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What are Master Notes?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 06 November 2016
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    2003-2016
    Conjecture Corporation
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Master notes are commercial papers that serve as short-term debt instruments issued by large corporations that are considered stable and credit-worthy. Banks are often the recipients of these instruments. Due to the high quality of the master notes, money managers often find them ideal when there is the need to adjust the total value upwards or downwards, while still earning a return within one calendar year or less.

The maturities on master notes usually generate interest payments that are in line with the London Interbank Offered Rate, or LIBOR. This rate is the standard reference rate used in the United Kingdom and many other nations as the standard for the interest rates that are charged between different lending institutions. In some instances, the entity that issues the master notes may use some other type of index as the standard for determining the amount of interest due to the holder of the notes. When the notes are made available to prospective buyers, the issuer usually identifies the index that is utilized to determine the calculation of the interest payments.

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In general, master notes are debt instruments that involve huge sums of money. For example, master notes offered by the Federal Farm Credit Bank in the United States come with a minimum face value that is no less than $25 million US dollars (USD). Similar institutions around the world issue notes that are roughly in the same range. Since the debt instruments are usually structured as a short-term investment, it is possible to realize a significant return within a year. This is especially true if the prevailing interest rates that apply are especially favorable for the entity holding the notes.

Money managers often are receptive to master notes for several reasons. One common benefit that managers associate with this type of investment is that it is possible to more easily control the buying and selling activity of money market instruments connected with the notes. A money manager may choose to place limitations on how frequently those instruments are bought or sold, a benefit that helps the manager to protect his or her interests with greater efficiency. Another advantage that many managers find appealing is their ability to make adjustments to the total value of the investment on a daily basis. That adjustment may involve an increase or a decrease, depending on which action is more likely to produce the desired effect.

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