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Introduction

Definition

Securities that can be converted into cash quickly at a reasonable price


are called marketable securities.
Marketable securities are liquid because they tend to have short-term
maturities of less than one year and the rate at which these securities
can be bought or sold has little effect on their prices.

Examples

There are different types of marketable securities, and the underlying


theme among all of them is that they are traded, or bought and sold,
frequently. This is a sign of liquidity. Those marketable securities that
are types of bonds or certificates of deposit must have a maturity date
or time at which a contract expires of no less than 12 months out.
Bonds are debt instruments, while certificates of deposit are savings
certificates, although both pay investors an interest rate over the life of
the contract. These securities trade in the secondary market, a
segment of the financial markets where previously issued securities
are bought and sold.
Cash is a type of marketable security, and it can be held in a checking
or savings account, because both allow for quick access to capital.
Money market instruments are another common type of marketable
securities, although features might vary depending on the region in
which they're purchased. In the United States, for example, treasury
bills are a commonly purchased money market marketable security.
U.S. treasury bill investments are sold in increments of $1,000 US
Dollars (USD) and are short-term in nature. They do not pay ongoing
interest income the way that long-term bonds do, but they are sold at
a discount price. When it comes time to redeem a treasury bill at the
maturity date, the U.S. government repays investors the full market
price.
There are various purposes for marketable securities. For instance, a
company with cash on hand might be looking for a place to invest that
money. Marketable securities are a viable option if that company might
need access to that capital in the short term, that is, in less than one
year. Financial institutions such as banks and insurance companies
often need quick access to large amounts of capital and therefore
might invest a significant portion of earnings into marketable
securities.

Treasury Bill
Treasury bills or T-Bills mature in one year or less, they do not pay
interest prior to maturity; instead they are sold at a discount of the par
value to create a positive yield to maturity.
It is issued by the United States Treasury through the Bureau of Public
Debt. Along with an assortment of other securities, T-Bills are used to
finance the Government by borrowing money from citizens. Investors
purchase T-Bills when they become available, and when they mature
after a set period of time, usually less than a year, the investors may
redeem their T-Bills for the face value. The purchase price of the T-Bill
serves as a temporary loan to the Government, which returns it when
the T-Bill matures.
The smallest face value for a T-Bill is $1,000 US Dollars (USD). The T-
Bill is sold at a discount, which is determined by the Bureau of Public
Debt, but the Treasury pays the full face value when it is redeemed.
For example, an investor might purchase a 90-day T-Bill for $900 USD,
and earn a $100 USD return on the investment when the T-Bill is
redeemed. Unlike many other securities, a T-Bill does not bear interest,
but the return on a T-Bill is highly predictable and very stable, barring
complete financial collapse of the United States Treasury.
Investors may choose to include T-Bills in their profiles because they
are highly stable investments with a pre-set time to maturity and a
dependable return. Unlike more risky investments, a T-Bill is unlikely to
return a substantial sum, but when they are traded on large volume,
they can represent a substantial return. Investors can potentially
purchase millions of dollars worth of T-Bills, assuming that they
possess the available capital. They are also extremely liquid assets,
making them a versatile and useful addition to a diverse investment
portfolio.

Commercial Papers
Commercial papers are debt instruments that are often utilized to
meet short-term credit needs. As an unsecured obligation that is often
utilized as an investment in a money market account, the duration
period for a commercial paper is limited. Generally, a commercial
paper may carry a maturity from anywhere between one business day
to six months from the date of issue.
In most cases, a commercial paper note will be issued in
denominations that are at least $100,000.00 US Dollars (USD).
However, it is possible to issue a commercial paper note that is
composed of multiple units of $1,000.00 USD that total to an amount
exceeding the hundred thousand dollar mark. This can allow purchases
of one or several units of the commercial paper, depending on the
desires of the investor.
Commercial paper is generally issued by corporations or by large
banking institutions. The main function is usually to provide funds for
the company’s Accounts Receivable in order to handle short-term
obligations. The expectation is that the issuing entity will be in a
position to honor the face value plus interest by the date of maturity
on the paper.
The commercial paper is not considered a proper debt instrument to
generate funds for long term projects. When a company wishes to
generate a source of revenue for any purpose that will exceed a six
month window, other investing and fund raising strategies will work
better than the short-term solution represented by the issue of a
commercial paper.
Companies may choose to issue a commercial paper as a means of
handling several short term projects. One common reason for the issue
of a commercial paper is to generate funds for the purchase of
inventory items that are required for an upcoming project. With the
completion of the project and the receipt of revenue from the venture
anticipated to occur between the date of issue and the date of
maturity, the company can manage the project without having to go
through a complicated loan process in order to finance the activity.
Asset-backed commercial paper refers to investments that use the
issuing company’s assets as collateral. These are usually short-term
investments, with maturities of nine months or less. Like all
commercial paper, asset-backed commercial paper is usually
discounted, or priced at less than face value. When the paper matures,
the investor who bought it gets the face value. The difference between
the discounted sale price and the investment's face value represents
the investor’s return. Because they are backed by assets of the issuing
company, they tend to be less risky than some other types of
investments.
Asset-backed commercial paper could be a collateralized debt
obligation (CDO) or a collateralized mortgage obligation, or CMO. Each
of these instruments is backed by a pool of assets with different levels
of risk. A CDO is typically backed by bonds or loans. A CMO is backed
by mortgages. By using a variety of assets, the risk is spread out over
the entire pool, reducing the impact of the potential default of any one
loan. A CDO or CMO is known as a pass-through security, as the loan
payments, after the deduction of fees, are passed through to the
investors.

