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Printable Flash Cards Section 2
Ch 2 - 7 in Essentials
Version 4.1
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from other material – you may want to print multiples of the last page for this purpose.
All information in this document was cross-referenced with or obtained from Essentials of Treasury Management, 4th Ed, which, itself, is a great
compilation of publicly available financial management information. All information in this file is segmented into associated chapters in Essentials of
Treasury Management, 4th Ed. This is not all of the information in the text, Essentials of Treasury Management, 4th Ed and is not meant to take the
place of the book.
A special thanks to http://www.investopedia.com/ which has proven to be a great resource for explanations and descriptions.
NOTE: TMExam.com does not guarantee that this information is accurate or will be on the Certified Treasury Professional (CTP) ® exam. Essentials
of Treasury Management, 4th Ed is the body of knowledge for the CTP® exam and these flash cards are not meant to take the place of this text but
are meant to be used as a GREAT study aid in conjunction with other study material.
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UCC Article 5
Defines and sets guidelines for Letters of Credit (L/C),
Documentary Draft and Documentary Demand for Payment.
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Describe DDA’s and TDA’s
DDA’s = Demand Deposit Account. Also known as a checking
account.
TDA’s = Time Deposit Account.
Types: Savings Accounts, Money Market Deposit Accounts (MMDA),
CD’s and NOW Accounts.
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Credit Unions
Nonprofit. Generally only able to offer services to certain types of
“members”: teachers, labor unions, etc.
Deposits are insured by the NCUSIF not the FDIC.
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Four Main roles of the Fed
1. Monetary Policy
2. Currency Issuance
3. Supervision and Regulation
4. Government Services
5. Depository Institution Services
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Financial Crimes Enforcement Network (FinCEN)
FinCEN –Implements policies to detect and fight money laundering
by criminal or terrorist organizations
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Federal Deposit Insurance Corporation (FDIC)
Established in 1933 as part of the Glass-Steagall Act.
Provides insurance on bank deposits
Offers $250,000 insurance on consumer and commercial
deposits at banks and thrifts.
Supervises depository institutions
Becomes trustee in the event of a bank failure.
Owns the Deposit Insurance Fund (DIF)
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Securities and Exchange Commission (SEC)
Primary mission of protecting investors and maintaining the integrity of
the securities market
Requires companies to register IPO’s and disclose financial information
for investors to make sound decisions.
Regulates Mutual Funds, Investment advisors and monitors for insider
trading
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Office of Foreign Asset Control (OFAC)
An office in the Treasury Department.
Enforces economic trade sanctions against foreign countries, Terrorist
sponsoring organizations and international drug traffickers.
Able to freeze foreign assets under US jurisdiction.
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3 phases of money laundering
Placement: Depositing money into a financial institution
Layering: Creating financial transactions to hide original
origins of deposited money
Integration: Creating a legitimate explanation of funds
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USA Patriot Act
In response to 9/11 attacks.
Adds more regulation on Financial Institutions in order to detect
terrorism financing
Implemented “know your customer” rules for financial institutions
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Sarbanes Oxley Act (SOX)
Companies must disclose if the audit committee has a financial
expert
Companies must develop internal controls for financial reporting
Companies must disclose code of ethics for officers
Requires an audit committee to preapprove services provided by
an auditor
Requires audit committee be briefed by auditors on company’s
accounting methods
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Check 21
Allows for check truncation and electronic clearing of checks
Meant to improve the efficiency of the US payment system
Allows for Image Replacement Documents (IRD) as a legal
substitute for paper payment methods (except for foreign checks)
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Gramm-Leach-Bliley Act
Allowed the creation of financial holding companies to own and
engage in a variety of financial activities.
Allowed foreign banks to enter the US markets more easily
Requires financial organizations to disclose their privacy policy
for sharing customer information.
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Reg J, Reg Q
Reg J Established the check collection and settlement rules through
the Fed.
Reg Q Says that S and C corporations cannot receive interest on DDA
accounts (many provisions were removed as part of Dodd-Frank Act)
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Reg D, Reg E
Reg D Created the reserve requirement for depository institutions.
