Treasury Bills-An Overview

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CMA. CS. Sanjay Gupta

"PROUD TO BE AN INDIAN"

114230 Points Joined February 2009

Treasury Bills

Treasury Bills are money market instruments to finance the short term requirements of the Government of India. These are discounted securities and thus are issued at a discount to face value. The return to the investor is the difference between the maturity value and issue price.

Types Of Treasury Bills There are different types of Treasury bills based on the maturity period and utility of the issuance like, ad-hoc Treasury bills, 3 months, 6 months and 12months Treasury bills etc. In India, at present, the Treasury Bills are issued for the following tenors 91-days, 182-days and 364-days Treasury bills.

Benefits Of Investment In Treasury Bills

	No tax deducted at source
	Zero default risk being sovereign paper
	Highly liquid money market instrument
	Better returns especially in the short term
	Transparency
	Simplified settlement
	High degree of tradeability and active secondary market facilitates meeting unplanned fund requirements.

Features

Form

The treasury bills are issued in the form of promissory note in physical form or by credit to Subsidiary General Ledger (SGL) account or Gilt account in dematerialised form.

Minimum Amount Of Bids Bids for treasury bills are to be made for a minimum amount of Rs 25000/- only and in multiples thereof.

Eligibility:

All entities registered in India like banks, financial institutions, Primary Dealers, firms, companies, corporate bodies, partnership firms, institutions, mutual funds, Foreign Institutional Investors, State Governments, Provident Funds, trusts, research organisations, Nepal Rashtra bank and even individuals are eligible to bid and purchase Treasury bills.

Repayment

The treasury bills are repaid at par on the expiry of their tenor at the office of the Reserve Bank of India, Mumbai.

Availability

All the treasury Bills are highly liquid instruments available both in the primary and secondary market.

Day Count

For treasury bills the day count is taken as 365 days for a year.

Yield Calculation

The yield of a Treasury Bill is calculated as per the following formula:

	(100-P)365100
Y =	------------------
	P*D

Wherein	Y = discounted yield
	P= Price
	D= Days to maturity

Example

A cooperative bank wishes to buy 91 Days Treasury Bill Maturing on Dec. 6, 2002 on Oct. 12, 2002. The rate quoted by seller is Rs. 99.1489 per Rs. 100 face values. The YTM can be calculated as following:

The days to maturity of Treasury bill are 55 (October – 20 days, November – 30 days and December – 5 days)

YTM = (100-99.1489) x 365 x 100/(99.1489*55) = 5.70%

Similarly if the YTM is quoted by the seller price can be calculated by inputting the price in above formula.

Primary Market

n the primary market, treasury bills are issued by auction technique.

CALENDAR OF AUCTION FOR TREASURY BILLS

Treasury Bill	Day of auction	Day of payment
91 day	Every Wednesday	Following Friday
182 day	Wednesday preceding thenon-Reporting Friday	Following Friday
364 day	Wednesday preceding the reporting Friday	Following Friday

Salient Features Of The Auction Technique

	The auction of treasury bills is done only at Reserve Bank of India, Mumbai.
	Bids are submitted in terms of price per Rs 100. For example, a bid for 91-day Treasury bill auction could be for Rs 97.50.
	Auction committee of Reserve Bank of India decides the cut-off price and results are announced on the same day.
	Bids above the cut-off price receive full allotment; bids at cut-off price may receive full or partial allotment and bids below the cut-off price are rejected.

Types Of Auctions

There are two types of auction for treasury bills:

	Multiple Price Based or French Auction: Under this method, all bids equal to or above the cut-off price are accepted. However, the bidder has to obtain the treasury bills at the price quoted by him.
	Uniform Price Based or Dutch auction: Under this system, all the bids equal to or above the cut-off price are accepted at the cut- off level. However, unlike the Multiple Price based method, the bidder obtains the treasury bills at the cut-off price and not the price quoted by him.

Secondary Market & Palyers

The major participants in the secondary market are scheduled banks, financial Institutions, Primary dealers, mutual funds, insurance companies and corporate treasuries. Other entities like cooperative and regional rural banks, educational and religious trusts etc. have also begun investing their short term funds in treasury bills.

