TREASURY BILLS AND WARRANT BY:- AKSHIT GARG, SEEMA SINGH, MONIKA BHADORIA

CONTENTS WHAT IS TREASURY BILL IMPORTANT QUALITIES OF TB TYPES OF TB DEFECTS OF TB SUMMARY OF TB WHAT ARE WARRANTS TYPES OF WARRANTS FEATURES OF WARRANTS

WHAT IS TREASURY BILL? Treasury bills represent short-term borrowings of the Government. Treasury bills are very popular and enjoy higher degree of liquidity since they are issued by the government. Treasury bills are issued only by the RBI on behalf of the Government. Treasury bills are issued for meeting temporary Government deficits.

CONTINUED…. A treasury bill is nothing but a promissory note issued by the Government under discount for a specified period stated therein. The Government promises to pay the specified amount mentioned therein to the bearer of the instrument on the due date. The period does not exceed a period of one year.

CONTINUED… The Treasury bill rate of discount is fixed by the RBI from time-to-time. It is the lowest one in the entire structure of interest rates in the country because of short-term maturity and degree of liquidity and security.

IMPORTANT QUALITIES OF TREASURY BILLS The high liquidity Absence of risk of default Ready availability Assured yield Low transaction cost Eligibility for inclusion in statutory liquidity ratio (SLR) Negligible capital depreciation

TYPES OF TB ORDINARY OR REGULAR AD HOC Ordinary treasury bills are issued to the public and other financial institutions for meeting the short-term financial requirements of the Central Government. These bills are freely marketable and they can be brought and sold at any time and they have secondary market also.

CONTINUED…. ‘Ad hocs’ are always issued in favor of the RBI only. They are not sold through tender or auction. They are purchased by the RBI and the RBI is authorized to issue currency notes against them. Ad hocs serve the Government in the following ways: They replenish cash balances of the central Government. Just like State Government get advance (ways and means advances) from the RBI, the Central Government can raise finance through these ad hocs. They also provide an investment medium for investing the temporary surpluses of State Government, semi-government departments and foreign central banks.

91 DAYS TREASURY BILLS 91days treasury bills are issued at a fixed discount rate of 4% as well as through auctions

182 DAYS TREASURY BILL With a view to widening the short-term money market, and to providing more outlets for temporary surplus fund, the authorities in India had introduced, in November 1986, a major innovation in the form of new money market instrument- the 182-day Treasury bill. It used to be sold in the market by the RBI in auctions which were monthly in the beginning; they were made fortnightly from July 1988.

CONTINUED…. It is important to note that no specific amount of funds was sought to be raised through the auctions of these bills. The 182-day bills could be purchased by any person resident in India, including individuals, firms, companies, banks, and financial institutions. The 182-day bill was quit liquid because of the availability of refinance facility against it and the existence of the secondary market in it.

364 DAYS TREASURY BILL Upon discounting the 182-day Treasury bill the authorities introduced a new money market instrument, namely 364-day TBs with effect from April 1992. It is being auction regularly every fortnight. Its features are very similar to those which the 182-day bill had. The RBI dose not purchase and rediscount this bill.

14 DAYS TREASURY BILLS With a view to further diversify the TBs market; the authorities have introduced recently two types of 14-day TBs: On April 1, 1997 which is known as intermediate treasury bill (ITB) Second on may 20, 1997. ITB has replaced the 91-day tap Treasury bill.

CONTINUED….. It is sold only to state governments, foreign central banks, and other specified bodies in order to provide them with alternate arrangements in place of 19-day tap TBs for investment of their temporary cash surplus. It can be repaid/renewed at par on the expiration of 14 days from the date of issue. The disadvantage of 14-day ITB is that it is not tradable or transferable.

DEFECTS OF TB Poor Yield: The yield form TBs is the lowest. Long term Government securities fetch more interest and hence subscriptions for TBs are on the decline in recent times. Absence Of Competitive Bids: Though TBs are sold through auction in order to ensure market rates for the investors, in actual practice, competitive bids are conspicuously absent. The RBI is compelled to accept these non-competitive bids. Hence adequate return is not available. It makes TBs unpopular. Absence Of Active Trading: Generally, the investors hold TBs till maturity and they do not come for circulation. Hence, active trading in TBs is adversely affected.

SUMMARY OF TB Treasury bills are available for a minimum amount of Rs.25,000 and in multiples of Rs. 25,000. Treasury bills are issued at a discount and are redeemed at par. Treasury bills are also issued under the Market Stabilization Scheme (MSS). 91-day T-bills are auctioned every week on Wednesdays. 182-day and 364-day T-bills are auctioned every alternate week on Wednesdays.

CONTINUED… T-bills auctions are held on the Negotiated Dealing System (NDS) and the members electronically submit their bids on the system.

Type of Day of T-bills Auction Payment* 91-day Wednesday Following Friday 182-day Wednesday of non- reporting week 364-day Wednesday of reporting week

WHAT ARE WARRANTS? Warrants are securities that give holders the right, but not the obligation, to buy share of common stock directly from a company at fixed price for a given period of time. Each warrants specifies the number of share of stock that the holder can buy. The exercise price and the expiration date. Warrants are also refers to as equity kickers because they are usually issued in combination with privately placed bonds. Sometimes warrants can be detachable.

TYPES OF WARRANTS Warrants with Common Stock or Bonds Debt Warrants Allow investors to purchase additional debt Warranted bond usually has same coupon & maturity as host bond Harmless Warrants: Variant of debt warrants Warrant not exercisable until host bond becomes callable If warrants exercised bonds will be called, so no increase in debt

CONTINUED….. Covered Warrants Synthetic warrants issued by third party e.g. Japanese debt warrants: BT issued identical warrants in local currency for Swiss investors Put Warrants Right to sell company’s common stock Typically used as part of share repo program e.g. company wants to hedge employee share options Takes in option premium Asset Warrants Based on any asset, e.g. currency, Nikkei 225

FEATURES OF WARRANTS Expiry date Exercise style Deliverable or cash settled Call or put warrants Conversion ratio Underlying instrument

CONVERTIBLE BONDS A convertible bond is a bond that gives the holder the right to "convert" or exchange the par amount of the bond for common shares of the issuer at some fixed ratio during a particular period. As bonds, they have some characteristics of fixed income securities. Their conversion feature also gives them features of equity securities.

FEATURES OF CONVERTIBLE BONDS Convertible bonds are debt instruments that can be converted into equity share of the company at a future date. These security has feature of debt and equity. It pays periodic coupon interest just like any other debt instrument. At the time of redemption of bond the investor can choose to receive share of the company instead of cash..

CALL OPTIONS A call option gives the holder the right, but not the obligation, to purchase shares of a particular underlying stock at a specified strike price with in specified period of time.

Difference between warrants and convertibles Time Frame Conversion Further Investment Investment Period

Difference between call option and warrants Call option are issued by individuals and warrants are issued by firms Each time warrants is exercised, the number of share outstanding increases. When call option is exercised, one investor gains and other loses. The number of share outstanding remains the same

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