Reg E Protects consumers and sets guidelines for Electronic
transactions (ACH, Debit and Credit cards – but not Wires)
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Reg Z
Protects customers from increases in credit card interest rates
Sets age limits on issuance of credit cards (21) without certain
qualifying factors being met
Requires credit card issues to receive permission to charge
over balance fees
Eliminates 2 cycle billing
Prohibits creditors from crediting minimum payment towards
lower interest rates first
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Reg BB, Reg CC
Reg BB requires banks to meet the credit needs of the
communities in which it does business – provisions of the CRA
Reg CC All about Checks – meant to speed processing of checks and sets
standards for endorsements. Sets rules for PTD
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UCC Article 3
Determines what meets standards of accord and satisfaction for
negotiable instruments
Created the rule of “paid in full” satisfying full payment of debt
(payee currently has 90 days to return the check before it is considered
paid in full)
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UCC Article 4
Defines the rules in the relationship between the bank and its
Customers, when a bank can charge a customer and the customer’s rights
to use banking services
Customers can issue stop payments, bank does not have to pay stale dated
checks, customer must report fraudulent signatures (within 30 days of
receiving statement)
Bank not required to pay stale dated checks (over 6 months)
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UCC Article 4A
Defines the rules surrounding Electronic Transactions (ACH, Wires,
CHIPS).
Security Procedures – use of security measures to protect the
customer and the funds from fraud (using PIN’s, information
verification, etc)
Consequential Damages – Says that Banks are not responsible for
losses due to bank error that are in excess of the actual loss (unless it
agrees to pay these damages in writing).
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Political Risk, Nationalization, Expropriation
Political Risk – Change in government policy may have an adverse
effect on a company’s position.
Nationalization – When a country takes ownership of the assets (land,
buildings, equipment) of a public property (or a specific industry such as
oil).
Expropriation – When a country takes ownership of a specific
company’s assets.
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Blocked Currency, Forced Reinvestment, Required
Majority Ownership
Blocked Currency – When exchange controls exist that will not allow
conversion to other currencies.
Forced Reinvestment – A transfer risk that requires that all profits
made in a country be reinvested into the country and not transferred
from the country.
Required Majority Ownership – Companies must be owned by
resident nationals.
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Shared Service Center
Shared Service Center (SSC) – A method of consolidated a variety of
business functions into one area: accounting, treasury, HR, etc, for use by
divisions of a company.
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AFP Service Codes (Essentials)
Six Character, alphanumeric codes that help identify, describe,
and report banking services and charges.
(Helps compare prices and services between banks, which is difficult
because banks use different explanations for the same services)
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Reserve Requirement, Earnings Credit Rate
Reserve Requirement – Currently 10%. This is the amount of collected
balances that the bank is required to maintain at the Fed. Since the bank
cannot use this money, it feels that its business customers should share
the expense.
Earnings Credit Rate – The rate that the bank uses, along with the
available balance, to determine the Earnings Credit. The earnings credit is
used to offset bank charges
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Request for Information (RFI)
Request for Proposal (RFP)
RFI – A request for information. Used prior to RFP – this is not to get
bids but to see who qualifies or to get some ideas of what to do.
RFP – Formal bid for services. Gives detail on what you are looking
for and asks for companies to explain how they can service you. Also
asks for pricing information (although pricing is not always the
deciding factor in RFP’s).
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Counterparty Risk
The risk that another party in a transaction or agreement will not fulfill
their requirements as promised.
There are multiple methods of reducing counterparty risk: Increase
number of counterparties, eliminate high risk counterparties, use third
party custodians, adjust liquidity allocations among counterparties,
implement balance limits on counterparties.
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Bank Score Card, Relationship Review
Service Report Card – Used to rate banking services (Lockbox,
ACH, Internet Banking, etc.). Gives companies a method of evaluating
and comparing bank services and relationships.
Relationship Review – These are more formal than Report Cards and
allow two way communications between your company and the
service provider. Allows your company to rate service as well as
discuss future needs and expectations (Essentials).
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Service Agreement, Account Resolution,
Signature Card
Service Agreement – Detailed agreement between company and service
provider specifying and detailing the services to be provided.
Account Resolution – A bank required document that enables the
management or owners of a company to grant someone the ability to
manage the company’s bank accounts and bank services.
Signature Cards – A paper or electronic image of the signature of
authorized account signers. Banks use this for verification of signature.
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Account Analysis
A bank statement detailing banking services, volume, balances,
Earnings Credit, etc for the period.
822 is the ANSI transaction format for Account Analysis.
