Treasury Bills IFM PPT by Group 2
Treasury Bills IFM PPT by Group 2
Treasury Bills IFM PPT by Group 2
Samanta Honavarkar Sapana Gaunekar Amey Mandrekar Abdulwali Alaji Omkar Ghatwal Pralahad Naik
A treasury bill nothing but promissory note issued by the Government under discount for a specified period stated therein. The Government promises to pay the specified amount mentioned therein to the beater of the instrument on the due date. The period does not exceed a period of one year. It is purely a finance bill since it does not arise out of any trade transaction. Treasury bill are issued only by the RBI on behalf of the Government. TBs are issued for meeting temporary Government deficits. The Treasury bill rate of discount is fixed by the RBI from time-to-time. It is the lowest one in the entire structure of interest rates in the country because of short-term maturity and degree of liquidity and security. A market for the purchase & sale of treasury bills is known as Treasury Bills Market
Cont.
Treasury bills have a face value of a certain amount, which is what they are actually worth. But they are sold for less. For example, a bill may be worth Rs.10,000, but you would buy it for Rs.9,600. Every bill has a specified maturity date, which is when you receive money back. The government then pays you the full price of the bill in this case Rs.10,000 and you earn Rs.400 from your investment. The amount that you earn is considered interest, or your payment for the loan of your money. The difference between the value of the bill and the amount you pay for it is called the discount rate, and is set as a %. In the example above, the discount rate is 4 %, because Rs.400 is 4 % of Rs.10,000.
Vital source : TB are an important source of raising short-term funds by government Monetary management : TB are an important tool of monetary management used by the central bank to infuse liquidity into the economy.
Types of Auction
Multiple Price Based Auction: Under this method, all bids equal to or above the cut-off price are accepted. However, the bidder has to obtain the treasury bills at the price quoted by him.
Uniform Price Based auction : Under this system, all the bids equal to or above the cut-off price are accepted at the cut- off level. However, unlike the Multiple Price based method, the bidder obtains the treasury bills at the cut-off price and not the price quoted by him.
Participants in TB market
1. 2. 3. 4. 5. 6. RBI and SBI Commercial banks State Governments DFHI (Discount And Finance House of India) STCI (Securities Trading Corporation of India ) Financial institutions like IFCI (Industrial Finance Corporation of India), NABARD (National Bank for Agriculture and rural development), LIC, GIC, UTI, IDBI, ICICI Corporate customers General Public Through many participants are there, in actual practice, this market is in the hands at the banking sector. It accounts for nearly 90 % of the annual sale of TBs.
7. 8.
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Ideal Fund Management: TBs are available on top as well through periodical auctions. They are also available in the secondary market. Fund managers of financial institutions build portfolio of TBs Statutory Liquidity Requirement: As per the RBI directives, commercial banks have to maintain SLR (Statutory Liquidity Ratio) and for measuring this ratio investments in TBs are taken into account. TBs are eligible securities for SLR purposes. Moreover, to maintain CRR (Cash Reserve Ratio). TBs are very helpful. They can be readily converted into cash and thereby CRR can be maintained. Source Of Short-Term Funds: The Government can raise short-term funds for meeting its temporary budget deficits through the issue of TBs. It is a source of cheap finance to the Government since the discount rates are very low.
Cont..
Non-Inflationary Monetary Tool: TBs enable the Central Government to support its monetary policy in the economy. For instance excess liquidity, if any, in the economy can be absorbed through the issue of TBs. Moreover, TBs are subscribed by investors other than the RBI. Hence they cannot be mentioned and their issue does not lead to any inflationary pressure at all Hedging Facility: TBs can be used as a hedge against heavy interest rate fluctuations in the call loan market. When the call rates are very high, money can be raised quickly against TBs and invested in the call money market and vice versa. TBs can be used in ready forward transitions.
Absence Of Active Trading: Generally, the investors hold TBs till maturity and they do not come for circulation. Hence, active trading in TBs is adversely affected.
100-P P
365 D
X 100
P = Purchase price D = Days to maturity D = (actual number of days to maturity/365), Day Count: For Treasury Bills
The discount rate at which RBI sells TBs is known as Treasury Bills rate
Y = {[(FV IP) / IP] x [364 / MP]) x 100 FV Face value IP Issue price of TBs MP Maturity period of TBs in days
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