Master Notes: What It Is, How It Works, Example

What Are Master Notes?

Master notes are short-term debt instruments issued by the Federal Farm Credit Banks Funding Corporation. They are high-quality fixed-income securities and generally accepted as collateral for put or call options. Within the Federal Farm Credit System (FFCS), they provide loans to rural communities and the U.S. agricultural sector.

Key Takeaways

• Master notes are a short-term debt instrument issued by the Federal Farm Credit Banks Funding Corporation.
• Their purpose is to extend capital to the U.S. agricultural sector.
• Master notes are issued with a face value of $25 million, feasible for large and sophisticated investors.

How Master Notes Work

The Federal Farm Credit Banks Funding Corp., based in Jersey City, N.J., manages various debt issuances on behalf of FFCS banks. The system is a group of 71 financial institutions in the United States and Puerto Rico designed to fund the U.S. farming and agricultural sectors. The corporation also provides consulting, accounting, and financial reporting services to banks.

The corporation distributes Farm Credit Debt Securities, such as discount notes, designated bonds, floating-rate bonds, fixed-rate bonds, and retail bonds to various investors, including commercial banks, states, municipalities, pension and money-market funds, insurance companies, investment advisers, corporations, foreign banks and governments, and other investors in the United States and internationally. It markets and distributes securities through dealers.

Banks in the system cannot hold deposits, so debt issuances are their main source of funding. Although the debt securities are not guaranteed by the U.S. government, the FFCS possesses a farm credit insurance fund, which would supply principal and interest payments should a system bank go bankrupt. System institutions are federally chartered under the Farm Credit Act and subject to supervision, examination, and regulation by the Farm Credit Administration.

Real World Example of Master Notes

The master notes issued by the Federal Farm Credit Banks Funding Corporation have a minimum face value of $25 million. They are typically a suitable investment only for large money managers. Master notes mature in one year and pay a coupon linked to the Fed Funds Rate or another appropriate index. Money managers highly value these notes for their high liquidity and the ability to adjust the principal amount by 25% in either direction. They can also be used as underlying collateral in put or call options.

According to the Federal Farm Credit Banks Funding Corporation, investors should have sufficient knowledge and experience in financial and business matters to evaluate the notes, as well as the merits and risks of investing in them. Additionally, investors should have access to, and knowledge of, appropriate analytical tools. No investor should purchase a note unless they understand and have sufficient financial resources to bear the price, yield, market, liquidity, structure, redemption, and other associated risks.