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Required Balance Calculation
Average Required Balance (CB) =
))1()365
( RRD
ECR
SC
CB = Required Collected Balance (to offset Service Charges)
SC = Bank Service Charges
ECR = Earnings Credit Rate
RR = Reserve Requirement (usually 10%)
D = Number of Days in Month
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Earnings Credit Calculation
Earnings Credit = AC x (1-RR) x (ECR x 365
D)
AC = Average Collected Balance (total collected balance ÷ days in cycle)
RR = Reserve Requirement (usually 10%)
ECR = Earnings Credit Rate
D = Number of Days in Month
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Financial Stability Board (FSB)
Based in Basel, Switzerland. Focused on promotion and implementation
of international regulatory, supervisory and financial sector policies.
Members of FSB are from G-20 nations, the world bank, IMF, BIS and
OECD, among others
Goals include: Maintaining Financial stability, promote transparency,
implement international financial standards and conducting peer reviews
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Five General Areas that Regulation of FI’s is
Concentrated (Essentials)
Monitoring safety and soundness of the banking system
Setting monetary policy
Guidelines for bank and FI chartering
Allocating credit to certain sectors of the economy and consumer
protection
Protect investors who purchase securities through FI’s
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National Credit Union Administration (NCUA)
Commodity Futures Trading Commission (CFTC)
NCUA: Government agency that is responsible for chartering and
oversight of federal credit unions. It also manages the National Credit
Union Share Insurance Fund (NCUSIF), which is similar to the FDIC
CFTC: Regulates futures and options markets in the US. Dodd Frank
Act requires CFTC to work with the SEC to regulate OTC derivatives
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Bank for International Settlement (BIS)
Based in Basel, Switzerland.
In general, BIS has 4 primary responsibilities: As a forum for
discussion and policy analysis among central banks, Acts as a center
for economic and monetary research, Acts as a counterparty for the
financial transactions of central banks, Acts as an agent or trustee for
international financial operations
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Basel Committee on Banking Supervision (BCBS)
Committee on Payment & Settlement Systems (CPSS)
BCBS: Standard setting body in the BIS and is a forum for cooperation
on banking supervisory issues. The objective is to improve banking
supervision and increase understanding of supervisory issues globally.
CPSS: Standard setting body for payment and securities settlement
systems hosted by the BIS. Is a forum for central banks in domestic
payment and clearing systems in addition to international and
multicurrency settlement systems
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Int’l Org of Securities Commissions (IOSCO)
Financial Action Task Force (FATF)
IOSCO: Sets international standards for securities markets. The
members of IOSCO regulate over 95% of global securities markets.
FATF: International organization. Develops policies to fight
terrorism financial and money laundering both nationally and
internationally.
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International Association of Insurance Supervisors
(IAIS)
Standard setting group for insurance regulators globally and is tasked
with increasing cooperation of members internationally and domestically.
Goal is to ensure efficient, fair, safe and stable insurance markets (4th Ed)
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Financial Stability Oversight Council (FSOC)
A committee led by the US Treasury Secretary that is responsible for
monitoring the financial system to identify threats to financial
stability. The FSOC cannot take action but can make
recommendations.
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Consumer Financial Protection Bureau (CFPB)
Fin Industry Regulatory Authority (FINRA)
CFPB: Created by the Dodd Frank Act. Oversees financial products and
services that are offered to consumers.
FINRA: regulates securities firms and registered securities firms that do
business in the US.
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The Dodd Frank Act
US Legislation that became effective in 2010 in response to the causes of
the Great Recession. The Act increases financial oversight of various
financial instruments, ends too big to fail, creates multiple agencies that
are charged with protecting consumers and monitoring the financial
system in multiple ways.
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Federal Insurance Office (FIO)
The Red Flag Rule
FIO: To be housed under the US Dept. of Treasury. When created, it
will be responsible for monitoring the insurance industry and providing
policy recommendations.
Red Flag Rule: Requires FI’s (any institution that holds a consumer
transaction accounts) to protect, prevent and mitigate identity theft risk
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UCC Article 9
Pension Protection Act (PPA)
UCC Article 9: Covers lending transactions where collateral is taken
for lending money. The lender must file a UCC-1 form that lists the
collateral used to secure the loan.
