Treasury Bill (T-Bill)

Filed Under Bonds , Fixed Income

Definition of 'Treasury Bill (T-Bill)'

than one year. T-bills are sold in denominations of $1,000 up to a maximum purchase of $5 million and commonly have maturities of one month (four weeks), three months (13 weeks) or six months (26 weeks). T-bills are issued through a competitive bidding process at a discount from par, which means that rather than paying fixed interest payments like conventional bonds, the appreciation of the bond provides the return to the holder.

A short-term debt obligation backed by the U.S. government with a maturity of l

Treasury Bills Treasury Bills are money market instruments to finance the short term requirements of the Government of India. These are discounted securities and thus are issued at a discount to face value. The return to the investor is the difference between the maturity value and issue price. Types Of Treasury Bills There are different types of Treasury bills based on the maturity period and utility of the issuance like, ad-hoc Treasury bills, 3 months, 6 months and 12months Treasury bills etc. In India, at present, the Treasury Bills are issued for the following tenors 91-days, 182-days and 364-days Treasury bills. Benefits Of Investment In Treasury Bills No tax deducted at source Zero default risk being sovereign paper Highly liquid money market instrument Better returns especially in the short term Transparency Simplified settlement High degree of tradeability and active secondary market facilitates meeting unplanned fund requirements. Features

Form The treasury bills are issued in the form of promissory note in physical form or by credit to Subsidiary General Ledger (SGL) account or Gilt account in dematerialised form. Minimum Amount Of Bids Bids for treasury bills are to be made for a minimum amount of Rs. 25000/- only and in multiples thereof. Eligibility: All entities registered in India like banks, financial institutions, Primary Dealers, firms, companies, corporate bodies, partnership firms, institutions, mutual funds, Foreign Institutional Investors, State Governments, Provident Funds, trusts, research organisations, Nepal Rashtra bank and even individuals are eligible to bid and purchase Treasury bills. Repayment The treasury bills are repaid at par on the expiry of their tenor at the office of the Reserve Bank of India, Mumbai. Availability All the treasury Bills are highly liquid instruments available both in the primary and secondary market. Day Count For treasury bills the day count is taken as 365 days for a year. Yield Calculation The yield of a Treasury Bill is calculated as per the following formula: (100P)*365*100 Y =-----------------P*D

Wherein Y = discounted yield P= Price D= Days to maturity Example A cooperative bank wishes to buy 91 Days Treasury Bill Maturing on Dec. 6, 2002 on Oct. 12, 2002. The rate quoted by seller is Rs. 99.1489 per Rs. 100 face values. The YTM can be calculated as following: The days to maturity of Treasury bill are 55 (October 20 days, November 30 days and December 5 days) YTM = (100-99.1489) x 365 x 100/(99.1489*55) = 5.70% Similarly if the YTM is quoted by the seller price can be calculated by inputting the price in above formula.

Primary Market n the primary market, treasury bills are issued by auction technique. CALENDAR OF AUCTION FOR TREASURY BILLS Treasury Bill Day of auction Day of payment 91 day Every Wednesday Following Friday 182 day Wednesday preceding thenon-Reporting Friday Following Friday 364 day Wednesday preceding the reporting Friday Following Friday Salient Features Of The Auction Technique The auction of treasury bills is done only at Reserve Bank of India, Mumbai. Bids are submitted in terms of price per Rs. 100. For example, a bid for 91-day Treasury bill auction could be for Rs. 97.50. Auction committee of Reserve Bank of India decides the cut-off price and results are announced on the same day. Bids above the cut-off price receive full allotment; bids at cut-off price may receive full or partial allotment and bids below the cut-off price are rejected. Types Of Auctions There are two types of auction for treasury bills: Multiple Price Based or French 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 or Dutch 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. Secondary Market & Palyers The major participants in the secondary market are scheduled banks, financial Institutions, Primary dealers, mutual funds, insurance companies and corporate treasuries. Other entities like cooperative and regional rural banks, educational and religious trusts etc. have also begun investing their short term funds in treasury bills. Advantages Market related yields Transparency in operations as the transactions would be put through Reserve Bank of Indias SGL or Clients Gilt account only Two way quotes offered by primary dealers for purchase and sale of treasury bills. Certainty in terms of availability, entry & exit

