INDIAN INSTITUTE OF BANKING &
FINANCE
CAIIB-Risk Management
Treasury Management –Module C
21/11/2008
6-7.30 pm
By
C.S.BALAKRISHNAN
chitturb@rediffmail.com
Syllabus
Module C: Treasury Management:
Treasury management; concepts and functions; instruments in the
treasury market; development of new financial products; control
and supervision of Treasury management; linkage of domestic
operations with foreign operations.
Asset-liability management; Interest rate risk; interest rate futures;
stock options; debt instruments; bond portfolio strategy; risk
control and hedging instruments.
Investments – Treasury bills – Money markets instruments such
as CDs, CPs, IBPs; Securitisation and Forfaiting; Refinance and
rediscounting facilities.
 Spot Trades-Settlement takes place two
working days from the trade date.
-TOM –Next Day
-All exchange rates are qouted on the screen
are for spot trade.
 Forward-purchase or sale of currency on a
future date.Forward exchange rates are
arrived at on the basis of interest rate
differentials of two currencies added or
deducted from spot exchange rate.
 Swap-The spot and forward transactions are the
primary products in foreign exchange market.A
combination of spot and forward transactions is
called a swap.
 Investment of Foreign Exchange Surpluses
Treasury is responsible for investment of foreign
exchange surpluses of a bank.The surpluses arise
out of
-Profits from treasury operations
-Profits from overseas operations
-Forex borrowings in overseas domestic
market
-Foreign currency and convertible rupee deposits
with branches
Example
Which of the following about a callable bond is
true?
a. Callable bonds always trade at a discount to noncallable bonds.
b. Callable bonds expose issuers to the risk of reduced
re-investment return.
c. Callable bonds are actually variable tenor bonds.
d. Callable bonds are not as liquid as non-callable
bonds.
Ans: c.
Treasury Products
 Products of Foreign Exchange Market.
-Most Liquid
-Most Transparent
-Virtual Market
-It’s a near perfect market with efficient price
discovery system.
ABC Bank enters into an Interest Rate Swap with XYZ Ltd on the
following terms
Principal Amount
Rs. 100crores
Corporate to Pay
6.50% Fixed
Corporate to Receive
3 month NSE MIBOR
Start date
25-4-08
Tenor
6 months
Termination date
25-10-08
Interest Payment Dates
25th July & 25th Oct
First Fixing
6.10%
In the above case, which of the following is correct in respect of net
interest amount payable/receivable on 25th July 2008?
a) XYZ Ltd to pay Rs.986301********
b) XYZ Ltd to receive Rs.986301
c)XYZ Ltd to pay Rs. 1972602
d) XYZh Ltd to receive Rs.1972602
1000000000*90*.4
------------------------36500
General Ledger Balance of ABC Bank as on 12-10-2008
Rs. In 000’s
Rs
Assets
Rs
Liabilities
Paid up capital
10,000
Current Account
Building
10000
Car
20000
180,000
SB
Cash Credit
1000000
Term Loan
800000
450,000
Fixed Deposit
600,000
Interest accrued
10000
Margin on LCs
Suspense Account
10000
Branch Adjustment
Account
20000
2,000
TT Payable
1,000
CBLO(Colaterised
Borrowing & Lending
Obligations)
600,000
ECGC Claims
7,000
18 60
1)Demand Liabilities in the above case
works out to ……………
a) 631000******
b) 638000
c) 1238000
d) None of the above
2)Time Liabilities is equal to ……………………
a) 600000********
b) 120000
c) 127000
d) None of the above
3)Other demand
and time
Liabilities
amounts to
a)
b)
c)
d)
………………
……
10000
17000
18000
None of the
above
4)Which of the following is not an
exempted category for the
purpose of CRR calculation?
a) Credit Balances in ACU Dollar
Accounts
b) CBLO
c) DTL in respect of OBUs
d) Staff Security Deposits ********
Which of the following can be
included for DTL/NDTL
computation
a. Amount received from
DICGC Claims
b. Amount received from
Insurance company on ad
hoc settlement of claims
c. Amount received from the
court receiver
d. Amount held as margin
against LC*********
ABC IS A CORPORATE, WHOSE BANKER IS XYZ.
