usually inventory, AR); determines “borrowing base” = eligible collateral x advance rate%; monitors collateral value and adjusts available credit accordingly

Question 17

define the role of a bank acting as a registrar

Answer 17

compiling lists of current stockholders and bondholders for the purpose of remitting dividend and interest payments