Bankers Acceptance
A banker’s acceptance, also known simply as a BA, is a negotiable
instrument that is sometimes used by traders, particularly in
international trade situations. Functioning as a time draft, the drawer
of the acceptance creates an order for his or her bank to pay a specific
amount of money to the bearer of the instrument on or after the date
noted on the document. This procedure allows traders to make use of
the credit standing of their banks, rather than rely solely on their own
credit rating.
The use of a banker’s acceptance usually depends a great deal on the
reputation of the bank within the financial community. Assuming that
the bank is well known for being a highly ethical institution, many
creditors are more than happy to accept a banker’s acceptance as
payment for goods and services rendered. Since the acceptance is a
short-term negotiable instrument, it can also be traded in much the
same way that other documents can be traded as a money market
instrument.
In order to be able to make use of a banker’s acceptance, the buyer
must be able to meet the requirements set forth by the bank itself.
Some of these requirements are connected with regulations issued by
national banking systems, while others may have to do with specific
criteria set by the individual bank. Essentially, the buyer is asking the
bank for financing, with an understanding that the bank will create a
time draft equal to slightly less than the face value of the acceptance.
The buyer is then free to draw against the amount in the time draft
account to make purchases, then repay the bank on or before the date
the banker’s acceptance comes due. In turn, the bank can honor the
acceptance when it is presented by the bearer.
There are number of benefits associated with the use of a banker’s
acceptance. While functioning in a manner that is somewhat like that
of a postdated check, this type of financial instrument does not run the
risk that the payer will empty the bank account before the date on the
check arrives, leaving the creditor with what is essentially a worthless
document. The seller receives the acceptance up front, so there are no
worries about payment at all. Since banks do not issue acceptances
without ample reason to expect that the instrument will be honored by
the buyer, the buyer is able to purchase goods now, resell them for a
profit, and settle the terms of the acceptance within the time frame
required.

Repurchase Agreement
Definition

A form of short-term borrowing for dealers in government securities is


called repurchase agreement. The dealer sells the government
securities to investors, usually on an overnight basis, and buys them
back the following day.
For the party selling the security (and agreeing to repurchase it in the
future) it is a repo; for the party on the other end of the transaction,
(buying the security and agreeing to sell in the future) it is a reverse
repurchase agreement.

Explanation
Repurchase agreement also known as a repo agreement, a repurchase
agreement is a strategy for acquiring a loan from a lender that involves
the sale and repurchase of an asset or security. Essentially, the lender
agrees to make the loan, with the understanding that the debtor will
sell the lender the security. At an agreed upon later date, the debtor
will regain control of the security, once the loan is repaid in full.
In the actual process, repurchase agreement function a great deal like
any cash loan transaction, but adds on the basic approach that is
involved with executing a forward contract. Funds are transferred from
the lender to the borrower. Simultaneously, the borrower transfers
ownership of the security to the lender. The settlement date identified
in the dual transaction also functions as the maturity date for the loan.

During the time that the lender has control of the security, he or she
earns interest on the transaction. The actual amount of interest is
calculated by determining the difference between the forward price
and the spot price. Assuming that the debtor repays the loan in full by
the maturity date, interest ceases to accrue at that point of payment.
A repurchase agreement can apply to a one-time transaction between
the debtor and lender, or set up a series of transactions, all of the
employing this strategy. Sometimes referred to as a master
repurchase agreement, the lender and debtor agree to an ongoing
schedule of loans and repayments, with agreed upon securities used as
collateral. This effective creates an ongoing reverse repurchase
agreement, in that the same security may change ownership multiple
times during the life of the master agreement.
It is possible to structure a repurchase as an overnight transaction,
effectively completing the entire cycle within a twenty-four hour
period. Other agreements of this type can also be arranged with a
specific due date, ranging anywhere from several days to a month or
more. It is even possible to structure what is known as an open
agreement, meaning the maturity date is not set in stone. Essentially,
this means the seller holds the security and earns a return until the
buyer has repaid the face amount of the loan.