Treasury Bills - An Effective Cash Management Product Treasury Bills are very useful instruments to deploy short term surpluses depending upon the availability and requirement. Even funds which are kept in current accounts can be

deployed in treasury bills to maximise returns Banks do not pay any interest on fixed deposits of less than 15 days,or balances maintained in current accounts, whereas treasury bills can be purchased for any number of days depending on the requirements. This helps in deployment of idle funds for very short periods as well. Further, since every week there is a treasury bills auction, one can purchase treasury bills of different maturities as per requirements so as to match with the respective outflow of funds. At times when the liquidity in the economy is tight, the returns on treasury bills are much higher as compared to bank deposits even for longer term. Besides, better yields and availability for very short tenors, another important advantage of treasury bills over bank deposits is that the surplus cash can be invested depending upon the staggered requirements. Example : Suppose party A has a surplus cash of Rs. 200 crore to be deployed in a project. However, it does not require the funds at one go but requires them at different points of time as detailed below: Funds Available as on 1.1.2000 Rs. 200 crore Deployment in a project Rs. 200 crore As per the requirements Rs 6.1.2000 50 crore . Rs 13.1.2000 20 crore . Rs 02.2.2000 30 crore . Rs 08.2.2000 100 crore . Out of the above funds and the requirement schedule, the party has following two options for effective cash management of funds: Option I Invest the cash not required within 15 days in bank deposits The party can invest a total of Rs. 130 crore only, since the balance Rs. 70 crores is required within the first 15 days. Assuming a rate of return of 6% paid on bank deposits for a period of 31 to 45 days, the interest earned by the company works out to Rs. 76 lacs approximately. Option II Invest in Treasury Bills of various maturities depending on the funds

requirements The party can invest the entire Rs. 200 crore in treasury bills as treasury bills of even less than 15 days maturity are also available. The return to the party by this deal works out to around Rs. 125 lacs, assuming returns on Treasury Bills in the range of 8% to 9% for the above periods. Portfolio Management Strategies

Strategies for managing a portfolio can broadly be classified as active or passive strategies. Buy And Hold A buy and hold strategy can be described as a passive strategy since the Treasury bills once purchased, would be held till its maturity. The salient features of this strategy are: Return is fixed or locked in at the time of investment itself. The exposure to price variations due to secondary market fluctuations is eliminated. There is no risk of default on maturity. Buy And Trade This strategy can also be described as an active market strategy. The returns on this strategy are higher than the buy and hold strategy as the yield can be optimised by actively trading the treasury bills in the secondary market before maturity.

Credit rating
From Wikipedia, the free encyclopedia

The examples and perspective in this article deal primarily with OECD and do not represent a worldwide view of the subject. Pleaseimprove this article and discuss the issue on the talk page. (October 2011)

Credit rating of governments around the world byStandard & Poor's: AAA AA A BBB BB

B not rated
A credit rating evaluates the credit worthiness of an issuer of specific types of debt, specifically, debt issued by a business enterprise such as a corporation or a government. It is an evaluation made by a credit rating agency of the debt issuers likelihood of default.[1] Credit ratings are determined by credit ratings agencies. The credit rating represents the credit rating agency's evaluation of qualitative and quantitative information for a company or government; including non-public information obtained by the credit rating agencies analysts. Credit ratings are not based on mathematical formulas. Instead, credit rating agencies use their judgment and experience in determining what public and private information should be considered in giving a rating to a particular company or government. The credit rating is used by individuals and entities that purchase the bonds issued by companies and governments to determine the likelihood that the government will pay its bond obligations. Credit ratings are often confused with credit scores. Credit scores are the output of mathematical algorithms that assign numerical values to information in an individual's credit report. The credit report contains information regarding the financial history and current assets and liabilitiesof an individual. A bank or credit card company will use the credit score to estimate the probability that the individual will pay back loan or will pay back charges on a credit card. However, in recent years, credit scores have also been used to adjust insurance premiums, determine employment eligibility, as a factor considered in obtaining security clearances and establish the amount of a utility or leasing deposit. A poor credit rating indicates a credit rating agency's opinion that the company or government has a high risk of defaulting, based on the agency's analysis of the entity's history and analysis of long term economic prospects. A poor credit score indicates that in the past, other individuals with similar credit reports defaulted on loans at a high rate. The credit score does not take into account future prospects or changed circumstances. For example, if an individual received a credit score of 400 on Monday because he had a history of defaults, and then won thelottery on Tuesday, his credit score would remain 400 on Tuesday because his credit report does not take into account his improved future prospects.

