Treasury

Money Market
Certificate of Deposit (CD) Commercial Paper (C.P) Inter Bank Participation Certificates Inter Bank term Money Treasury Bills Call Money

Certificate of Deposit
CDs are short-term borrowings in the form of Usance Promissory Notes having a maturity of not less than 7 days up to a maximum of one year. CD is subject to payment of Stamp Duty under Indian Stamp Act, 1899 (Central Act) They are like bank term deposits accounts. Unlike traditional time deposits these are freely negotiable instruments and are often referred to as Negotiable Certificate of Deposits

Features of CD

Issued by all scheduled commercial banks except RRBs Minimum period 7 days Maximum period 1 year Minimum Amount Rs 1 lac and in multiples of Rs. 1 lac CDs are transferable by endorsement CDs are to be stamped

Commercial Paper
Commercial Paper (CP) is an unsecured money market instrument issued in the form of a promissory note. Who can issue Commercial Paper (CP) Highly rated corporate borrowers, primary dealers (PDs) and all-India financial institutions (FIs)

Eligibility for issue of CP

the tangible net worth of the company, as per the latest audited balance sheet, is not less than Rs. 4 crore; b) the working capital (fund-based) limit of the company has been sanctioned by banks c) borrowal account of the company is classified as a Standard Asset by the financing bank/s.
a)

Rating Requirement

All eligible participants should obtain the credit rating for issuance of Commercial Paper

Credit Rating Information Services of India Ltd. (CRISIL)

Investment Information and Credit Rating Agency of India Ltd. (ICRA)

Credit Analysis and Research Ltd. (CARE) Fitch Ratings Duff & Phelps Credit Rating India Pvt. Ltd. (DCR India) The minimum credit rating shall be P-2 of CRISIL or such equivalent rating by other agencies

Features

CP can be issued for maturities between a minimum of 7 days and a maximum upto one year from the date of issue.

Minimum issue price Rs. 5 lakhs and in multiples of Rs. 5 lakhs

Issued in demat form only

To whom issued
CP is issued to individuals, banking companies, other corporate bodies registered or incorporated in India and unincorporated bodies, Non-Resident Indians (NRIs) Foreign Institutional Investors (FIIs).

CP-Yield calculation

Yield =

(Face value-Price)*365*100 -------------------------------Price *No of days to maturity

Face value 5 lakhs price 4,92,711 for 90 days Find out yield 500000-492711*365*100 ---------------------------------= 6% 492711*90

Call Money
The money that is lent for one day is known as "Call Money", If it exceeds one day (but less than 15 days) it is referred to as "Notice Money".

Call Money Market

Banks borrow in this market for the following purpose To fill the gaps or temporary mismatches in funds To meet the CRR & SLR mandatory requirements as stipulated by the Central bank To meet sudden demand for funds arising out of large outflows.

Factors influencing interest rates

The factors which govern the interest rates are mostly economy

related and are commonly referred to as macroeconomic factors.

Some of these factors are: 1) Demand for money

2) Government borrowings
3) Supply of money 4) Inflation rate 5) The Reserve Bank of India and the Government policies which determine some of the variables mentioned above.

Gilt edged securities

The term government securities encompass all Bonds & T-bills issued by the Central Government, and state governments. These securities are normally totally referred secured to, as by "gilt-edged" as repayments of principal as well as interest are guarantee.

Treasury Bills
Treasury bills, commonly referred to as T-Bills are issued by Government of India against their short term borrowing requirements with maturities ranging between 14 to 364 days. All these are issued at a discount-to-face value. For example a Treasury bill of Rs. 100.00 face value issued for Rs. 91.50 gets redeemed at the end of it's tenure at Rs. 100.00.

Who can invest in T-Bill

Banks, Primary Dealers, State Governments, Provident Funds, Financial Institutions, Insurance Companies, NBFCs, FIIs (as per prescribed norms), NRIs & OCBs can invest in T-Bills.

What is auction of Securities

Auction is a process of calling of bids with an objective of arriving at the market price. It is basically a price discovery mechanism

Debenture
A Debenture is a debt security issued by a company (called the Issuer), which offers to pay interest in lieu of the money borrowed for a certain period. These are long-term debt instruments issued by private sector companies. These are issued in denominations as low as Rs 1000 and have maturities ranging between one and ten years.

Difference between debenture and bond

Long-term debt securities issued by the Government of India or any of the State Governments or undertakings owned by them or by development financial institutions are called as bonds. Instruments issued by other entities are called debentures.

Swap
A swap agreement between two parties commits each counterparty to exchange an amount of funds, determined by a formula, at regular intervals, until the swap expires. In the case of a currency swap, there is an initial exchange of currency and a reverse exchange at maturity.

Mechanics
Firm A needs fixed rate loan AAA rated Firm B needs floating rate -A rated Firm A enjoys an absolute advantage in both credit markets.

Firm A Fixedrate finance Firm B

9%

11%

Floating- LIBOR LIBOR rate finance +0.0% +1%

Mechanics
STEP ! Firm A will borrow at Fixed rate 9% Firm B will borrow at floating rate (LIBOR +1)% STEP 2 Firm A will pay Floating rate [LIBOR] to Firm B Firm B will Pay Fixed rate [9.5%] only Gain Net interest cost LIBOR- .5% Net Interest cost 9+[ 1%+0.5%]=10.5%

Mechanics
Gain
A 9.5%
Borrows at 9.0% fixed for 7 years

Interest payments to each other in years t 1 to t 7.

B
Borrows at LIBOR + 1% floating for 7 years

LIBOR