Money Market Instruments Available In Us And India Finance Essay - Free Essay Example

Sample details Pages: 5 Words: 1500 Downloads: 8 Date added: 2017/06/26 Category Finance Essay Type Narrative essay Did you like this example? Treasury Bills, are a type of money market instruments available in both US and India. These are the zero coupon bond and doesnt pay any coupon. Thats why these are generally issued at discount and on maturity redeemed at the face value. Don’t waste time! Our writers will create an original "Money Market Instruments Available In Us And India Finance Essay" essay for you Create order In India, also called as Government Instruments (G-secs), it is issued by RBI and are backed by Government of India. These are short term debt instruments as the tenure of currently issued T bills is of 3 types: 91 day (3 months), 182 day (6 months) and 364 day (1year). For example, a 91 day Treasury Bill of Rs.100/- (face value) may be issued at a discount of say, Rs.1.80, that is Rs.98.20 and redeemed at the face value of Rs.100/-. The investors will get a return equal to difference between the maturity value or face value (i.e., Rs.100) and the issue price. Treasury Bills are issued through auctions conducted by the Reserve Bank of India usually every Wednesday and payments for the Treasury Bills purchased have to be made on the following Friday. The Treasury Bills of 182 days and 364 days tenure are issued on alternate Wednesdays, that is, Treasury Bills of 364 day tenure are issued on the Wednesday preceding the reporting Friday while Treasury Bills of 182 days tenure are iss ued on the Wednesday prior to a non-reporting Friday. Currently, the notified amount for issuance of 91 day and 182 day Treasury Bills is Rs.500 crore each whereas the notified amount for issuance of 364 day Bill is higher at Rs.1000 crore. Government, at its discretion, can also decide to issue additional amounts of the Treasury Bills by giving prior notice. An annual calendar of T-Bill issuances for the following financial year is released by the Reserve Bank 8 of India in the last week of March. The Reserve Bank of India also announces the issue details of Treasury bills by way of press release every week. In US it is issued by Fed and is backed by US government. Tenure of US T-bills is 4 weeks, 13 weeks, 26 weeks, or 52 weeks. Generally these are issued in the denomination of USD 1000 and are issued at discount since these are zero coupon bonds. Dated Government Instruments are the Instruments which are longer in term than the T bills. These Instruments pay interest at fix ed time periods (usually half yearly) called coupon on the face value and this can be either fixed or floating coupon. The tenor of these Instruments can be up to 30 years. In India, the Public Debt Office (PDO) of the RBI acts as the registry / depository of Government Instruments. This office takes care of all the dealings for these Instruments like issue, interest payment and repayment of principal at maturity. We generally have fixed coupon Instruments. The nomenclature of a typical dated fixed coupon Government security has the following features coupon, name of the issuer, maturity and face value. e.g. If the bond is called 7.49% GOI 2017 then it would have these features. Date of Issue : April 16, 2007 Date of Maturity : April 16, 2017 Coupon : 7.49% paid on face value Coupon Payment Dates : Half-yearly (October16 and April 16) every year Minimum Amount of issue/ sale : Rs.10,000 Same as the case with Treasury Bills, dated Instruments of both Gover nment of India and State Governments are issued by RBI through auctions. The Auctions are announced by the RBI a week in advance through Press Releases and paid advertisements in major dailies (for dated Instruments). Hence the investors get adequate time in order to plan for the purchase of government Instruments through such auctions Types of Dated Instruments Fixed Rate Bonds As the name suggests the interest rate i.e. cupon rate is fixed on these bonds for the entire life of the bond. As already told, In india, most Government bonds are issued as fixed rate bonds. e.g. Lets say RBI issue 8.24%GS2018 on April 22, 2008 and the tenor of the bind is 10 years maturing on April 22, 2018. Coupon on this security will be paid half-yearly at 4.12% (as the 8.24% is the total coupon and hence the half yearly payment being the half of it) of the face value and it will be paid on October 22 and April 22 of each year. Floating Rate Bonds As the name suggest these bonds dont have a fixed coupon rate and the coupon is re-set at pre-announced intervals based on a specified methodology. In these bonds the coupon of the bond is re-set at regular intervals and these interval are defined