A credit score is a numerical expression based on a statistical analysis of a person's credit files, to represent the creditworthiness of that person. A credit score is primarily based on credit reportinformation typically sourced from credit bureaus. Lenders, such as banks and credit card companies, use credit scores to evaluate the potential risk posed by lending money to consumers and to mitigate losses due to bad

debt. Lenders use credit scores to determine who qualifies for a loan, at what interest rate, and what credit limits. Lenders also use credit scores to determine which customers are likely to bring in the most revenue. The use of credit or identity scoring prior to authorizing access or granting credit is an implementation of a trusted system. Credit scoring is not limited to banks. Other organizations, such as mobile phone companies, insurance companies, landlords, and government departments employ the same techniques. Credit scoring also has a lot of overlap with data mining, which uses many similar techniques. FICO is a publicly-traded corporation (under the ticker symbol FICO) that created the best-known and most widely used credit score model in the United States.

Score interpretation
The first step to interpreting a score is to identify the source of the credit score and its use. There are numerous scores based on various scoring models sold to lenders and other users. The most common was created by Fair Isaac Co. and is called the FICO score. FICO produces scoring models that are most commonly used, and which are installed at and distributed by the three largest national credit repositories in the U.S (TransUnion, Equifax and Experian) and the two national credit repositories in Canada (TransUnion Canada and Equifax Canada). FICO controls the vast majority of the credit score market in the United States and Canada although there are several other competing players that collectively share a very small percentage of the market. In the United States, FICO risk scores range from 300-850, with 723 being the median FICO score of Americans in 2010. The performance definition of the FICO risk score (its stated design objective) is to predict the likelihood that a consumer will go 90 days past due or worse in the subsequent 24 months after the score has been calculated. The higher the consumer's score, the less likely he or she will go 90 days past due in the subsequent 24 months after the score has been calculated. Because different lending uses (mortgage, automobile, credit card) have different parameters, FICO algorithms are adjusted according to the predictability of that use. For this reason, a person might have a higher credit score for a revolving credit card debt when compared to a mortgage credit score taken at the same point in time. The interpretation of a credit score will vary by lender, industry, and the economy as a whole. While 620 has historically been a divider between "prime" and "subprime", all considerations about score revolve around the strength of the economy in general and investors' appetites for risk in providing the funding for borrowers in particular when the

score is evaluated. In 2010, the Federal Housing Administration (FHA) tightened its guidelines regarding credit scores to a small degree, but lenders who have to service and sell the securities packaged for sale into the secondary market largely raised their minimum score to 640 in the absence of strong compensating factors in the borrower's loan profile. In another housing example, Fannie Mae and Freddie Mac began charging extra for loans over 75% of the value that have scores below 740. Furthermore, private mortgage insurance companies will not even provide mortgage insurance for borrowers with scores below 660. Therefore, "prime" is a product of the lender's appetite for the risk profile of the borrower at the time that the borrower is asking for the loan.

Securitization
From Wikipedia, the free encyclopedia
For Securitization in International relations, see Securitization (international relations). Securitization is the financial practice of pooling various types of contractual debt such as residential mortgages, commercial mortgages, auto loans or credit card debt obligations and selling said consolidated debt as bonds, pass-through securities, or Collateralized mortgage obligation (CMOs), to various investors. The principal and interest on the debt, underlying the security, is paid back to the various investors regularly. Securities backed by mortgage receivables are called mortgage-backed securities (MBS), while those backed by other types of receivables are asset-backed securities(ABS). Critics have suggested that the complexity inherent in securitization can limit investors ability to monitor risk, and that competitive securitization markets with multiple securitizers may be particularly prone to sharp declines in underwriting standards. Private, competitive mortgage securitization is believed to have played an important role in the U.S. subprime mortgage crisis. [1] In addition, off-balance sheet treatment for securitizations coupled with guarantees from the issuer can hide the extent of leverage of the securitizing firm, thereby facilitating risky capital structures and leading to an underpricing of credit risk. Off balance sheet securitizations are believed to have played a large role in the high leverage level of U.S. financial institutions before the financial crisis, and the need for bailouts. [2] The granularity of pools of securitized assets is a mitigant to the credit risk of individual borrowers. Unlike general corporate debt, the credit quality of securitised debt is non-stationary due to changes in volatility that are time- and structure-dependent. If the transaction is properly structured and the pool performs as expected,

the credit risk of all tranches of structured debt improves; if improperly structured, the affected tranches may experience dramatic credit deterioration and loss.[3] Securitization has evolved from its tentative beginnings in the late 1970s to a vital funding source with an estimated outstanding of $10.24 trillion in the United States and $2.25 trillion in Europe as of the 2nd quarter of 2008. In 2007, ABS issuance amounted to $3.455 trillion in the US and $652 billion in Europe.[4] WBS (Whole Business Securitization) arrangements first appeared in the United Kingdom in the 1990s, and became common in various Commonwealth legal systems where senior creditors of an insolvent business effectively gain the right to control the company.[5]

What is securitization?