ABC WILL IMPORT RAW MATERIAL WORTH
USD.500000.00 IN THE MONTH OF JANUARY &
PAYMENT IS TO BE MADE ON 31ST JANUARY,2008
ABC WANTS TO BOOK A FORWARD CONTRACT
FOR THIS TRANSACTION :
SPOT RATE OF USD : 39.32/33
PREMIUM UPTO 31ST JANUARY,2008 :RS.0.15 PAISE
BANK WILL KEEP A MARGIN OF RS.0.03 PAISE
BASED ON THE ABOVE, WHAT WILL BE THE RATE
TO BE QUOTED TO ABC, BY XYZ :
(A) RS. 39.50
(B) RS. 39.51
(C) RS.39.44
Answer : B
(D) RS.39.48
The credit portfolio of ABC Bank has undergone
a uniform downgrade as on 31-3- 2008
after an economic downturn. The position prior
to the downgrade is given below:.The minimum capital required after
downgrade is …………..
Rating Scale
Risk Weight (%)
Exposure
Rs. In crores
Extent of
downgrade
AAA
20
200
20 %
AA
50
200
20 %
A
50
100
20 %
BBB
100
200
20 %
BB& Below
150
100
800
Minimum capital
under Basel II
Rs.48.60 crores
a)52.38 crores***********
b)58.6 crores
c)60.6 crores
d)52.6 crores
Working
Ratin Risk
g
Weig
Scal ht
e
Expos
ure
AAA
20%
200
AA
50%
A
50%
BBB
RWA
Before
down
grade
Exposur
e after
Downgra
de
RWA
AFTER
DOWNGRA
DE
40
160
32
200
100
200
100
100
50
120
60
100% 200
200
180
180
BB & 150% 100
belo
w
150
140
210
540
582
Integrated Treasury
 Integrated Treasury refers to integration of money
market, securities market and foreign exchange
operations.
-Meeting reserve requirements
-Efficient merchant services
-Global cash management
-Optimizing profit by exploiting market
opportunities in forex market, money market and
securities market
-Risk management
-Assisting bank management in ALM
FRONT OFFICE
Dealing
MID OFFICE
BACK OFFICE
settlement
MIS
Treasury
Money Market






Certificate of Deposit (CD)
Commercial Paper (C.P)
Inter Bank Participation Certificates
Inter Bank term Money
Treasury Bills
Call Money
Certificate of Deposit
 CDs are short-term borrowings BY BANKS
in the form of Usance Promissory Notes
having a maturity of not less than 7 days up
to a maximum of one year.
 CD is subject to payment of Stamp Duty
under Indian Stamp Act, 1899 (Central Act)
Features of CD
 Issued by all scheduled commercial banks
except RRBs
 Minimum period 7 days
 Maximum period upto 1 year
 Minimum Amount Rs 1 lac and in multiples
of Rs. 1 lac
 CDs are transferable by endorsement
 CRR & SLR are to be maintained
 CDs are to be stamped
Commercial Paper
 Commercial Paper (CP) is an
unsecured money market
instrument issued in the form of a
promissory note by
corporates/PDs/FIs
 Who can issue Commercial
Paper (CP)
Highly rated corporate borrowers,
primary dealers (PDs) and all-
Eligibility for issue of CP
a) The tangible net worth of the company,
as per the latest audited balance sheet,
is not less than Rs. 4 crore;
b) The borrowal account of the company is
classified as a Standard Asset by the
financing bank/s.
Rating Requirement
 All eligible participants should obtain the credit rating for
issuance of Commercial Paper
 Credit Rating Information Services of India Ltd. (CRISIL)
 Investment Information and Credit Rating Agency of India
Ltd. (ICRA)
 Credit Analysis and Research Ltd. (CARE)
 Duff & Phelps Credit Rating India Pvt. Ltd. (DCR India)

The minimum credit rating shall be P-2 of
CRISIL or such equivalent rating by other
agencies
To whom issued
CP is issued to individuals, banking
companies, other corporate bodies
registered or incorporated in India and
unincorporated bodies, Non-Resident
Indians (NRIs) and Foreign Institutional
Investors (FIIs).
Maturity
 CP can be issued for maturities between a
minimum of 7 days and a maximum upto
one year from the date of issue.
 If the maturity date is a holiday, the
company would be liable to make payment
on the immediate preceding working day.