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Sales Tax
Use Tax
Sales Tax: A tax that is charged to someone for purchasing a good or
service. The seller is responsible for charging it and remitting the tax to
the government.
Use Tax: A taxed charged after a sale, where no sales tax was collected.
The buyer is responsible for paying the tax to the government.
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Unanimous Consent
Cram-Down
These are two methods of formulating a Ch 11 reorganization plan
Unanimous Consent: 2/3 of creditors and equity holders must agree
on the reorganization plan
Cram-Down: When the court forces a reorganization plan that it feels
is fair to all parties involved. Used when creditors and equity holders
do not agree on a reorganization plan
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3 Types of Formal Ch 7 Bankruptcy procedures
Informal Bankruptcy
- Freefall: Company enters bankruptcy with no plan to come out of it
- Pre-Arranged: Some creditors have agreed to bankruptcy plan but
it may not be binding
- Pre-packaged: A formal plan has been filed with the SEC and all
creditors have accepted it.
Informal Bankruptcy: Where a company does not file bankruptcy but,
instead, comes to an agreement with creditors on reducing debt in order
to assist the company in becoming financially viable.
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Uniform Bank Performance Report (UBPR)
SAS 70 Audit
UPBR: Report published by FFIEC that allows you to evaluate the
performance of a bank. Three types of data are used: bank data, peer
group data, percentile ranking of the bank
SAS 70 Audit: An audit that monitors a financial institutions
operational risk.
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PCAOB
PCAOB – Public Company Accounting Oversight Board
Created by SOX – monitors all accounting organizations that provide audit
services to public companies.
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Non-cash US payment methods
Paper Items (checks, money orders, etc)
ACH
Wire transfer
Credit and Debit Cards
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Four types of Interbank check clearing methods
Clearing House – Banks in close proximity meet to “exchange” checks
that have been deposited to their bank.
Federal Reserve Bank – Fed receives checks and processes and sends
them to the appropriate bank.
Correspondent Bank – Bank A holds an account at Bank B specifically
for the clearing of checks (may also perform other services for the bank)
Direct Send – Bank A sends a cash letter to Bank B (or fed branch). This
allows the items to be processed more quickly.
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Ledger Balance, Collected Balance,
Available Balance
Ledger Balance – Total of all of the transactions that are showing up in
your bank system (regardless of the availability)
Collected Balance – Ledger Balance minus Deposit Float. Amount that
has been collected/settled.
Available Balance – Amount available – Collected balance plus amount
to be collected at the end of the day plus Reg CC required credits
(assigned/required float based on the deposit type).
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Pre-Authorized Draft, Money Order, Travelers
Checks
Pre-Authorized Draft/Check – ACH drafts, transaction is
initiated by the payee (loan payments, utility bills, etc)
Money Order – Prepaid check like payment instrument.
Travelers Checks – Prepaid check like payment instruments (very much
like money orders). 2 signatures are usually required for security
purposes.
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Procurement Cards (Purchasing Cards, PCards)
Used for employee business purchases – supplies, etc.
These allow the company to more efficiently track spending and keep
employees from filing for reimbursement for regular purchases.
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Smart Card
The information for purchase verification is stored in the card rather
than using a network to verify funds. Also called Chip Cards.
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ACH Transaction Participates (from Sender to
Receiver)
1. Originator (business initiating ACH transaction)
2. ODFI (bank that processes the origination)
3. ACH Operator (processes the transaction to the appropriate RDFI)
4. RDFI (Receivers Bank)
5. Receiver (Person receiving the ACH transaction)
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Clearing House Interbank Payment System (CHIPS)
A bank owned, real time settlement system that uses bilateral and
multilateral netting of payments.
CHIPS processes over 95% of USD cross border payments (chips.org)
Payments through CHIPS are final once released. CHIPS is governed by
UCC 4A
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Bank Clearinghouse
Bank Clearinghouse: Group of financial institutions that exchange
payments between each other in order to make financial transactions
processed more efficiently
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OCR
PTD
Optical Character Recognition (OCR) – reads information printed on
check and remittance data. Used in Lockbox to increase efficiency.
PTD – Issued to be paid by payor and not the bank
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Debit Cards, Smart Cards, Stored Value Cards
Debit Cards – Funds are deducted directly from bank account or
giro account.
Smart Card – Contain a microchip that stores the value on the card that
offers security protection. These will be prepaid.
