Capital & Money Markets Assignment# 1 - Treasury Bills

7/29/2019 Capital & Money Markets Assignment# 1 - Treasury Bills

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Treasury BillsBy

Deepak Motiramani (2012G11)

Hrishikesh Wattamwar (2012G15)

Manish Jain (2012G18)

Naem Mujawar (2012G19)

Sachin Kumar Bansal (2012G44)


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History

In 1914, United States carried a debt of $1 billion

By 1919, end of World War I, the debt rose to $25 billion

Personal Income Tax rose to 73% Bonds and short term debts were not sufficient to pay

this debt

In 1921, personal income tax was reduced from 73% to58%, which reduced revenue and Treasury was forced

to consider other debt management tools In 1929, new security - Zero coupon bondswas

introduced/auctioned. It had less than one-yearmaturity and was issued at a discount of face value.

These were called Treasury Bills or T-Bills because of

their short-term nature.


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History (contd.)

About 98% of the US debt (called Treasury debt) ismade of marketable (tradable) securities i.e. Treasurybills, notes and bonds.

These are issued electronically and can be purchaseddirectly from Treasury or broker


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Pays interest onagreed frequency

until maturity

Types of Treasury bondsMarketable Securities

T-Bonds10 to 30 years

Pays interest on agreedfrequency until maturity

T-Notes1 to 10 years

Does not pay interestbefore maturity

T-Bills< 1 year


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Introduction to T-bill market

A particular kind of finance note put out by thegovernment of the country. Treasury bills are highlyliquid because there cannot be a better guarantee of

repayment than the one given by the government.These are claims against the government.

That means when you buy a Treasury, we are actuallyloaning money to the government and thegovernment in turn is paying you interest on theborrowed money.


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Characteristics of T-bills

Affordable to individual investors

Assured yield

Simple & easy to understand

Risk-free investments

High liquidity (can be sold in secondary markets)

Readily available

Low transaction cost

Tax exempt in some countries such as United States

Downside

Returns are smaller than many other forms of investment

Market price might depend on the Government rating


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Types of T-bills

Ordinary T-bills:-

Ordinary T-bills are issued to the public and the RBIfor enabling the government to meet the needs of

supplementary short term finance.

Adhoc T-bills:-

The practice of issuing adhoc T-bills has beendiscounted through the signing of two agreementbetween the government and the RBI.


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T-bills rate

Treasury bills rate is the rate of interest at whichtreasury bills are sold by RBI

The effective return on treasury bills is thediscount at which they are sold and theirredemption value.

Generally, the longer the maturity period, themore money you will make from your investment


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Present status

At present the government of India issues fourtypes of treasury bills trough auctions namely 14day, 91 day, 182 day and 364 day.

There are no treasury bills issued by stateGovernment.

T-bills are available for a minimum amount Rs.25000 and in multiple Rs. 25000. T-bills are issued

at a discount and are redeemed at par (facevalue).


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Auction

Type of T-Bill Day of Auction Day of Payment

91-Day Every Wednesday Following Friday

182-Day Wednesday of non-reporting week Following Friday364-Day Wednesday of reporting week Following Friday

The Reserve Bank of India issues a quarterly calendar of T-bill auctions at http://www.rbi.org.in:

Exact date of auction

Amount to be auctioned Payment dates

Bids for treasury bills are to be made for a minimumamount of Rs25000/- only and in multiples there of.

The T-Bills are repaid as par on the expiry of their tenorat the office of RBI, Mumbai.
http://www.rbi.org.in/http://www.rbi.org.in/http://www.rbi.org.in/http://www.rbi.org.in/


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Salient Features of the

Auction Technique The auction of T-Bills is done only at RBI Mumbai

Bids are submitted in terms of price per Rs100.e.g. a bid for 91-day, T-Bill auction could be for Rs97.50. Auction Committee of RBI decides thecut-off price and results are announced on thesame day.


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How are they issued?

T-bills are issued through a competitive biddingprocess /auctions

Members electronically submit their bids onNegotiated Dealing System (NDS)

Bids are of two types:

Competitive bidding - have to specify the returnwhich you would like to receive

Non-competitive bidding - you agree to acceptwhatever interest rate is decided at the auction


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FORM

The T-bills are issued in the form of Promissorynote in Physical Form or by credit SubsidiaryGeneral Ledger (SGL) account or Gill account in

dematerialised form.


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YIELD CALCULATION

The yield of a T-Bill is calculated as per the followingformula:

= (100 )

365

100

P: Price

D: Days of maturity


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Example

Treasury bills have a face value of a certain amount,which is what they are actually worth, but are sold forless.

For example, a bill may be worth Rs 100,000, but youwould buy it for Rs 96,000. Every bill has a specifiedmaturity date, which is when you receive money back.The government then pays you the full price of the bill --in this case Rs 100,000 -- and you earn Rs 4000 from yourinvestment.

The amount that you earn is considered interest, or yourpayment for the loan of your money. The differencebetween the value of the bill and the amount you payfor it is called the discount rate, and is set as apercentage. In the example above, the discount rate is

4 percent, because Rs 4000 is 4% of Rs 100,000.


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Reference

Treasury Bills Video
http://www.investopedia.com/video/play/treasury-bill/http://www.investopedia.com/video/play/treasury-bill/


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Thank YouByDeepak Motiramani (2012G11)

Hrishikesh Wattamwar (2012G15)

Manish Jain (2012G18)

Naem Mujawar (2012G19)

Sachin Kumar Bansal (2012G44)

Documents

Capital & Money Markets Assignment# 1 - Treasury Bills