Meaning of Repo
 It is a transaction in which two parties agree to sell
and repurchase the same security. Under such an
agreement the seller sells specified securities with
an agreement to repurchase the same at a
mutually decided future date and a price
 The Repo/Reverse Repo transaction can only be
done at Mumbai between parties approved by RBI
and in securities as approved by RBI (Treasury
Bills, Central/State Govt securities).
Repo
 Uses of Repo
It helps banks to invest surplus cash
It helps investor achieve money market returns
with sovereign risk.
It helps borrower to raise funds at better rates
An SLR surplus and CRR deficit bank can use the
Repo deals as a convenient way of adjusting
SLR/CRR positions simultaneously.
RBI uses Repo and Reverse repo as instruments
for liquidity adjustment in the system
Coupon rate and Yield
The difference between coupon rate and
yield arises because the market price of a
security might be different from the face
value of the security. Since coupon
payments are calculated on the face value,
the coupon rate is different from the implied
yield.
Example








10% Aug 2015 10 year Govt Bond
Face Value RS.1000
Market Value Rs.1200
In this case Coupon rate is 10%
Yield is 8.33%
1000*10
----------= 8.33%
1200
Call Money Market
The call money market is an integral part of
the Indian Money Market, where the day-today surplus funds (mostly of banks) are
traded.
The money that is lent for one day in this
market is known as "Call Money",
if it exceeds one day (but less than 15 days)
it is referred to as "Notice Money".
Call Money Market
Banks borrow in this market for the
following purpose
 To fill the gaps or temporary mismatches in
funds
 To meet the CRR & SLR mandatory
requirements as stipulated by the Central
bank
 To meet sudden demand for funds arising
out of large outflows.
Factors influencing interest rates
The factors which govern the interest rates are
mostly economy related and are commonly
referred to as macroeconomic factors. Some of
these factors are:
1) Demand for money
2) Government borrowings
3) Supply of money
4) Inflation rate
5) The Reserve Bank of India and the Government
policies determine some of the variables
mentioned above.
Gilt edged securities
The term government securities encompass
all Bonds & T-bills issued by the Central
Government, and state governments. These
securities are normally referred to, as "giltedged" as repayments of principal as well
as interest are totally secured by sovereign
guarantee.
Treasury Bills
Treasury bills, commonly referred to as TBills are issued by Government of India
against their short term borrowing
requirements with maturities ranging
between 14 to 364 days.
All these are issued at a discount-to-face
value. For example a Treasury bill of Rs.
100.00 face value issued for Rs. 91.50 gets
redeemed at the end of it's tenure at Rs.
100.00.
Who can invest in T-Bill
Banks, Primary Dealers, State Governments,
Provident Funds, Financial Institutions,
Insurance Companies, NBFCs, FIIs (as per
prescribed norms), NRIs & OCBs can invest
in T-Bills.
What is auction of Securities
Auction is a process of calling of bids with
an objective of arriving at the market price. It
is basically a price discovery mechanism
Yield of Treasury Bill






Y= (100-P)*365*100
----------------------P*D
Y = Yield
P= Price
D =Days to maturity
Example
 91 days treasury bills maturing on 612-2008
 Purchased on 12-10-2008 Rate
quoted is Rs.99.1489 per Rs100
(100-99.1489)*365*100= 31065.15
---------------------------(99.1489*55 days) =5453.18
=5.70%
Debenture
 A Debenture is a debt security issued by a
company (called the Issuer), which offers to
pay interest in lieu of the money borrowed
for a certain period.
 These are long-term debt instruments
issued by private sector companies. These
are issued in denominations as low as Rs
1000 and have maturities ranging between
one and ten years.
Difference between debenture
and bond
Long-term debt securities issued by the
Government of India or any of the State
Government’s or undertakings owned by
them or by development financial institutions
are called as bonds. Instruments issued by
other entities are called debentures.
Current yield
This is the yield or return derived by the
investor on purchase of the instrument (yield
related to purchase price)
It is calculated by dividing the coupon rate
by the purchase price of the debenture. For
e. g: If an investor buys a 10% Rs 100
debenture of ABC company at Rs 90, his
current Yield on the instrument would be
computed as:
Current Yield = (10%*100)/90 X 100 , That is
11.11% p.a.
Primary Dealers
Primary Dealers can be referred to as
Merchant Bankers to Government of
India, comprising the first tier of the
government securities market. These
were formed during the year 1994-96
to strengthen the market infrastructure
What role do Primary Dealers play?
