Treasury Bills IFM PPT by Group 2

8/3/2019 Treasury Bills IFM PPT by Group 2

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Treasury bills

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 oneyear. 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 iswhat 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 betweenthe 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.



Characteristics of Treasury Bills

• Issuer : TB are issued by the government for raising short-term funds from

institutions to the public for bridging temporary gaps between receipts

(both revenue & capital) & expenditure.

•Finance bills : TBs are in the nature of finance bills because they do notarise due to any genuine commercial transaction in goods.

• Liquidity : TBs are not self-liquidating like genuine trade bills, although

they enjoy higher degree of liquidity

• 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 Treasury Bills

In India, there are 2 types of treasury bills

• 1) ordinary or regular ordinary treasury bills are issued to the public

and other financial institutions for meeting the short-term financial

requirements of the Central Government. These bills are freelymarketable and they can be brought and sold at any time and they

have secondary market also.

• 2) „ad hoc‟ known as „ad hocs‟are always issued in favour of the

RBI only. They are not sold through tender or auction. They arepurchased by the RBI on top and the RBI is authorised to issue

currency notes against them. They are marketable sell them back to

the RBI. Ad hocs serve the Government in the following ways:



Types of Treasury Bills Cont… • They replenish cash balances of the central

Government. Just like State Government get advance

(ways and means advances) from the RBI, the Central

Government can raise finance through these ad hocs.• They also provide an investment medium for

investing the temporary surpluses of State

Government, semi-government departments and

foreign central banks.



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.



Treasury Bills Auction On the basis of periodicity, treasury bills may be classified into three they are:

• 91 Days treasury bills,

• 182 Days treasury bills, and

• 364 Days treasury bills.

• 91 days treasury bills are issued at a fixed discount rate of 4% as well as

through auctions.

• 364 days bills do not carry any fixed rate. The discount rate on these bills

are quoted in auction by the participants and accepted by the authorities.

Such a rate is called cut off rate.• In the same way, the rate is fixed for 91 days treasury bills sold through

auction. 91 days treasury bills (top basis) can be rediscounted with the RBI

at any time after 14 days of their purchase. Before 14 days a penal rate is

charged.



Operations and Participants • The RBI holds day‟s treasury bills (TBs) and they are issued on

top basis throughout the week.

• However, 364 days TBs are sold through auction which is

conducted once in a fortnight. The date of auction and the last

date of submission of tenders are notified by the RBI through apress release.

• Investors can submit more than one bid also. On the next

working day of the date auction, the accepted bids with prices are

displayed.• The successful bidders have to collect letters of acceptance from

the RBI and deposit the same along with cheque for the amt. due

on RBI within 24 hours of the announcement of auction results.



Operations and Participants Cont…. • Institutional investors like commercial banks, DFHI, STCI, etc,

maintain a subsidiary General Ledger (SGL) account with the RBI.

• Purchases and sales of TBs are automatically recorded in this account

invests who do not have SGL account can purchase and sell TBs

through DFHI. (Discount And Finance House of India)• The DFHI does this function on behalf of investors with the helps of

SGL transfer forms. The DFHI is actively participating in the auctions

of TBs. It is playing a significant role in the secondary market also by

quoting daily buying and selling rates.

• It also gives buy-back and sell- back facilities for period‟s upto 14 daysat an agreed rate of interest to institutional investors. The establishment

of the DFHI has imported greater liquidity in the TB market.



Participants in TB market

1. RBI and SBI

2. Commercial banks

3. State Governments

4. DFHI (Discount And Finance House of India)

5. STCI (Securities Trading Corporation of India )

6. Financial institutions like

IFCI (Industrial Finance Corporation of India), NABARD (National Bank

for Agriculture and rural development), LIC, GIC, UTI, IDBI, ICICI

7. Corporate customers

8. 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.



Importance of Treasury Bills

• Safety: Investments in TBs are highly safe since the payment of interest

and repayment of principal are assured by the Government. They carry zero

default risk since they are issued by the RBI for and on behalf of the

Central Government.

• Liquidity: Investments in TBs are also highly liquid because they can be

converted into cash at any time at the option of the inverts. The DFHI

announces daily buying and selling rates for TBs. They can be discounted

with the RBI and further refinance facility is available from the RBI against

TBs. Hence there is a market for TBs.

• Ideal Short-Term Investment: Idle cash can be profitably invested for a

very short period in TBs. TBs are available on top throughout the week at

specified rates. Financial institutions can employ their surplus funds on any

day. The yield on TBs is also assured.



Importance of Treasury Bills Cont….. • 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.



Importance of Treasury Bills 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 cannotbe 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 callrates 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.



Defects of Treasury Bills: • Poor Yield: The yield form TBs is the lowest. Long term Government

securities fetch more interest and hence subscriptions for TBs are on

the decline in recent times.

• Absence Of Competitive Bids: Though TBs are sold through auctionin order to ensure market rates for the investors, in actual practice,

competitive bids are competitive bids are conspicuously absent. The

RBI is compelled to accept these non-competitive bids. Hence adequate

return is not available. It makes TBs unpopular.

• 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.



How is the yield of a Treasury Bill calculated?

• It is calculated as per the following formula:-

Yield = 100-P X 365 X 100

P D

P = Purchase price

D = Days to maturityD = (actual number of days to maturity/365), Day Count: For Treasury Bills



How is the Treasury Bill Rate calculated?

• 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 TBsMP – Maturity period of TBs in days



Thank You

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Treasury Bills IFM PPT by Group 2