INDIAN INSTITUTE OF BANKING FINANCE Risk Management Module
INDIAN INSTITUTE OF BANKING & FINANCE Risk Management –Module C Treasury Management 26 -04 -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. 100 crores 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 25 th July & 25 th Oct First Fixing 6. 10% In the above case, which of the following is correct in respect of net interest amount payable/receivable on 25 th July 2008? a) XYZ Ltd to pay Rs. 986301**** b) XYZ Ltd to receive Rs. 986301 100000*90*. 4 ------------c)XYZ Ltd to pay Rs. 1972602 36500 d) XYZh Ltd to receive Rs. 1972602
General Ledger Balance of ABC Bank as on 12 -10 -2008 Rs. In 000’s Rs Assets Rs Liabilities Paid up capital 10, 000 Building 10000 Current Account 180, 00 Car 20000 450, 00 Cash Credit 1000000 600, 000 Term Loan 800000 0 SB 0 Fixed Deposit Interest accrued 10000 Margin on LCs 2, 00 Suspense Account 10000 1, 00 Branch Adjustment Account 20000 0 TT Payable 0 CBLO(Colaterised Borrowing & Lending Obligations) 600, 00 0 ECGC Claims 7, 00 0 18 60 186000
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 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 31 ST JANUARY, 2008 ABC WANTS TO BOOK A FORWARD CONTRACT FOR THIS TRANSACTION : SPOT RATE OF USD : 39. 32/33 PREMIUM UPTO 31 ST 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 20 % AA 50 20 % A 50 100 20 % BBB 100 20 % BB& Below 150 100 800 Minimum capital Rs. 48. 60 crores under Basel II a)57. 6 crores****** b)58. 6 crores c)60. 6 crores d)52. 6 crores
Working Ratin Risk g Weig Scal ht e Exposu RWA re Before down grade Exposur e after Downgra de AAA 20% 200 40 160 80 AA 50% 200 100 A 50% 100 50 120 60 BBB 100% 200 180 BB & 150% 100 belo w 150 140 210 540 RWA AFTER DOWNGRA DE 630
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.
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 Rs 100 (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 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 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 7% of demand 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. The CRR and SLR are to be maintained on fortnightly basis.
Demand 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 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.
Va. R Value at Risk (Va. R) 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 – Va. R at 95% confidence level, implies a 5% probability of incurring the loss; at 99% confidence level the Va. R 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).
Va. R A Va. R of Rs. 100, 000 at 99% confidence level for one week for a investment portfolio of Rs. 10, 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 31 st 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 5 Currency pair GBP/USD Bid 0. 9891 Ask 0. 9894 AUD/USD 1. 2287 1. 2289 Ans : GBP/AUD 0. 8049/0. 8052
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. 4625 Amount Payable to the bank Rs. 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 Floatingrate finance Firm A Firm B 9% 11% LIBOR +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 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 all. India 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 Maturity of exposure(years) 6 2 Nature of exposure Corporate Currency USD INR Rating of Exposure BBB UNRATED Haircut for exposure 12% 25% Value of collateral after haircut Rs. 88 crore Rs 75 crore Risk weight 100% In the above case, the RWA for the net exposures of A & B under Basel II are …. . ……………… A)Rs. 28 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
A dealer has a $200 million open position. He finds that his Va. R 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 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 Doubtful Classificatio more than 3 n Status years as on 31 -3 -2007 ECGC 50% Cover Realizable Rs. 1. 50 Value of lakhs The total provision required in the above case is Security …………………. a) Rs. 1. 25 lakh*****Rs. 4 lakhs Balance b)Rs. 2. 50 lakh Outstanding 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 23 rd 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, 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, 000 * 116. 42/100 =Rs. 3, 49, 26, 000 Accrued Interest: The number of days is 93. Accrued interest = 3, 00, 000 * 11. 99%* 93/360 = Rs. 9, 225. 00 Therefore, the settlement amount is: Rs. 3, 49, 26, 000 + Rs. 9, 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 -Aug 2008, 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%to 15% b)3% to 20% c)5% to 20% 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
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