The role of Primary Dealers is to;
(i) commit participation as Principals in
Government of India issues through bidding
in auctions
(ii) provide underwriting services
(iii) offer firm buy - sell / bid ask quotes for TBills & dated securities
(v) Development of Secondary Debt Market
OMO
OMO or Open Market Operations is a
market regulating mechanism often resorted
to by Reserve Bank of India. Under OMO
Operations Reserve Bank of India as a
market regulator keeps buying or/and selling
securities through it's open market window.
It's decision to sell or/and buy securities is
influenced by factors such as overall liquidity
in the system,
YIELD CURVE
 The relationship between time and yield on
a homogenous risk class of securities is
called the Yield Curve. The relationship
represents the time value of money showing that people would demand a
positive rate of return on the money they are
willing to part today for a payback into the
future
SHAPE OF YIELD CURVE
A yield curve can be positive, neutral or flat. A
positive yield curve, which is most natural, is
when the slope of the curve is positive, i.e. the
yield at the longer end is higher than that at the
shorter end of the time axis. This results, as
people demand higher compensation for parting
their money for a longer time into the future.
A neutral yield curve is that which has a zero slope,
i.e. is flat across time. T his occurs when people
are willing to accept more or less the same
returns across maturities.
The negative yield curve (also called an inverted
yield curve) is one of which the slope is negative,
i.e. the long term yield is lower than the short
Shape of Yield curve
LIBOR
 LIBOR stands for the London Interbank
Offered Rate and is the rate of interest at which
banks borrow funds from other banks, in
marketable size, in the London interbank
market.
 LIBOR is the most widely used "benchmark" or
reference rate for short term interest rates. It is
compiled by the British Bankers Association
as a free service and released to the market at
about 11.00[London time] each day.
CRR & SLR
CRR is at present prescribed at 5.5% of
demand and term liabilities (DTL) of the bank,
respectively, under Reserve Bank of India Act
of 1934.
The minimum and maximum SLR are
prescribed at 25% and 40% of DTL
respectively, under Banking Regulation Act of
1949.Present SLR is 24%.
The CRR and SLR are to be maintained on
fortnightly basis.
Demand and Time Liabilities





Main components of DTL are:
Demand deposits (held in current and savings
accounts, margin money for LCs, overdue fixed
deposits etc.)
Time deposits (in fixed deposits, recurring
deposits, reinvestment deposits etc.)
Overseas borrowings
Foreign outward remittances in transit (FC
liabilities net of FC assets)
Other demand and time liabilities (accrued
interest, credit balances in suspense account etc.
)
SLR
SLR is to be maintained in the form of the
following assets:
 Cash balances (excluding balances
maintained for CRR)
 Gold (valued at price not exceeding current
market price)
 Approved securities valued as per norms
prescribed by RBI.
VaR
Value at Risk (VaR) is the most probable loss that
we may incur in normal market conditions over a
given period due to the volatility of a factor,
exchange rates, interest rates or commodity
prices. The probability of loss is expressed as a
percentage – VaR at 95% confidence level, implies
a 5% probability of incurring the loss; at 99%
confidence level the VaR implies 1% probability of
the stated loss. The loss is generally stated in
absolute amounts for a given transaction value (or
value of a investment portfolio).
VaR
A VaR of Rs. 100,000 at 99% confidence
level for one week for a investment
portfolio of Rs. 10,000,000 similarly
means that the market value of the
portfolio is most likely to drop by
maximum Rs. 100,000 with 1%
probability over one week.
Exchange Rate Quotation
Exchange Quotations :
There are two methods
 Exchange rate is expressed as the price per unit of foreign
currency in terms of the home currency is known as the
“Home currency quotation” or “Direct Quotation”
 Exchange rate is expressed as the price per unit of home
currency in terms of the foreign currency is known as the
“Foreign Currency Quotation” or “Indirect Quotation”
 Direct Quotation is used in New York and other foreign
exchange markets and Indirect Quotation is used in
London foreign exchange market.
Principles
 Direct Quotation: Buy Low, Sell High:
 The prime motive of any trader is to make profit.
By purchasing the commodity at lower price and
selling it at a higher price a trader earns the profit.
In foreign exchange, the banker buys the foreign
currency at a lesser price and sells it at a higher
price.
