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.