Stored Value Card – Offers no security protection and is able to keep
track of purchases made and balances. Used mainly as gift cards or
phone cards.
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SWIFT
Society for Worldwide Interbank Financial Telecommunications
A member-owned cooperative through which the financial world
conducts its business operations with speed, certainty and confidence.
More than 9,000 banking organizations, securities institutions and
corporate customers in 209 countries trust us every day to exchange
millions of standardized financial messages. (swift.com)
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Financial Action Task Force (FATF) and Office of
Foreign Assets and Control (OFAC)
FATF: International body that is tasked with creating and
promoting policies to fight money laundering and terrorism
financing.
OFAC: US body under the US Department of Treasury that is
tasked with creating, promoting and enforcing policies to fight
money laundering and terrorism financing
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Exchange Rate Calculations
Exchange Rate Calculations
if $1 = ₤1.5, then
$100 = 100 ÷ 1.5 = ₤66.66
And
₤100 = 100 x 1.5 = $150.00
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Scenario and Sensitivity Analysis
Simulation
Scenario Analysis – “what if” analysis of a projects outcomes
(worst case and best case scenario’s)
Sensitivity Analysis – Analysis of how sensitive the analysis is in
changes in assumptions.
Monte Carlo Simulation analytical technique that estimates an
outcome based on random variables.
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Cash Letter
Used in the Check Clearing Process where a bundle of checks is
packaged to be transferred between banks, a clearinghouse, or a federal
reserve office. It includes a list of the checks with dollar amount, $ total
and number of checks
Now, a cash letter can also mean a list of checks along with images
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Factors of Check Availability
Paying Bank Endpoint
Time of Deposit
Day of Deposit
Specific Bank’s Availability Schedule
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Pre-Authorized Draft Transactions
Remotely Created Check
Pre-Authorized Transactions: Where the payor allows the payee to
debit an account for payment. Can be reoccurring or one time
Remotely Created Check: Electronic Debit that is approved for a one -
time payment. Many times, this is created as an ACH from an actual
check at the point of sale.
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Participants in a Credit Card Transaction
Cardholder
Issuer
Merchant
Merchant Acquirer
Acquiring Processor
Issuer Processor
Network Operator
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Ghost Cards, Department Cards, Single Use Cards
Ghost Cards: No actual card is created. A number is supplied to a
specific vendor for purchases
Department Cards: P-card that is linked to a specific department rather
than an individual user (Essentials)
Single Use Card: Cards or card numbers created for one specific
purchase or payment
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Bank Identifier Code (BIC)
International Bank Account Number (IBAN)
BIC: International standard to identify a bank country and branch
location
IBAN: International standard to identify bank accounts across borders
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Cash Letter
Ledger Cutoff
Cash Letter: A group of checks with a list showing the detail of the
checks.
Ledger Cutoff: Time a deposit must be received to be credited to your
ledger balance that day.
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FedGlobal ACH Payments
FedGlobal: A service offered by the Federal Reserve to process ACH
credits across borders.
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Ghost Card, Departmental Card,
Single Use Card
Ghost Card: Where a card number is issued to make purchases but no
physical card is issued
Departmental Card: Where a card is issued to a department of a company
rather than to an individual of the company
Single Use Card: As the name implies, this is a card that is issued for one
purchase
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What is:
Private Placement and IPO
Private Placement – When a company sells its securities to a limited
number of investors. Usually less expensive to the seller than offering
to the public.
IPO (Initial Public Offering) – Company offers stock for public sale
for the first time.
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Money Market
Short-term
Maturity of 1 year or less (usually)
Highly liquid
Generally invested in very safe securities: T-Bills, Commercial
Paper, etc.
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Capital Market
Long-term
Maturity of more than 1 year
Less liquid than Money Market Securities
Unlike Money Market, these may be in riskier investments: bonds,
stock, etc.
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T-Bills, Government Sponsored Enterprises,
Municipal Notes
T-Bills – Issued by the US Treasury. Considered Risk Free. Maturity of 1
yr or less. Can be bought and sold easily for low transaction fees.
GSE – Ginnie Mae, REMIC’s, Mortgage Backed Securities, Fannie Mae,
Freddie Mac, Sallie Mae. Backed by US Government.
Municipal Notes Issued by State and Local Government. Considered
safe and may offer Tax Exemption on Interest.
