presentation on money market and government securities
TRANSCRIPT
PRESENTATION ON MONEY MARKET AND GOVERNMENT SECURITIES
Team Members (GROUP: 2)
Roll No
Name
5040 Patel Kaustubh
5068 Ankita Bhardwaj
5098 Kalpana Sindhu
5100 Komal Patel
Money market
As per RBI definitions “ A market for short terms financial assets that are close substitute for money, facilitates the exchange of money in primary and secondary market”.
The money market is a mechanism that deals with the lending and borrowing of short term funds (less than one year).
A segment of the financial market in which financial instruments with high liquidity and very short maturities are traded.
It doesn’t actually deal in cash or money but deals with substitute of cash like trade bills, promissory notes & government papers which can converted into cash without any loss at low transaction cost.
It includes all individual, institution and intermediaries.
Features of Money Market?
It is a market purely for short-terms funds or financial assets called near money.
It deals with financial assets having a maturity period less than one year only.
In Money Market transaction can not take place formal like stock exchange, only through oral communication, relevant document and written communication transaction can be done.
Transaction have to be conducted without the help of brokers.
It is not a single homogeneous market, it comprises of several submarket like call money market, acceptance & bill market.
The component of Money Market are the commercial banks, acceptance houses & NBFC (Non-banking financial companies).
Objective of Money Market?
To provide a parking place to employ short term surplus funds.
To provide room for overcoming short term deficits.
To enable the central bank to influence and regulate liquidity in the economy through its intervention in this market.
To provide a reasonable access to users of short-term funds to meet their requirement quickly, adequately at reasonable cost.
Money Market Instrument A variety of instrument are available in a developed money
market. In India till 1986, only a few instrument were available. However, now certain improvement is been seen in money market instrument.
There are two types of Instrument in General a) Government Securities and b) Non Government Securities Instrument
Government Securities
Non-Government
Securities
Government Securities
Government Securities are securities issued by the
Government for raising a public loan or as notified in
the official Gazette. They consist of Government
Promissory Notes, Bearer Bonds, Stocks or Bonds held
in Bond Ledger Account. They may be in the form of
Treasury Bills or Dated Government Securities.
Meaning of Government Sec.
Government security means a security created and issued by
the Government for the purpose of raising a public loan or any
other purpose as notified by the Government.
The Government securities comprise dated securities issued by
the Government of India and state governments as also,
treasury bills issued by the Government of India.
Also known as Gilt Edged Securities
Features of Government Securities Issued at face value
Face value is the par value of the security. The issue price
may be at a discount or a premium to the par value.
No Tax Deducted At Source
In government securities no tax is deducted at source.
No default risk
The main feature of investing in G-secs is that there is a
minimal default risk, as the instrument is issued by the GOI.
The government generates revenue in the form of taxes and
income from ownership of assets. Besides these, it borrows
extensively from banks, financial institutions and the public
to finance its expenditure in excess of its revenues.
Can be held in D-mat form
Government Securities can also be held in demat form.
SGL or CSGL are a demat form of holding government
securities with the RBI.
Liquidity
G-secs have ample amount liquidity available both in the
primary and secondary market.
Maturity and rate of interest
These securities have a maturity period of 1 to 30 years. G-
Secs offer fixed interest rate, where interests are payable
half yearly.
Repayment
Government securities are repaid at par on the expiry of
their tenor.
Government Securities
Government securities
Central Government(T-Bill & Bonds)
State Government(Bonds or Dated Securities)
Instruments of Govt. Sec.
1. T-Bills
2. Cash management Bills
3. Dated Securities
4. State Development Loans(SDLs)
Treasury bills or T-bills, are the money market
instruments, that are short term debt instruments
issued by the Government of India.
T-Bills
T-bills(Tenure)
91 days 364 days
Ques :
T-Bill- 91 days , Maturity Date-31/10/2012
B/P-98.0445 , Redemption price -100
FORMULA:
Gain/B/P * 365/No. of T-Bill days
GAIN = R/P-B/P = 100-98.0445 = 1.955
1.955/98.0445 * 365/91=8%
When gain =9%(GIVEN) B/P=?
9%=100-X/X * 365/91
So, X=97.81
STATE DEVELOPMENT LOANS(SDLs) State Governments also raise loans from the market.
SDLs are dated securities issued through an auction similar
to the auctions conducted for dated securities issued by the
Central Government .
Interest is serviced at half-yearly intervals and the principal
is repaid on the maturity date. Like dated securities 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).
Cash Management Bills Government of India, in consultation with the Reserve Bank
of India, has decided to issue a new short-term instrument,
known as Cash Management Bills (CMBs), to meet the
temporary mismatches in the cash flow of the Government.