Certificate of Deposit
A Certificate of Deposit or CD is a time deposit, a financial product
commonly offered to consumers by banks, thrift institutions, and credit
unions. It is negotiable if having majority less than one year.
CDs are similar to savings accounts in that they are insured and thus
virtually risk-free; they are "money in the bank" (CDs are insured by
the FDIC for banks or by the NCUA for credit unions). They are different
from savings accounts in that the CD has a specific, fixed term (often
three months, six months, or one to five years), and, usually, a fixed
interest rate. It is intended that the CD be held until maturity, at which
time the money may be withdrawn together with the accrued interest.
In exchange for keeping the money on deposit for the agreed-on term,
institutions usually grant higher interest rates than they do on
accounts from which money may be withdrawn on demand, although
this may not be the case in an inverted yield curve situation. Fixed
rates are common, but some institutions offer CDs with various forms
of variable rates. For example, in mid-2004, interest rates were
expected to rise, many banks and credit unions began to offer CDs
with a "bump-up" feature. These allow for a single readjustment of the
interest rate, at a time of the consumer's choosing, during the term of
the CD. Sometimes, CDs that are indexed to the stock market, the
bond market, or other indices are introduced.
A few general guidelines for interest rates are:
• A larger principal should receive a higher interest rate, but may not.
• A longer term will usually receive a higher interest rate, except in
the case of an inverted yield curve (i.e. preceding a recession)
• Smaller institutions tend to offer higher interest rates than larger
ones.
• Personal CD accounts generally receive higher interest rates than
business CD accounts.
• Banks and credit unions that are not insured by the FDIC or NCUA
generally offer higher interest rates.

Future Contract
A futures contract is an agreement between a buyer and a seller for a
commodity, including agricultural products and energy resources, or a
financial instrument to be traded a future date. The underlying
commodity determines the value of the contract, which is sold at a
market-determined price on a futures exchange. Sometimes the
commodity product is delivered at the end of a contract's term, but
most of the time deals are settled for cash prior to the expiration date.
Traders facilitate orders for a futures contract on a futures exchange.
Financial instruments are the most widely traded futures contracts,
although futures trading began as an agricultural market. Agricultural
and energy commodities continue to trade on the futures exchange,
including contracts for grains, metals, and fossil fuel products, such as
oil and gas.
While individual components to a particular commodity vary, all are
traded as a standardized contract. Each contains details such as the
value of a contract and the anticipated delivery date. Once it's signed,
a futures contract is a binding obligation that must either be delivered
upon or settled after a period of time. These trades are often compared
with options contracts, but the primary difference is traders in an
options agreement are under no obligation to fulfill the deal and may
let a contract expire.
The futures markets are designed for hedging and risk management. A
seller of a futures contract could be a farmer attempting to lock-in
prices for an agricultural crop. Since this farmer does not know
whether or not a harvest will be a bumper crop, or what the price for
the commodity will be at the time of harvest, he may opt to hedge his
position. He does this by agreeing now to sell the crop later at a
market-determined price to a buyer.

Forward Contract
Forward contracts are an agreement between a buyer and a seller of a
certain asset, such as a commodity or financial instrument. The
transaction is agreed upon for a predetermined price to be executed at
a future date, known as the expiration or delivery date of the contract.
This is when either the underlying asset in a forward contract must be
delivered or the contract must instead be settled for a cash price.
When forward contracts are traded, no money or asset is exchanged at
first. Delivery is reserved for the contract's expiration date. The
contract serves as a promise between a buyer and seller to exchange
goods at a future date, and it carries with it benefits and risks.
For the seller, a benefit of trading forward contracts is that it relatively
removes uncertainty that an asset will be unloaded at what appears to
be a reasonable price. In the event that an asset is selling for more
money in the open market than the agreed upon price in a forward
contract at the delivery date, the seller will attempt to mitigate his
losses. One way to do this is to settle the contract for cash instead of
following through with delivery on the item.
A benefit for the buyer in a forward contract is that he is relatively
guaranteed a price for an asset. As a result, he subsequently can plan
his budget accordingly. By locking in a predetermined price, a buyer
also is hedging or safeguarding against the possibility of volatility in
the underlying asset's price.
Value in a forward contract is derived from an underlying asset,
including energy and agricultural commodities, as well as financial
instruments. Underlying securities in a forward contract might be
volatile commodities, including oil and gas resources. A transportation
company, such as an airline or trucking company, might purchase oil
and gas forward contracts to ensure that the price of oil or gas will not
exceed a certain threshold in coming months.
Components in forward contracts resemble those in a futures contract
in terms of the predetermined price and future settlement date,
although there are other key differences. Futures contracts are
exchanged or traded in organized exchanges, such as the CME Group
in the United States or LIFFE in Europe. Forward contracts, on the other
hand, are traded in the over-the-counter (OTC) market. The parties
involved in forward contracts have more flexibility than futures traders
because futures contracts are standardized and forward contracts can
be individually tailored for both parties.