Module 8 Alternative Bonds Question 1 Solutions a. B is correct. A negotiable certificate of deposit (CD) allows any depositor (initial or subsequent) to sell the CD in the open market prior to maturity. A is incorrect because negotiable CDs are mostly available in large (not small) denominations. Large-denomination negotiable CDs are an important source of wholesale funds for banks, whereas small-denomination CDs are not. C is incorrect because a penalty is imposed if the depositor withdraws funds prior to maturity for non-negotiable (instead of negotiable) CDs. b. B is correct. A repurchase agreement (repo) can be viewed as a collateralized loan where the security sold and subsequently repurchased represents the collateral posted. A and C are incorrect because interbank deposits and negotiable certificates of deposit are unsecured deposits-that is, there is no collateral backing the deposit. c. A is correct. Repo margins vary by transaction and are negotiated bilaterally between the counterparties. d. A is correct. The repo margin (the difference between the market value of the underlying collateral and the value of the loan) is a function of the supply and demand conditions of the collateral. The repo margin is typically lower if the underlying collateral is in short supply or if there is a high demand for it. B and C are incorrect because the repo margin is usually higher (not lower) when the maturity of the repurchase agreement is long and when the credit risk associated with the underlying collateral is high. Question 2 What criteria must an issue meet to be classified as a green bond? Green Bonds are any type of bond instrument where the proceeds or an equivalent amount will be exclusively applied to finance or re-finance, in part or in full, new and/or existing eligible Green Projects (see Use of Proceeds section below) and which are aligned with the four core components of the GBP 1
Question 3 What is the opportunity cost of a discount on an invoice with terms of 5/7, n30? Opportunity Cost % discount × 100-% discount 365 days difference between early and late settlement 5.0 Opportunity Cost = 365 × 95.0 23 Opportunity cost = 0.8352 = 83.52% Question 4 What is the difference between recourse and non-recourse factoring? Recourse factoring is where the factoring institution has the right to approach the firm if the debtor fails to pay their debt. Non-recourse the factoring institution does not have the right to approach the firm. Questions 5 and 6 see solution in Canvas 2