beforehand while issuing the security. The rate is generally calculated by adding a spread over a base rate. In India, most floating rate bonds issued by the GOI, the base rate is the weighted average cutoff yields of the last three 364 day Treasury Bill auction preceding the coupon re-set date. Floating Rate Bonds were first issued in September 1995 in India. For example, a Floating Rate Bond was issued on July 2, 2002 for a tenor of 15 years, maturing on July 2, 2017. The base rate on the bond for the coupon payments was fixed at 6.50% being the weighted average rate of implicit yield on 364 day Treasury Bills during the preceding six auctions. Further, in the bond auction, a cut-off spread (markup over the benchmark rate) of 34 basis points (0.34%) was decided. Hence the coupon for the first six months was fixed at 6.84%. At the next reset date after six months, assuming that the average cutoff yield in the preceding six auctions of 364 day Treasury Bill is 6.60%, coupon applicable for the next half year would be 6.94%. Zero Coupon Bonds Zero coupon bonds are bonds with no coupon payments. Like Treasury Bills, they are issued at a discount to face value. Such Instruments were issued by the Government of India in the 1990s, but no issue was made thereafter. Capital Indexed Bonds These are bonds, the principal of which is linked to an accepted index of inflation with a view to protecting the holder from inflation. A capital indexed bond, with the principal hedged against inflation, was issued in December 1997. These bonds matured in 2002. Steps are now being taken to revive the issuance of the Inflation Indexed Bonds wherein payment of both the coupon and principal payments on the bonds will be linked to an Inflation Index (Wholesale Price In dex). Bonds with Call/ Put Options Bonds can also be issued with features of optionality wherein the issuer can have the option to buyback (call option) or the investor can have the option to sell the bond (put option) to the issuer during the currency of the bond. A bond (viz., 6.72%GS2012) with call / put option was issued in India in the year 2002 which will mature in 2012. 6.72%GS2012 was issued on July 18, 2002 for a maturity of 10 years maturing on July 18, 2012. The optionality on the bond could be exercised after completion of five years tenure from the date of issuance on any coupon date falling thereafter. The Government has the right to buyback the bond (call option) at par value (equal to the face value) while the investor has the right to sell the bond (put option) to the Government at par value at the time of any of the half-yearly coupon dates starting from July 18, 2007. Special Instruments In addition to Treasury Bills and dated Instruments issued by the Gov ernment of India under the market borrowing programme, the Government of India also issues, from time to time, special Instruments to entities like Oil Marketing Companies, Fertilizer Companies, the Food Corporation of India, etc. as compensation to these companies in lieu of cash subsidies. These Instruments are usually long dated Instruments carrying coupon with a spread of about 20-25 basis points over the yield of the dated Instruments of comparable maturity.These Instruments are, however, not eligible SLR Instruments but are approved Instruments and are eligible as collateral for market repo transactions. The beneficiary oil marketing companies may divest these 11 Instruments in the secondary market to banks, insurance companies / Primary Dealers, etc., for raising cash. Steps are being taken to introduce new types of instruments like STRIPS (Separate Trading of Registered Interest and Principal of Instruments). STRIPS are instruments wherein each cash flow of the fixed coup on security is converted into a separate tradable Zero Coupon Bond and traded. For example, when Rs.100 of the 8.24%GS2018 is stripped, each cash flow of coupon (Rs.4.12 each half year) will become coupon STRIP and the principal payment (Rs.100 at maturity) will become a principal STRIP. These cash flows are traded separately as independent Instruments in the secondary market. State Development Loans (SDLs) State Governments also raise loans from the market. SDLs are dated Instruments issued through an auction similar to the auctions conducted for dated Instruments issued by the Central Government (see question 3 below). Interest is serviced at half-yearly intervals and the principal is repaid on the maturity date. Like dated Instruments issued by the Central Government, SDLs issued by the State Governments qualify for SLR. They are also eligible as collaterals for borrowing through market repo as well as borrowing by eligible entities from the RBI under the Liquidity Adjustment Facility (LAF).