 Indirect Quotation: Buy High, Sell Low:
 A trader for a fixed amount of investment would
acquire more units of the commodity when he
purchases and for the same amount he would part
with lesser units of the commodity when he sells.
Spot and Forward
Transactions
 ‘A’ Bank agrees to buy from ‘B’ Bank USD
100000. The actual exchange of currencies
i.e. payment of rupees and receipt of US
Dollars, under the contract may take place :
 on the same day or
 two days later or
 some day later, say after a month.
Interpretation of Quotation
 The market quotation for a currency consists
of the spot rate and the forward margin.
The outright forward rate has to be
calculated by loading the forward margin
into the spot rate. For example US Dollar is
quoted as under in the inter-bank market on
a given day as under :
 Spot
1 USD = Rs.44.1000/1300
 Spot/November
0200/0500
 Spot/December
1500/1800
TT Buying Rate


TT Buying Rate (TT stands for Telegraphic
Transfer)
This is the rate applied when the transaction
does not involve any delay in realization of the
foreign exchange by the bank. In other words,
the nostro account of the bank would already
have been credited. The rate is calculated by
deducting from the inter-bank buying rate the
exchange margin as determined by the Bank.
Bills Buying Rate
 This is the rate to be applied when a foreign
bill is purchased. When a bill is purchased,
the proceeds will be realized by the Bank
after the bill is presented to the drawee at
the overseas center. In the case of a
usance bill the proceeds will be realized on
the due date of the bill which includes the
transit period and the usance period of the
bill.
Problem
You would like to import machinery from USA worth USD
100000
to be payable to the overseas supplier on 31st Oct
[a] Spot Rate
USD = Rs.45.8500/8600
Forward Premium
September 0.2950/3000
October 0.5400/5450
November 0.7600/7650
[b] exchange margin 0.125%
[c] Last two digits in multiples of nearest 25 paise
 Calculate the rate to be quoted by the bank ?
Find out the CROSS rate for GBP/AUD
Currency pair
GBP/USD
Bid
0.9891
Ask
0.9894
AUD/USD
1.2287
1.2289
Ans : GBP/AUD 0.8049/0.8052
5
Solution
This is an example Forward Sale Contract .
Inter Bank Spot Selling Rate Rs. 45.8600
Add Forward Margin
.5450
-------------46.4050
Add Exchange Margin
.0580
--------------Forward Rate
46.4630
Rounded Off to multiple of 25 paise
Rs.46.4625
Amount Payable to the bank
Rs.46,46,250
Swap
 A swap agreement between two parties
commits each counterparty to exchange an
amount of funds, determined by a formula,
at regular intervals, until the swap expires.
 In the case of a currency swap, there is an
initial exchange of currency and a reverse
exchange at maturity.
Mechanics
 Firm A needs fixed rate loan –AAA rated
 Firm B needs floating rate
-A rated
 Firm A enjoys an absolute advantage in both
credit markets.
Fixedrate
finance
Firm A
Firm B
9%
11%
Floating- LIBOR LIBOR
rate
finance +0.0% +1%
Mechanics
STEP !
Firm A will borrow at Fixed rate 9%
Firm B will borrow at floating rate (LIBOR +1)%
STEP 2
Firm A will pay Floating rate [LIBOR] to Firm B
Firm B will Pay Fixed rate [9.5%] only
Gain
Net interest cost LIBOR- .5%
Net Interest cost 9+[ 1%+0.5%]=10.5%
Mechanics
Interest payments to each
other in years t 1 to t 7.
Gain
A
B
9.5%
Borrows at
9.0%
fixed
for 7 years
LIBOR
Borrows at
LIBOR + 1%
floating
for 7 years
Which set of the following statements is true in respect
of Commercial Paper (CP):
1, Commercial Paper (CP) is an unsecured money market instrument
issued in the form of a promissory note
2. CP can be issued by Corporate, primary dealers (PDs) and the allIndia financial institutions (FIs)
3. A corporate would be eligible to issue CP provided the tangible net
worth of the company, as per the latest audited balance sheet, is not
less than Rs.4 crore;
4.. The minimum credit rating shall be P-1 of CRISIL or such
equivalent rating by other agencies.
5. CP can be issued for maturities between a minimum of 7 days and a
maximum up to six months from the date of issue.