The CMBs have the generic character of T-bills but are
issued for maturities less than 91 days.
Like T-bills, they are also issued at a discount and
redeemed at face value at maturity.
The tenure, notified amount and date of issue of the CMBs
depends upon the temporary cash requirement of the
Government.
Dated SecuritiesDated Securities
Fixed rate Bonds
Floating Rate Bonds
Zero coupon bonds
Capital Indexed bonds
Different types of Dated Securities
Securities with fixed coupon rates viz, Dated
Securities.
Securities with variable coupon rates, viz, Floating
Rate Bonds.
Zero Coupon Bonds
Securities for either the subscription is received or
the repayment is made in instalments
Securities with Embedded Derivatives (e.g. Call and
Put Options).
Issue of government securities
1. Auction
2. OMOs
3. Fixed Coupon Rate
4. Floating Rate
Auction
Competitive Bidding
Yield Based Auction Price Based Auction
Uniform Price
Multiple price
Yield Based Auction:
A yield based auction is generally conducted when a new
Government security is issued.
Successful bidders are those who have bid at or below the cut-
off yield.
Price Based Auction:
A price based auction is conducted when Government of India
re-issues securities issued earlier.
Bids are arranged in descending order and the successful
bidders are those who have bid at or above the cut-off price.
Uniform Price :Each winning bidder pays the uniform price
decided by the Reserve Bank.
Multiple Price : Each winning bidder pays the price
it bid.
Competitive Bidding : In a competitive bid,
participants submit their bids to the Reserve Bank
who then decides the cut off yeild/ price and makes
the allotment.
Non-Competitive Bidding : In non competitive bid,
participants are not allowed to bid ,as they do not
have the expertise in bidding and are allotted bids at
the weighted average price determined in
competitive bidding.
Open Market Operations (OMOs)
OMOs are the market operations conducted by the Reserve
Bank of India by way of sale/ purchase of Government
securities to/ from the market with an objective to adjust
the rupee liquidity conditions in the market on a durable
basis.
When the RBI feels there is excess liquidity in the market, it
resorts to sale of securities thereby sucking out the rupee
liquidity.
Similarly, when the liquidity conditions are tight, the RBI will
buy securities from the market, thereby releasing liquidity
into the market.
Question-Answer What is meant by buyback of Government securities?
Governments make provisions in their budget for buying back
of existing securities. Buyback can be done through an auction
process or through the secondary market route, i.e., NDS/NDS-
OM.
How and in what form can Government Securities be
held?
How does the trading in Government securities take
place?
1. Over the Counter/Telephone
2. Negotiated Dealing System
3. Stock Exchange
Why does the price of Government security
change?
The price of a Government security, like other financial
instruments, keeps fluctuating in the secondary market.
The price is determined by demand and supply of the
securities.
Specifically, the prices of Government securities are
influenced by the level and changes in interest rates in
the economy and other macro-economic factors, such
as, expected rate of inflation, liquidity in the market,
etc.
Developments in other markets like money, foreign
exchange, credit and capital markets also affect the price
of the Government securities.
Further, developments in international bond markets,
specifically the US Treasuries affect prices of Government
securities in India.
Policy actions by RBI (e.g., announcements regarding
changes in policy interest rates like Repo Rate, Cash
Reserve Ratio, Open Market Operations, etc.) can also
affect the prices of Government securities.
What are the risks involved in holding Government securities?
1. Market risk – Market risk arises out of adverse
movement of prices of the securities that are
held by an investor due to changes in interest
rates. This will result in booking losses on
marking to market or realizing a loss if the
securities are sold at the adverse prices. Small
investors, to some extent, can mitigate market
risk by holding the bonds till maturity so that
they can realize the yield at which the
securities were actually bought.
2. Reinvestment risk – Cash flows on a Government
security includes fixed coupon every half year and
repayment of principal at maturity. These cash flows
need to be reinvested whenever they are paid. Hence
there is a risk that the investor may not be able to
reinvest these proceeds at profitable rates due to
changes in interest rate scenario.
3. Liquidity risk – Liquidity risk refers to the inability of an
investor to liquidate (sell) his holdings due to non availability
of buyers for the security, i.e., no trading activity in that
particular security. Usually, when a liquid bond of fixed
maturity is bought, its tenor gets reduced due to time decay.
For example, a 10 year security will become 8 year security
after 2 years due to which it may become illiquid. Due to
illiquidity, the investor may need to sell at adverse prices in
case of urgent funds requirement. However, in such cases,
eligible investors can participate in market repo and borrow
the money against the collateral of the securities.