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 Bankers 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 Manufacturers 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 Bankers Acceptance Continued Manufacturers bank can request Present Value of the future payment now in exchange for Bankers Acceptance Originating bank can hold Bankers 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 Bankers Acceptance