Banking Terms - Set 17 (Tax and loan acc, TAB, Exchange rate risk, Hard call protection, Corporate sector securities)

Corporate Sector Securities

Securities issued by U.S. corporations and non-U.S. corporations in the United States which excludes the general government, private households, and non-profit organizations serving individuals. The corporate sector is divided into investment grade and non-investment grade sectors by rating agencies such as Moody’s and S&P.

E.g. Includes bonds, MTNs, structured notes and commercial paper issued by those organizations.

Hard call protection

Hard call protection usually refers to callable bonds. The protection is the period of time when the bond cannot be called, no matter what the interest rate is. That is, if the interest rate falls sharply, most callable bonds will be called. Hard call protection ensures that the holder of the bond can benefit when rates fall.

E.g. Company A has issued 1000000 bonds which has a protection period of 4yrs. from the date when the bond/security is being issued. This assures the holder that the company will not be able to call back the bonds that are outstanding before this period.

Exchange Rate Risk

A foreign currency nominated bond has unknown domestic currency cash flows. The domestic currency cash flows are dependent on the exchange rate at the time when the payments are received. In Simple terms, it can be referred as the risk that an investor faces when he/she invests on a foreign currency bonds.

For example, suppose that a German investor purchases a bond whose payments are in British pounds (GBP). If pounds depreciate relative to euros (EUR), fewer euros will be received and vice versa. This risk is also referred to as currency risk.

Tax Anticipation Bill (TAB)

Short-term obligation issued by the U.S. Treasury to raise funds during a period when tax receipts are not large enough to cover current disbursements. TABs mature approximately one week after quarterly corporate tax payments are due. The attractiveness of TABs is that the government will accept them in payment for taxes at their face value.

Tax and loan account

Account in a private-sector depository institution, held in the name of the district Federal Reserve Bank as fiscal agent of the United States that serves as a repository for operating cash available to the U.S. Treasury. Withheld income taxes, employers' contributions to the Social Security fund, and payments for U.S. government securities routinely go into a tax and loan account.