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Investment Opportunities in Tradable Instruments: Treasury Bills, Certificates of Deposit

Investment Opportunities in Tradable Instruments: Treasury Bills, Certificates of Deposit Gilts, Supranational and Corporate Bonds. Investment Landscape. A heightened focus on Treasury since the onset of the crisis: - Risk aversion - Counterparty lending lists

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Investment Opportunities in Tradable Instruments: Treasury Bills, Certificates of Deposit

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  1. Investment Opportunities in Tradable Instruments: Treasury Bills, Certificates of Deposit Gilts, Supranational and Corporate Bonds.

  2. Investment Landscape • A heightened focus on Treasury since the onset of the crisis: - Risk aversion - Counterparty lending lists • Principles of Treasury Management remain unchanged: “Security, Liquidity, Yield…In that order!”(DCLG investment principles)

  3. What are the benefits of negotiable instruments? • Treasury Bills - Secure, Liquid and Yield more than the DMADF. • Certificates of Deposit (CD’s) - Negotiable deposit issued by banks, building societies • Gilts, Supranational and Corporate Bonds - Medium/longer term fixed flow of interest

  4. Range of investments Liquidity Maturity • Certificates of Deposit Same Day 2 weeks - 1 Year • Treasury Bills Same Day 1 week - 6 Months • Gilts T+1 3 months - 50 years • Supranational bonds T+3 3 months - 50 years • Corporate bonds T+3 3 months - 40 years Custodian service required Crest, for CDs, T bills and gilts Euroclear, for Supranational and Corporate bonds

  5. Current Yields

  6. Treasury Bills

  7. Treasury Bills • Short-term securities issued by HM Treasury on a discount basis • Issued below 100, but you get 100 back on maturity • Difference equals your interest return • Very low risk in both duration and credit: extremely liquid.

  8. Treasury Bills • Issued, by tender, usually to central, clearing and investment banks, 1, 3 and 6 month bills • Best rates available through primary market • Bids are submitted on a Friday, before 11.00am with settlement on the next working day • Secondary market can be expensive

  9. Purchase / Sale Proceeds Calculation Nominal ( ) Deal Rate x No of Days to Maturity 1 + 36,500 Treasury Bill – Worked Example : Purchase • Nominal: £10m • Deal Rate: 0.41% • Trade Date: 03/02/2012 • Value Date: 06/02/2012 • Maturity Date: 06/08/2012

  10. Purchase / Sale Proceeds Calculation £10m ( ) Deal Rate x No of Days to Maturity 1 + 36,500 Treasury Bill – Worked Example : Purchase • Nominal: £10m • Deal Rate: 0.41% • Trade Date: 03/02/2012 • Value Date: 06/02/2012 • Maturity Date: 06/08/2012

  11. Purchase / Sale Proceeds Calculation £10m ( ) 0. 41 x No of Days to Maturity 1 + 36,500 Treasury Bill – Worked Example : Purchase • Nominal: £10m • Deal Rate: 0.41% • Trade Date: 03/02/2012 • Value Date: 06/02/2012 • Maturity Date: 06/08/2012

  12. Purchase / Sale Proceeds Calculation £10m ( ) 0.41 x 182 1 + 36,500 Treasury Bill – Worked Example : Purchase • Nominal: £10m • Deal Rate: 0.41% • Trade Date: 03/02/2012 • Value Date: 06/02/2012 • Maturity Date: 06/08/2012

  13. Purchase / Sale Proceeds Calculation £10m ( ) 74.62 1 + 36,500 Treasury Bill – Worked Example : Purchase • Nominal: £10m • Deal Rate: 0.41% • Trade Date: 03/02/2012 • Value Date: 06/02/2012 • Maturity Date: 06/08/2012

  14. Treasury Bill – Worked Example : Purchase • Nominal: £10m • Deal Rate: 0.41% • Trade Date: 03/02/2012 • Value Date: 06/02/2012 • Maturity Date: 06/08/2012 Purchase / Sale Proceeds Calculation £10m ( ) 1.00204438356

  15. Treasury Bill – Worked Example : Purchase • Nominal: £10m • Deal Rate: 0.41% • Trade Date: 03/02/2012 • Value Date: 06/02/2012 • Maturity Date: 06/08/2012 Purchase / Sale Proceeds Calculation £9,979,597.87

