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Chapter 22 – Bank Obligations

Chapter 22 – Bank Obligations. Banks as sellers of debt instruments Raise funds for Bank Operations Long-Term Debt Bonds Short-Term Debt (Money Market) Large CDs Banker’s Acceptance Federal Funds Four Bank Categories Money Centers, Regional, Japanese, Yankee.

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Chapter 22 – Bank Obligations

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  1. Chapter 22 – Bank Obligations • Banks as sellers of debt instruments • Raise funds for Bank Operations • Long-Term Debt • Bonds • Short-Term Debt (Money Market) • Large CDs • Banker’s Acceptance • Federal Funds • Four Bank Categories • Money Centers, Regional, Japanese, Yankee

  2. Chapter 22 – Bank Obligations • Large Denominated CDs – Negotiable • Introduced in early 60s • Way to raise funds for bank operations • Usually $1 million or more (face value) • Merrill Lynch “offers small CDs” and offers a secondary market • Face Value less than $100,000 • Stands ready to buy back small CDs – liquidity available • Non-negotiable – investor must wait entire period with no secondary market

  3. Chapter 22 – Bank Obligations • Types of CDs • “Regular” CDs – issued in U.S. by U.S. Bank • Eurodollar CDs – issued outside the U.S. by a U.S. Bank and denominated in U.S. dollars • Yankee CDs – issued in the U.S. by a foreign bank and denominated in U.S. dollars • Thrift CDs – issued by Savings and Loan Associations or Savings Banks • Term CDs have maturity in excess of 1 year • Yields • Credit Rating, maturity, supply and demand for $

  4. Chapter 22 – Bank Obligations • Federal Funds • The Federal Banking System of the U.S. has 12 Districts and a Federal Reserve Bank in each District (San Francisco, CA is ours) • Commercial Banks (demand deposit institutions) and Thrifts must keep a balance of funds at their Federal Reserve Bank • Based on average demand deposits over past 14 days • No interest earned on the funds

  5. Chapter 22 – Bank Obligations • Underfunded and Overfunded Banks • Banks can loan funds to each other to bring the balance up to requirement for underfunded banks and • Overfunded banks can earn interest on their funds in excess of the minimum required • The rate on these inter-bank loans is the Federal Funds Rate • Short Period on Loans – Usually Overnight • Bank Trading Desks deal directly with each other to arrange the loan • Money Center Banks typical borrower and Regional Banks typical lenders

  6. Chapter 22 – Bank Obligations • Bankers’ Acceptance (pre-dated check) • To facilitate commercial trade • Bank creates a document that promises payment by their client for goods to be received from a manufacturer • Document sent to Manufacturer’s Bank • Bank accepts document and notifies Manufacturer to ship products • Manufacturer can now take Present Value of future payment from their banker or wait

  7. Chapter 22 – Bank Obligations • Banker’s Acceptance Continued • Manufacturer’s bank can request Present Value of the future payment now in exchange for Banker’s Acceptance • Originating bank can hold Banker’s Acceptance in Portfolio or sell in market • Client collects shipped goods • Client makes good on promise to pay and provides payment to bank • Client sells or uses goods purchased through Banker’s Acceptance

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