6. Amount invested by a single investor should not be less than Rs.15 lakh .
A.1,2 & 4
B.1,2 & 3*****
C.1,4 & 5
D.1,4 & 6
Which of the following is/are true in respect of Certificate of
Deposit?
1. CDs can be issued by (i) scheduled commercial banks excluding
Regional Rural Banks (RRBs) and Local Area Banks (LABs); and (ii)
select all-India Financial Institutions .
2.. Minimum amount of a CD should be Rs.5 lakh i.e., the minimum
deposit that could be accepted from a single subscriber should not be
less than Rs. 5 lakh and in the multiples of Rs. 1 lakh thereafter.
3. CDs can be issued to individuals, corporations, companies, trusts,
funds, associations, etc.
4.. The maturity period of CDs issued by banks should be not less than 7
days and not more than three years.
A. 1&2
B. 1 & 3*******
C 1&4
D 2&3
Credit Risk Mitigation
Borrower- A Ltd
Borrower- B Ltd
Exposure
Rs.100 crore
Rs.100 crore
Maturity of
exposure(years)
6
2
Nature of exposure
Corporate
Corporate
Currency
USD
INR
Rating of Exposure
BBB
UNRATED
Haircut for exposure
12%
25%
Value of collateral
after haircut
Rs.88crore
Rs75 crore
Risk weight
100%
100%
In the above case, the RWA for the net exposures of A & B under Basel II
A)Rs.24 crore and Rs 50 crore respectively********
B)Rs.172.50 crore and Rs.53 crore respectively
C)Rs.18 crore and Rs.12 crore respectively
D)Rs.150 crore and Rs.75 crore respectively
are …..………………
A dealer has a $200 million open position. He finds that his
VaR for a one day period with a one percent probability is
$1000,000.Which of the following is true?
a) This means that the dealer can expect to lose at least $1000,000
in any given day about one percent of the time, or in other words,
2.5 times in a year (assuming 250 trading days).****
b)This means that the dealer can expect to lose at least $1000,000
in any given day about 99 percent of the time, or in other words,
247.5 times in a year (assuming 250 trading days).
c) This means that the dealer can expect to lose at least $2,000,000
in any given day about one percent of the time, or in other words,
2.5 times in a year (assuming 250 trading days).
d)This means that the dealer can expect to lose at least $ 4000,000
in any given day about one percent of the time, or in other words,
2.5 times in a year (assuming 250 trading days).
Bank A enters into a Overnight Indexed Swap (OIS) with XYZ Ltd whereby
Bank agrees to pay 7 days OIS at 6.25% for Rs.25 crores and receive
MIBOR Overnight Rate.
Actual MIBOR rates for 7 days are given below:
Day 1
6.15%
Day 2
6.05%
Day 3
6.10%
Day 4
6.15%
Day 5
6.05%
Day 6
6.05%
Day 7
6.10%
In the above case. the difference to be settled between the bank and
the XYZ Ltd amounts to……………..
a)Rs.7671*********
b)Rs.7692
c)Rs.8035
d)Rs.8074
The following is the NPA status of XYZ Exporters Ltd account in
Bank A
Asset Classification Doubtful -more than
Status
3 years as on 31-32007
ECGC Cover
50%
Realizable Value of
Security
Rs.1.50 lakhs
Balance
Rs.4 lakhs
The
total provision required in the above case is
Outstanding
………………….
a)Rs.1.25 lakh*****
b)Rs.2.50 lakh
c)Rs.0.50 lakh
d)Rs.2.00 Lakh
Example
Coupon of a floating rate bond is
a. modified whenever there is a change in the
benchmark rate.
b. modified at pre-set intervals with reference to a
benchmark rate.
c. modified for changes in benchmark rate beyond
agreed levels.
d. modified within a range, for changes in the
benchmark rate.
Ans: b.
Example
Which of the following is true about a
uniform price auction?
a. a.
An auction in which all successful bids are
made for the same price.
b. b.
An auction in which all bidders have bid a
uniform price.
c. c.
An auction in which all successful bidders
are allotted bonds at the same price.
d. d.
An auction in which the cut-off price is
derived as the weighted average of all successful
bids.
Answer: c
Example
A treasury bill maturing on 28-Jun-2008 is
trading in the market on 3-Jul-2007 at a
price of Rs. 92.8918. What is the discount
rate in this price?