  16. Treasury Bill – Worked Example : Purchase • Nominal: £10m • Deal Rate: 0.41% • Trade Date: 03/02/2012 • Value Date: 06/02/2012 • Maturity Date: 06/08/2012 Receive at maturity Purchase / Sale Proceeds Calculation £9,979,597.87

  17. Treasury Bill – Worked Example : Purchase Receive at maturity • Nominal: £10m • Deal Rate: 0.41% • Trade Date: 03/02/2012 • Value Date: 06/02/2012 • Maturity Date: 06/08/2012 Purchase / Sale Proceeds Calculation £ 9,979,597.87 Return is £10,000,000 - £ 9,979,597.87 = £20,402.13

  18. Treasury Bill – Worked Example : Purchase • Nominal: £10m • Deal Rate: 0.41% • Trade Date: 03/02/2012 • Value Date: 06/02/2012 • Maturity Date: 06/08/2012 Receive at maturity 182 days Purchase / Sale Proceeds Calculation £9,979,597.87 Return is £10,000,000 - £ 9,979,597.87 = £20,402.13

  19. Certificates of Deposit (CD’s)

  20. Interest Calculation ( ) Principal x Interest Rate x Number of Days 36,500 Certificates of Deposit (CD’s) • Negotiable form of deposit. Interest rate remains fixed, there is no obligation to hold to maturity. • Issued by UK and international banks and building societies on a daily basis • Same interest calculation at maturity as a fixed deposit:

  21. Certificates of deposit (CDs) Secondary market access: • Ability to lend to counterparties that do not take cash in the form of fixed deposits – fulfilling unused counterparty limits. • The ability to liquidate an investment at any point; - To crystallise a capital return - Due to counterparty credit concerns - Or to raise cash – unexpected payment

  22. Ratings correct as at 6th February 2012

  23. The Yield Curve

  24. The Yield Curve Buy at 1.06%

  25. The Yield Curve – 6 weeks later Buy at 1.06% Sell at 0.85%

  26. Sale Proceeds Calculation ( ) 36,500 + (Issue Rate x Original No of Days) Nominal x 36,500 + (Deal Rate x Days to Run) CD – Worked Example : Sale • Nominal £10m • Issuer Standard Chartered • Issue Rate 1.06% • Issue Date 05/01/2012 • Maturity Date 05/04/2012 • Deal Rate 0.85% • Deal Date 16/02/2012

  27. Sale Proceeds Calculation ( ) 36,500 + (Issue Rate x Original No of Days) £10m x 36,500 + (Deal Rate x Days to Run) CD – Worked Example : Sale • Nominal £10m • Issuer Standard Chartered • Issue Rate 1.06% • Issue Date 05/01/2012 • Maturity Date 05/04/2012 • Deal Rate 0.85% • Deal Date 16/02/2012

  28. Purchase/Sale Proceeds Calculation ( ) 36,500 + (1.06% x Original No of Days) £10m x 36,500 + (Deal Rate x Days to Run) CD – Worked Example : Sale • Nominal £10m • Issuer Standard Chartered • Issue Rate 1.06% • Issue Date 05/01/2012 • Maturity Date 05/04/2012 • Deal Rate 0.85% • Deal Date 16/02/2012

  29. Sale Proceeds Calculation ( ) 36,500 + (1.06% x 91) £10m x 36,500 + (Deal Rate x Days to Run) CD – Worked Example : Sale • Nominal £10m • Issuer Standard Chartered • Issue Rate 1.06% • Issue Date 05/01/2012 • Maturity Date 05/04/2012 • Deal Rate 0.85% • Deal Date 16/02/2012

  30. Sale Proceeds Calculation ( ) 36,500 + (1.06% x 91) £10m x 36,500 + (0.85% x Days to Run) CD – Worked Example : Sale • Nominal £10m • Issuer Standard Chartered • Issue Rate 1.06% • Issue Date 05/01/2012 • Maturity Date 05/04/2012 • Deal Rate 0.85% • Deal Date 16/02/2012

  31. Sale Proceeds Calculation ( ) 36,500 + (1.06% x 91) £10m x 36,500 + (0.85% x 49) CD – Worked Example : Sale • Nominal £10m • Issuer Standard Chartered • Issue Rate 1.06% • Issue Date 05/01/2012 • Maturity Date 05/04/2012 • Deal Rate 0.85% • Deal Date 16/02/2012