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Convertible Bonds, Warrants
Convertible Bonds – Bonds that can be converted to shares of stock
at a specific time and/or for a specific amount per share (some classes
of stock may also be convertible).
Warrants – Attached to Bonds and give the bondholder the ability to
purchase shares of stock at a specific time and/or for a specific amount
per share. (Can be attached to preferred stock).
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Stock Terms Par Value, Retained Earnings,
Paid-in Capital
Par Value – The nominal amount that the issuer of a security places on
each share. Usually an arbitrary low number (Ex. $1. There can also be a
$0 par value).
Retained Earnings – Profits generated that are held within the company
and not paid to shareholders. These funds are meant to be used for
company reinvestment (to create more value).
Paid-in Capital – Amount paid at time of stock issuance per share of
stock (Ex from Essentials – New share costs $25 and has a $1 par value,
the Paid in Capital is $24 per share).
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Term Loan
Term Loan – Medium or Long term debt usually used for fixed assets
(plant, machinery, etc) and may be for duration equal to the expected
life of the asset. Payments are usually in installments but other
payment methods are available.
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Treasury Stock
Treasury Stock is stock that has been repurchased by the company.
These stocks have no votes and do not receive dividends.
Treasury stocks can 1) be retired or held to be resold, 2) used for
stock options, warrants, or convertible bonds or 3) used to fund
repurchases or future acquisitions
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Treasury stock, Book Value per share,
Market Value per share
Treasury Stock – Stock repurchased by a company. Held within
company for reissue or retirement. Does not carry votes or receive
dividends.
Book Value per Share – Stockholder equity divided by outstanding
shares of stock.
Market Value per Share – Current selling price per share of stock in
the market.
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Medium or Intermediate Term
Notes and Bonds and Long Term Bonds
The issuer is the Borrower and the investor is the lender. Bonds are
coupon with investment amount paid at maturity or zero-coupon with
investor paying discounted amount and receiving face value at maturity.
Bonds and other debt generally have precedence to company assets in
bankruptcy (compared to stocks)
Medium or Intermediate Term – Usually for terms of 2 to 10 years.
Very similar to LT bonds but with a shorter maturity.
Long Term Bonds – Usually for 10 to 30 years.
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Covenants and indentures, debentures, cure period
Covenants or indentures – legally binding requirements that the
borrower of funds (or bond issuer) must comply (maintain certain
Quick Ratio, cannot pay dividends over certain % of net income, etc).
Debenture – Represents unsecured debt – company usually must have
high credit standing to issue debt that is debentured.
Cure Period – The time the borrower has to correct an event of
default.
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Callable Bonds, Zero Coupon Bond, Equipment
Trust Certificate, Economic Development Bond
Callable Bonds –Issuers can buy back bonds and reissue at lower rate
can present the investor with need to reinvest funds.
Zero Coupon Bond – Purchased for below par value and par value is
paid when bond matures
Equipment Trust Certificate – Bonds secured by movable equipment
Economic Development Bond – Issued by underdeveloped countries or
sponsor of underdeveloped country
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Municipal Bonds, High Yield Bonds
Municipal Bonds – Bonds issued by governmental entities. May offer
tax advantages.
High Yield Bonds – aka Junk Bonds. These bonds are high risk and
have a low bond rating.
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Income Bond, Collateral Trust Bond,
Indexed Bonds
Income Bond – Will guarantee principle but will only pay interest if
company is profitable.
Collateral Trust Bond – Bonds that are collateralized by the securities
of another company.
Indexed Bonds – Interest rates paid are tied to the interest rate of an
economic index (Ex Inflation).
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Securitization, Off Balance Sheet Financing, Project
financing, Floating Rate Debt
Securitization – Bundling assets together (many times A/R or
inventory) and selling as securities.
Off Balance Sheet financing – A lease that does not show up on the
balance sheet (As with capital lease).
Project financing – Financing a project – the lender is paid from the
projects cash flows (may not have recourse in event of default).
Floating Rate Debt – Debt with a rate tied to fluctuations in the
interest environment. Lender or borrower makes decision based on
yield curve (or anticipated changes in yield curve).
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Sinking Fund, Refinancing Operations (Essentials),
Defeasance of Debt, Promissory Note
Sinking Fund – Funds are regularly paid into a trust or account in order
to repay the lump sum of a bond issue at maturity. May be required as
part of a bond issues indenture agreement.
