Types of treasury bills, Financial Management

Types of Treasury Bills

Treasury bills are issued at various maturities, generally up to one year. Thus, they are useful in managing short-term liquidity. At present, the GOI (Government of India) issues 3 types of T-bills viz., 91-day, 182-day and 364-day. in 1997, in order to enhance the depth of the money market in India, the RBI decided to introduce 14-day and 28-day T-bills. However, so far, only 14-day T-bills have seen the light. Latter, the RBI had withdrawn the 14-day and 182-day T-bills with effect from May 14, 2001. With effect from April, 2005, the Government reintroduced 182-day TBs.

Yield

T-bills do not carry a coupon rate, but they are issued at a discount. Though the yields on T-bills are less when compared to other money market instruments, the risk averse investors and banks prefer to invest in these securities.

Yields on T-bills are considered as benchmark yields. It is considered as a representative of interest rates in the economy in general, whil arriving at an interest rate or yield on any short-term instrument.

Considering the risk-free nature of T-bills all other instruments in money market will have to provide for higher yields.

Ad hoc T-bills are issued to serve two purposes. Firstly, to replenish cash balances of the Central Government and secondly, to provide a medium of investment for temporary surpluses to State Governments, semi-government departments and foreign central banks.

The RBI acts as a banker to the Central Government, hence, the Government needs to maintain a minimum balance of Rs.50 crore on Fridays and Rs.4 crore on other days free of obligation to pay interest thereon and further whenever the balance in the account of the Government falls below the minimum agreed amount, the account will be replenished by the creation of ad hoc Treasury Bills in favor of Bank. Ad hocs have maturity period of 91-day and carry a discount rate of
4.6 percent. These bills can be extinguished before maturity.

The maximum incremental outstanding limit of T-bills at the end of the year should be Rs.5,000 crore and within the year, the incremental ad hoc T-bills cannot exceed Rs.9,000 crore for a period greater than ten consecutive days. In case this is not adhered to, the RBI would automatically reduce the level of ad hoc T-bills by auctioning them or selling fresh Government of India dated securities in the market thereby, bringing down the level of ad hocs to the maximum level permitted. This is essentially an arrangement between Central Government and RBI and the actual operational aspects may vary from time to time. It is adequate to state that this is essentially a mechanism through which the Central Bank (RBI) funds the government.

T-bills have to be repaid by the government when it has adequate cash flows. However, there was no compulsion that they have to be repaid. When they were outstanding for more than 90 days, the RBI used to convert them into dated securities. As the expenditure of the government always exceeded its income, some amount of T-bills remain unpaid at the end of the year thus becoming a permanent source to finance the budget deficit, which can lead to fiscal indiscipline resulting in serious imbalances in the economy. As there was no limit on the amount that can be raised by the government on its own, the government itself decided to put a cap on it.

Consequently, the Union Budget 1994-95 stated that automatic monetization of budget deficit through creation of ad hoc T-Bills would be phased out completely over three years period with an objective to reduce inflation. Subsequently, a limit on the issue of ad hocs was imposed under an agreement between the Union Government and the RBI. The Union Government and the RBI have, therefore, entered into an agreement to change the way the budget deficit is financed. The agreement was signed in March 1997, bringing into existence the new system of Ways and Means Advances (WMA) - replacing the system of ad hoc treasury bills.

 

Posted Date: 9/11/2012 3:45:03 AM | Location : United States







Related Discussions:- Types of treasury bills, Assignment Help, Ask Question on Types of treasury bills, Get Answer, Expert's Help, Types of treasury bills Discussions

Write discussion on Types of treasury bills
Your posts are moderated
Related Questions
What is the annual tax shield to a firm that has total assets of $80 million and a net worth of $55 million, if the average interest rate on debt is 8.5% and the marginal tax rate

A Company has the following capital structure: Debt: $2,000,000 Preferred: $1,000,000 Common: $4,000,000 Retained Earnings: $3,000,000 The amounts shown gives book values.  The m

Calculate the Future Value of an Annuity: Annuity is stated as periodic payment every period for a number of periods. This periodic payment is the same each year only then it c

Define the market segmentation of the term structure of interest rates. Market segmentation: And also the investors’ expectations regarding future interest rates and thei

Bridge Financing A type of short-term financing used to cover an organization short-term want; a loan that is expected to be repaid relatively fast.

There are two approaches to value Asset-Backed Securities. They are: Zero-Volatility Spread (Z-spread) Approach. Option-Adjusted Spread

The option features embedded in many bonds and fixed-income securities have made the binomial interest rate tree approach a valuable model for pricing debt. Binomial

capital structure

Q. Show Gross Vs net working capital? The distinction between the gross working capital or the net working capital does not in any way undermine the relevance of the concepts o

Q. Problems in computations of cost of retaining earning? Problems in computations of cost of retaining earning: it is sometimes argued that retained earning do not involve any