  32. CD – Worked Example : Sale • Nominal £10m • Issuer Standard Chartered • Issue Rate 1.06% • Issue Date 05/01/2012 • Maturity Date 05/04/2012 • Deal Rate 0.85% • Deal Date 16/02/2012 Sale Proceeds Calculation ( ) 36,500 + (96.46) £10m x 36,500 + (41.65)

  33. CD – Worked Example : Sale • Nominal £10m • Issuer Standard Chartered • Issue Rate 1.06% • Issue Date 05/01/2012 • Maturity Date 05/04/2012 • Deal Rate 0.85% • Deal Date 16/02/2012 Sale Proceeds Calculation ( ) 36,596.46 £10m x 36,541.65)

  34. CD – Worked Example : Sale • Nominal £10m • Issuer Standard Chartered • Issue Rate 1.06% • Issue Date 05/01/2012 • Maturity Date 05/04/2012 • Deal Rate 0.85% • Deal Date 16/02/2012 Sale Proceeds Calculation ( ) = £10,014,999.32 £10m x 1.00149993226

  35. CD – Worked Example : Summary • Purchased 05/01/2012 at 1.06% • Sold 16/02/2012 at 0.85% • Held for 42 Days • Cost £10,000,000.00 • Sale proceeds £10,014,999.32 • Gain £14,999.32 • Return 1.30% p.a.

  36. CD – Worked Example : Summary • Purchased 05/01/2012 at 1.06% • Sold 16/02/2012 at 0.85% • Held for 42 Days • Cost £10,000,000.00 • Sale proceeds £10,014,999.32 • Gain £14,999.32 • Return 1.30% p.a. Return = 1.30% pa for 42 days.

  37. The Yield Curve – 6 weeks later Reinvest at 0.68 Re-invest anywhere along the curve

  38. Conventional Fixed and Corporate Bonds

  39. Conventional Fixed and Corporate Bonds Types of fixed bond: UK Gilt:HM Treasury AAA-rated, Sterling-denominated bond. Supranational:Joint and several liability of leading developed nations e.g. World Bank or EIB. Corporate bond:Issued by Banks, Building Societies and Corporate institutions.

  40. Conventional Fixed and Corporate Bonds • Guarantees to pay holder a coupon every 6 months until maturity on same dates each year • Fixed flow of interest income and at maturity a fixed capital repayment. • Coupon refers to the cash payment per £100 nominal that holder will receive each year.

  41. Fixed income – accrued interest A holder of £1,000,000 nominal of UKT 5.25% 2012: • Receives two coupon payments of £26,250 a year on 7th March and 7th September - Interest accrued since last interest payment date is paid in addition to the capital price.

  42. Accrued Interest Calculation = ( ) ( ) Coupon Nominal x x No of days accrued 2 Days in coupon period Fixed income – accrued interest • UKT 5.25% 2012 example : Last coupon payment: 7th December 2011 Next coupon payment: 7th June 2012 Purchased on 6th February 2012.

  43. Accrued Interest Calculation ( ) ( ) 5.25% £1m x x 61 2 183 Fixed income – accrued interest • UKT 5.25% 2012 example : Last coupon payment: 7th December 2011 Next coupon payment: 7th June 2012 Purchased on 6th February. 183 days 61 days have accrued since 7th Dec = £8,750.00

  44. Fixed income – accrued interest

  45. Corporate Bond Issues

  46. Floating Rate Notes (FRN’s)

  47. FRN’s Floating Rate Notes • Dealt at a spread over LIBOR (Published after 11am by the BBA) • Re-set at a fixed margin over LIBOR every 3 months, until maturity. • E.g. The EIB 19th February 2015 FRN re-sets at +0.10% over 3 month LIBOR until maturity. Last coupon payment: 20/02/2012 3m Libor at re-fix; 1.07081 Current coupon rate: 1.17081 Next coupon payment: 21/05/2012 3 month return.

  48. Floating Rate Notes

  49. Summary Negotiable instruments offer additional avenues of investment, including: Increased Liquidity Counterparty diversification. High quality credit, without sacrificing yield

  50. Any questions?

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