Treasury Bills

Topics: Finance, Investment, Bond Pages: 2 (419 words) Published: November 1, 2011
Treasury Bills (T-Bills)

Treasury Bills are short term instruments issued by the central banks of each country. In India they are sold by the Reserve Bank of India (RBI). Treasury bills are also known as T- Bills in the market. The maturity period of T-Bills ranges from 14 days to 364 days. The most commonly issued T-Bills are the ones with maturity periods of 91 days, 182 days and 364 days. Based on their maturity period, they are referred to as T-91, T-182 and T-364 bills respectively.

These are issued by auction with the issue price determining the yield on the T-bill issued. They are issued at a discount to their face value and do not involve coupon payments.

Earning of the investor = Purchase price – Maturity value

The expression is more briefly discussed later in this unit.

If the face value of the T-bill is Rs. 100, the investor will receive this amount when the T-Bill matures. Any investor, who wants to invest in a debt instrument, would like to know the return he will get by making the investment. This return is known as the yield. Equation 1.1 represents a formula to calculate ‘Yield’.

.......Eq. 1.1

Generally, in all yield calculations, the number of days in a year is considered to be 365. Hence, these calculations are called 365 day calculation of yield. This is sometimes also referred to as actual day conversion. In some situations a 360 day year is considered. In such calculations 365 in the equation 1.1 is replaced by 360.

Solved Problem - 1If you buy a T-364 bill for Rs. 96 which matures after 364 days, then find the annualised yield on this T-Bill?Solution:Income or the interest earned for 364 days = 100 – 96 = Rs. 4 Amount invested = Rs. 96 = 0.0418 = 4.18%Thus, the annualised yield on the T-Bill is 4.18%.| Solved Problem - 2What is the annualised yield on a T-bill maturing after 180 days, if you purchase it from the market for Rs. 98?Solution:= 0.0414 = 4.14%The annualised yield on a T-bill maturing after 180...
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