Securitization is the process of taking an illiquid asset, or group of assets, and through financial engineering, transforming them into a security.

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A typical example of securitization is a mortgage-backed security (MBS), which is a type of asset-backed security that is secured by a collection of mortgages. The process works as follows: First, a regulated and authorized financial institution originates numerous mortgages, which are secured by claims against the various properties the mortgagors purchase. Then, all of the individual mortgages are bundled together into a mortgage pool, which is held in trust as the collateral for an MBS. The MBS can be issued by a third-party financial company, such a large investment banking firm, or by the same bank that originated the mortgages in the first place.

Mortgage-backed securities are also issued by aggregators such as Fannie Mae or Freddie Mac. Regardless, the result is the same: a new security is created, backed up by the claims against the mortgagors' assets. This security can be sold to participants in the secondary mortgage market. This market is extremely large, providing a significant amount of liquidity to the group of mortgages, which otherwise would have been quite illiquid on their own. (For a one-stop shop on subprime mortgages, the secondary market and the subprime meltdown, check out the Subprime Mortgages Feature.) Furthermore, at the time the MBS is being created, the issuer will often choose to break the mortgage pool into a number of different parts, referred to as tranches. These tranches can be structured in virtually any way the issuer sees fit, allowing the issuer to tailor a single MBS for a variety of risk tolerances. Pension funds will typically invest in high-credit rated mortgage-backed securities, while hedge funds will seek higher returns by investing in those with low credit ratings. Read more: http://www.investopedia.com/ask/answers/07/securitization.asp#ixzz1gLBycoje

On-Bill Financing
Zero-Interest Financing for Business Customers and Government Agencies
The Energy Efficiency Retrofit Loan Program, or On-Bill Financing (OBF), lets you make facilities improvements without large outlays of cash. PG&E will finance the project, and you pay the loan interest-free through your monthly utility bills. Financing is available to fund many technologies, including lighting, refrigeration, HVAC, and LED street lights. Your project may be eligible for OBF if it qualifies for a rebate or incentive through a PG&E program, including the Customized Incentive Program (CIP), certain PG&E third-party programs, the LED Street Light Program or certain product rebate programs. Loan funds must be used to purchase and install qualifying energy-efficient equipment. You can use a contractor or install the equipment yourself. PG&E will inspect your facility before you remove old equipment and again after the new products are operating. Loan terms and monthly payment amounts are determined based on your estimated monthly savings from the new products. Business customers may qualify for loans between $5,000 and $100,000, with loan periods of up to 60 months.

Government agencies may qualify for loans between $5,000 and $250,000 per PG&E meter, with loan periods of up to 120 months.

On Bill Financing
On August 2, 2010, the Southern California Edison Company made funds available to government agencies and businesses at a zero percent interest for energy efficiency projects. The program provides capital for agencies (like the city) to fund energy efficiency projects. These projects will benefit Edison by reducing the demand for electricity during peak usage and benefit the customer by reducing energy consumption and the electric bill. Cost to retrofit 16 projects (buildings in the city) is approximately $230,000. Approximately $27,000 of the $230,000 will be rebated, reducing the total project cost. $250,000 have been financed so additional projects will be possible. It will take between 3 and 5 years for the city to pay off the loan, and it will start saving on energy costs every year thereafter. An AC control/lighting system has been created that allows the citys facilities department to manually change temperatures/lighting of various city buildings to decrease energy usage and save costs.

What is On-Bill Financing?

On-bill financing allows customers to make energy efficiency improvements without the sticker shock of paying for the new equipment all at once. Instead, the utility finances the purchase and then, recoups the cost over time through a charge on the customers monthly utility bill. If the program is designed properly, the monthly loan payment is equal to or less than the energy cost savings, and so the property owner shouldnt see their monthly bills increase. On-bill financing can be set-up in two different ways: through loans or tariffs. A loan is assigned directly to the property owner, who is obligated to pay it back even if he or she moves. By contrast, the tariff approach links the charge to the meter, meaning that whoever lives in the

home or owns the business is responsible for repayment. If the original customer moves, the new occupant takes over payments. The tariff approach allows for a longer payment term and therefore, lowers monthly costs. Renters may also be able to participate in tariff-based financing because they only pay for the measures, while they benefit from them. While on-bill financing is convenient for customers, it sometimes complicates billing for the utility and may require cost-prohibitive upgrades to the billing system. Resources in this section share both successful attempts and those that didnt make it to market.