Refinancing Operations – If bonds are callable, the issuer may call the
bonds and reissue new bonds in periods of lower interest rates.
Defeasance of debt – Sufficient funds are placed in an irrevocable trust
and used to repay debt. Removes debt from balance sheet without
repaying debt.
Promissory Note – An agreement with the lender dictating the terms to
repay (how and when).
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Lien, Guarantee, Full Guarantee, Specific Project
Guarantee (Essentials)
Lien – A legal claim on collateral in case of default.
Guarantee – Confirmation by a parent company that a subsidiary’s
debt will be repaid.
Full Guarantee – The parent company agrees to pay all debt if the
subsidiary defaults.
Specific Project Guarantee – Parent company only agrees to repay
amounts related to a specific project.
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Guarantee of payment/collection, Comfort Letter,
Performance Guarantee, Personal Guarantee
Guarantee of pay. or coll. – Guarantor agrees to make payment on the
loan or to collect in case of default.
Comfort letter – Parent company provides letter of the actions it ill or
will not take on behalf of the borrower (may not be enforceable).
Performance Guarantee – Full – Parent agrees to fully guarantee
subsidiary’s repayment. Best Efforts – Parent agrees to use its best effort
to make the subsidiary pay.
Personal Guarantee – Owner or managers of the business personally
guarantee the repayment of debt.
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Various issuers of debt and equity securities
Central Banks – debt securities – T Bills
Corporations – debt and equity securities – bonds and stock
Government Sponsored Entities – Debt Securities – Non Asset
Backed Debt Securities
Municipalities – Debt Securities – Municipal bonds
Mutual Fund Companies – Debt and Equity Securities – Sell funds
made up of Money Market, Stocks and Bonds
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Maturity by ST Investment Type
CP: Up to 270 days, usually 45 days
Asset Backed CP: Up to 270 days, usually 45 days
Bank Obligation: 1 day to 2 years
T-Bills: 4 to 52 weeks
Floating rate notes: Variable
Repo: Negotiable
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Depository Trust and Clearing Corp (DTCC)
“An investment, industry owned works through its subsidiaries to
provide clearing, settlement and information services for equities,
corporate and municipal bonds, government and mortgage backed
securities, MM instruments and over the counter derivatives”
Essentials, 4th Ed
It is a combination of the DTC and NSCC
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Investment Bankers, Origination Desks, Securities
Traders, Brokerage Syndicates
Investment Banker: Help place (sell) securities for a company
Origination Desk: Evaluate, price and manage the placement of
securities
Securities Traders: Manage secondary markets for securities (after
placement)
Brokerage Syndicates: Multiple brokerage firms that work together to
place securities (creates efficiencies)
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Callable Bond, Tender Option Bond, Foreign Bond,
Eurobond
Callable bond: Allows the issuer to buy back (call) bond issues if
they have an opportunity to save interest expense.
Tender Option Bond: Allows the buyer to sell the bond back to the
issuer at par value during the life of the bond, or at a point in time
Foreign Bond: Sold in a country that is not the company’s home
country. Sold in the denomination of the country it’s being sold
Eurobond: Sold in multiple countries at the same time, but not in the
home country of the issuer.
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Multicurrency Bond, Credit Enhancement,
Tracking Stock
Multicurrency Bond: Allows the investor to choose multiple currencies
that the bond is denominated. Many times, the currencies are
predetermined.
Credit Enhancement: Additional guarantee that the borrower will pay.
Can be a number of items: collateral, insurance, letter of credit, etc.
Tracking Stock: A security that tracks a stock index. Also called Spiders
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Settlement Risk
Settlement Risk: The risk that the debited party in a transaction will
not perform or honor the obligation
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Treasury Stock
Treasury Stock is stock that has been repurchased by the company.
These stocks have no votes and do not receive dividends.
Treasury stocks can 1) be retired or held to be resold, 2) used for
stock options, warrants, or convertible bonds or 3) used to fund
repurchases or future acquisitions
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Types of Bankruptcy
Chapter 7: Company liquidation
Chapter 9: Government bankruptcy
Chapter 11: Company reorganization
Chapter 13: Consumer bankruptcy
Chapter 15: Bankruptcy that includes multiple countries
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