Answer:
The yield is computed as:
= ((100-price)*365)/(Price * No of days to
maturity)
= ((100-92.8918)*365)/(92.8918*360)) =
7.7624%
Example
What is the price at which a treasury bill
maturing on 23rd March 2008 would be
valued on July 13, 2007 at a yield of
6.8204%?
Answer:
The price can be computed as
= 100/(1+(yield% * (No of days to
maturity/365))
= 100/(1+(6.8204%*(253/365)) =
Rs. 95.4858
Example
What is the day count convention in the treasury
bill markets?
a. 30/360
b. Actual/Actual
c. Actual/360
d. Actual/365
Answer: d
Example
Which of the following participants in the call
markets are allowed to lend as well as borrow?
a. Mutual Funds
b. Banks and Primary Dealers
c. Corporates
d. Financial Institutions
Answer: b
Repo
A 3-day repo is entered into on July 10, 2007, on an 11.99%
2009 security, maturing on April 7, 2009. The face value of
the transaction is Rs. 3, 00, 00, 000. The price of the security
is Rs. 116.42. If the repo rate is 7%, what is the settlement
amount on July 10, 2007?
Answer: Settlement amount on July 10, 2007 is the transaction
value for the securities plus accrued interest.
Transaction Value:
3, 00, 00, 000 * 116.42/100 =Rs. 3, 49, 26, 000
Accrued Interest:
The number of days is 93.
Accrued interest = 3, 00, 00, 000 * 11.99%* 93/360 = Rs. 9, 29,
225.00
Therefore, the settlement amount is: Rs. 3,49,26,000 + Rs.
9, 29, 225.00 = Rs. 3, 58, 55, 225.00
Example
Compute the Rupee value of an SGL transaction, with the following data:
Coupon Rate: 11.68%
Maturity date: August 6, 2008
Settlement Date: July 11, 2007
Price: Rs. 105.4025
Transaction amount: Rs. 50000000
Answer:
Value of the transaction = number of securities * trade price
= (50000000/100) * 105.4025
= Rs. 5,27,01,250
Accrued Interest for the period since the last coupon is
= days since the last coupon/360 * coupon rate * face value
= (155/360) * 0.1168 * 50000000
= Rs. 25,14,444
Settlement amount = Value of transaction + Accrued Interest
= Rs. 5,27,01,250 + 25,14,444
= Rs. 5,52,15,694
A GOI security with coupon of
11.68%, maturing on 6-Aug2008, is to be settled on
1-Feb-07. What are the number
of days from the previous coupon
date?
a.
179
b.
176
c.
178
d.
175
Answer: d.
1
 In a forward contract,actual cash flows
happen on date of
a)contract itself b)maturity
c)delivery d)termination
 Main source of bank funds is the deposits
which consist of(which is not correct
explanation of such deposit)
a)Demand deposit-current & savings
b)Term deposits-Recurring & fixed
c)Overdue deposits d)call deposits
 Forward rate is
a)Derived from spot rates b)spot rate
adjusted for premium/discount
c)The rate agreed for settlement on an
agreed date in future
d)All the above
 An FCNR deposit received from an NRI in
us$ can be viewed by the bank as
a)Euro-rupee deposit b)Petro-dollar
deposit c)Rupee-dollar deposit
d)Euro-dollar deposit
 The simultaneous purchasing and selling of
different securities by a person so that the
composition of the portfolio can be changed
without significant cost is called
a)Arbitrage deal b)Swap deal c)Switch
deal d)Option deal
 The minimum and maximum cash resrve
ratio that RBI can prescribe,falls under
which of the following range
a)3%to15%
b)3% to 20% c)5% to20%
d)none of the above
 Which among the following is not a correct
statement in the context of treasury bills
a)Issued in a demat form (SGL)unless the
investor so desires
b)Issued at a discount to face value
c)Are approved securities and qualify for
SLR purpose for banks
d)Discount is calculated at front end
 A company has issued debentures for a
period of 5 years with the provision that
interest for the first year shall be 6.5% and
for the remaining 4 years it shall be
6%.These can be called
a)Floating rate debentures
b)Step up debentures
c)Flexible debentures
d)Option debentures
 Yield to Maturity of a bond is also called as
a)Internal rate of return of the bond
b)coupon of the bond
c)discount of the bond
d)swap rate of the bond
THANK YOU
&
BEST WISHES FOR
AN OUTSTANDING
PERFORMANCE IN THE EXAM