Advantages

	Market related yields
	Transparency in operations as the transactions would be put through Reserve Bank of India’s SGL or Client’s Gilt account only
	Two way quotes offered by primary dealers for purchase and sale of treasury bills.
	Certainty in terms of availability, entry & exit

Treasury Bills - An Effective Cash Management Product

Treasury Bills are very useful instruments to deploy short term surpluses depending upon the availability and requirement. Even funds which are kept in current accounts can be deployed in treasury bills to maximise returns Banks do not pay any interest on fixed deposits of less than 15 days,or balances maintained in current accounts, whereas treasury bills can be purchased for any number of days depending on the requirements. This helps in deployment of idle funds for very short periods as well. Further, since every week there is a treasury bills auction, one can purchase treasury bills of different maturities as per requirements so as to match with the respective outflow of funds. At times when the liquidity in the economy is tight, the returns on treasury bills are much higher as compared to bank deposits even for longer term. Besides, better yields and availability for very short tenors, another important advantage of treasury bills over bank deposits is that the surplus cash can be invested depending upon the staggered requirements.

Example :

Suppose party A has a surplus cash of Rs 200 crore to be deployed in a project. However, it does not require the funds at one go but requires them at different points of time as detailed below:

Funds Available as on 1.1.2000 Rs. 200 crore

Deployment in a project Rs. 200 crore

As per the requirements

6.1.2000	Rs.	50 crore
13.1.2000	Rs.	20 crore
02.2.2000	Rs.	30 crore
08.2.2000	Rs.	100 crore

Out of the above funds and the requirement schedule, the party has following two options for effective cash management of funds:

Option I

Invest the cash not required within 15 days in bank deposits

The party can invest a total of Rs 130 crore only, since the balance Rs 70 crores is required within the first 15 days. Assuming a rate of return of 6% paid on bank deposits for a period of 31 to 45 days, the interest earned by the company works out to Rs 76 lacs approximately.

Option II

Invest in Treasury Bills of various maturities depending on the funds requirements

The party can invest the entire Rs 200 crore in treasury bills as treasury bills of even less than 15 days maturity are also available. The return to the party by this deal works out to around Rs 125 lacs, assuming returns on Treasury Bills in the range of 8% to 9% for the above periods.

Portfolio Management Strategies

Strategies for managing a portfolio can broadly be classified as active or passive strategies.

Buy And Hold A buy and hold strategy can be described as a passive strategy since the Treasury bills once purchased, would be held till its maturity. The salient features of this strategy are:

	Return is fixed or locked in at the time of investment itself.
	The exposure to price variations due to secondary market fluctuations is eliminated.
	There is no risk of default on maturity.

Buy And Trade

This strategy can also be described as an active market strategy. The returns on this strategy are higher than the buy and hold strategy as the yield can be optimised by actively trading the treasury bills in the secondary market before maturity.

Replies (11)

Aditya Maheshwari

CA in Practice

35867 Points Joined June 2009

Nice details.

CA Sanat Pyne

F.C.A. & M.COM

20117 Points Joined August 2007

VALUABLE RESOURCE

Guest

Originally posted by : Aditya Maheshwari
	Nice details.

Rahul Gupta

Project Controller ACA MBA(Fin.)

8019 Points Joined July 2007

Useful Information. Thanks

sivaram

Asst Mgr-Taxation

6918 Points Joined April 2009

thanks for sharing very useful

RATIKA BINDRA

STUDENT

144 Points Joined December 2008

thanku very much for sharing sir............

NANDHINI

STUDENT

26 Points Joined November 2009

thank you. it is useful

Harish Chandra

CA (Final) Student & Doing Job in a CA F

1646 Points Joined March 2010

Good Informative article

Rajiv nice as twice

Article assistant

72 Points Joined November 2009

very useful information..

