Time Value of Money & Money Market

Introduction

Time Value of Money

Money Marke t
Calcula tion of TVM

Money Market Instruments

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Financial Markets And Services

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Presented By:12002 - Abhishek Unnithan 12012 - Ashwin Tripathy 12022 - Kuldeep Singh 12045 - Sonali Agrawal 12055 - Vishwanath Rana
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Time Value Of Money

A rupee today is more valuable than a rupee a year hence. Reasons : Inflation Reinvestment opportunity Expected rate of returns

Applied

in decision making individuals , business firm etc.

by
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Timelines
q A timeline is a graphical device used to

clarify the timing of the cash flows for an investment

q Each tick represents one time period

PV 0 Today
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FV 1 2 3 4 5
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Abbreviations
r = rate of return t = time period n = number of time periods PMT = payment CF = Cash flow (the subscripts t and 0 mean at

time t and at time zero, respectively) annuity) annuity)

PV = present value (PVA = present value of an FV = future value (FVA = future value of an
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Example of FV of a Lump Sum

How much money will you have in 5 years if you invest Rs.100 today at a 10% rate of return?
i = 10% 1 2 3 4

Rs.10 0 0 Formula: FVt = CF0 *(1+r)t

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? 5

Solution: FV = 100 * (1+.1)5 FV = Rs.161.05

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Example of PV of a Lump Sum

How much would $100 received five years from now be worth today if the current interest rate is 10%?
i = 10% ? 0 1 2 3 4 $100 5

Formula : PV = CFt / (1+r)t

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Solution: PV = 100 / (1 + .1)5 PV = $62.09

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Annuities
An

annuity is a series of nominally equal payments equally spaced in time

Rent Mortgage payments Car payment Pension income

Annuities are very common:

10 10 10 10 Example of a 5-year, $100 10 annuity: 0

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0 1

0 3

0 4

0 5

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Example of PV of an Annuity

Assume that Sally owns an investment that will pay her $100 each year for 20 years. The current interest rate is 15%. What is the PV of this annuity?
$100 $100 $100 $100 $100

0 1 ?

3 .

19 20

i = 15%
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Solution: PVA = $100 * {[1-(1+.15)-20]/.15} PVA = $100 * 6.2593 PVA = $625.93

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Example of FV of an Annuity

Assume that Sally owns an investment that will pay her $100 each year for 20 years. The current interest rate is 15%. What is the FV of this annuity? Draw a timeline
$100 $100

1.

$100 $100 $100

0 1

3 .

19 20 ?

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i = 15%

1111

Solution: FVA20 = $100 * [(1+.15)20 1]/.15 FVA20 = $100 * 102.4436 FVA20 = $10,244.36

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Money Market
A segment of the financial market in which financial instruments that are close substitutes for money and having maturity period of one or less than one year are traded.

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Characteistics
Market of Short-term debt instrument. No Physical location Creditworthiness

of the participants is

important
Main Players
RBI, DFHI Banks and NBFCs Corporate investors
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Functions
Balance

Benefits
Provides

demand and supply of shortterm funds liquidity and level of interest rates in the economy reasonable access to suppliers and users.

a stable source of funds to banks and Govt development of nonbank entities

Influence

Encourage

Provides

Makes

monetary actions
Helps

effective policy in

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pricing different floating interest products 1515

Role Of RBI
To

maintain liquidity and interest rates in accordance with the monetary policy objectives ensure adequate flow of credit to the productive sectors of the economy

To

Bring order in Foreign Exchange market

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Money Market Instruments

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Treasury Bills
short-term instruments used by the government to raise short-term funds Issued By Denomination Maturity RBI Min face value Rs.25000 and in multiples there of. 91 days ,182 days and 364 days.

Rate of interest At discounted rate Other features Highly liquid and safe investment Sold on auction basis every fortnight by calling bids from banks, State Govt. etc
1818

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Commercial Papers(CPs)
Unsecured short-term promissory notes
Issued By Denomination creditworthy corporates, primary dealers and All India financial institutions min Rs. 5 Lac and multiples thereof

Maturity 7 days to 1 year Rate of interest 0%, Provided at discount Other features Negotiable and transferable Can be issued to individuals, banks, companies etc.

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Certificates Of Deposits(CDs)
deposits
Issued By Denomination Maturity

Unsecured, short-term tradable time

Commercial Banks and financial institutions min Rs. 1 Lac and multiples thereof 7 days to 1 year

Rate of interest 0%, Provided at discount Other features Negotiable and transferable Can be subscribed by individuals, corporations, companies, trusts etc.

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Call/Notice Money Market

The

call money market is an integral part of the Indian Money Market, where the day-to-day surplus funds (mostly of banks) are traded. loans are of short-term duration varying from 1 to 14 days. The money that is lent for one day in this market is known as "Call Money", and if it exceeds one day (but less than 15 days) it is referred to as "Notice Money".

The

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Call Money Market

Banks borrow in this market for the following purposes
To To

fill the gaps or temporary mismatches in funds meet the CRR & SLR mandatory requirements as stipulated by the Central bank large outflows.

To meet sudden demand for funds arising out of

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Commercial bills
Commercial

bills are generally associated with business lending or high-end investment lending. interest rate, or floor rate, is based on two things, the Bank Bill Swap Rate (BBSW), and a margin added by the lender of 1.00-3.00% called the facility fee.

The

rollover period may be 30, 60, 90, 180 days, 6 3/16/12 2323 monthly or even annually. Interest is paid at each

The

Collateralised Borrowing and Lending Obligation (CBLO)

Offered By Denomination Maturity CCIL members Banks, FIs, Primary dealers, MFs and Cooperative Banks min order lot for auction Rs. 50 Lac and in multiples of Rs. 5 Lac thereof 1 day to 1 year

Rate of interest 0%, Provided at discount Other features Provide liquidity to non-bank entities Regulated by RBI

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