Can you plz let us explain difference between Cash Management Bills & Tresury Bills

Rushikesh Hole

N/A

21 Points Joined November 2011

Treasury Bills are money market instruments to finance the short term requirements of the Government of India. However, in eligibility criteria, Govt. of India is not included only state government is mentioned.

Please clear this basic doubt. ( Actually, Iam not from economy background )

Kalpeshkumar Ratillal Shah

Law advicer

21 Points Joined December 2010

(i) Treasury Bills: A treasury bill is an instrument for short-term borrowing by the government of India. It is issued by RBI(Reserve Bank of India) in form of a promissory note on behalf of the government of India.

The need for issuing treasury bills occurs due to the periodic nature of revenues of government, while on the other hand government is incurring public expenditure on a continuous basis. People pay taxes either at the end of the year, quarter or a month but the government has to incur expenditure on a daily basis or monthly basis. Government issues treasury bills to borrow money to bridge this time-gap between revenue and expenditure.

Features of treasury Bills:

(1) Treasury bills (T-bills) offer short-term investment opportunities, generally up to one year. They are thus useful in managing short-term liquidity.

(2) Types: At present, the Government of India issues three types of treasury bills through auctions, namely, 91-day, 182-day and 364-day. There are no treasury bills issued by State Governments.

(3) 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. It means for example, a treasury bill of Rs. 25000 of 364 days, will be available at 12% discount rate. It means it is available at Rs. 22321 presently. And when it will matures after 364 days, you will Rs. 25000 on giving it to the RBI.

Calculation of Discount rate:

We multiply the 25000 by 0.8928, we will find the present value of Rs. 25000 treasury bills.

Government pays the treasury bill amount on maturity. The difference between the amount paid by the investor at the time of buying (which is less than the face value) and the amount received by him on maturity shows the interest income on treasury bills. This interest is also known as discount. On receipt of treasury bills amount Tax is not deducted at Source.

(4) Treasury bills are also issued under the Market Stabilization Scheme (MSS).

(5) While 91-day T-bills are auctioned every week on Wednesdays, 182-day and 364-day T-bills are auctioned every alternate week on Wednesdays. The Reserve Bank of India issues a quarterly calendar of T-bill auctions which is available at the Banks’ website. (URL:https://www.rbi.org.in). It also announces the exact dates of auction, the amount to be auctioned and payment dates by issuing press releases prior to every auction.

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

* If the day of payment falls on a holiday, the payment is made on the day after the holiday.

(6) Payment by allottees at the auction is required to be made by debit to their/ custodian’s current account.

(7) Any person in India including Individuals, Firms, Companies, Corporate bodies, Trusts and Institutions can purchase Treasury Bills. Treasury Bills are eligible securities for SLR purposes.

BENEFITS OF INVESTMENT IN TREASURY BILLS

(1) When you sell the treasury bills, tax is not deducted at source by RBI. So it is a benefit to the investors.

(2) There is no risk of bad debt(default) because it is issued by the government. And in India government is considered to be the safest credit, with almost zero default possibility.

(3) Treasury bills are extremely liquid money market instrument. You can encash them at any point in time.

(4) Treasury bills gives better returns especially in the short term to the investors.

(5) As it is issued by the government is self; we can have transparency in the management of it.

(6) Treasury bills are eligible for inclusion in securities for SLR requirement for the banks.

Types of treasury Bills:

One-tap Bills: These are the bills which could be purchased at any time at the discount rate of 4.666%. However, they are discontinued by government from 1^st April, 1997.

Ad-hoc Bills: Ad-hoc bills were started in 1955. Ad hoc bills were introduced in 1955. From April 1, 1997 a system of Ways and Means Advances replaced the ad-hoc bills. Ad-hoc bills were introduced to balance temporary gap between the revenues and expenditure of government of India.

Auctioned Bills: They are auctioned by Reserve Bank of India at regular intervals and issued at a discount to face value. On maturity the face value is paid to the holder. The rate of discount and the corresponding issue prices are determined at each auction. When liquidity is tight in the economy, returns on Treasury Bills sometimes become even higher than returns on bank deposits of similar maturity.