Where to purchase t bill

When Issued trading takes place between the time a Government Security is announced for issuance and the time it is actually issued. All 'When Issued' transactions are on an 'if' basis, to be settled if and when the actual security is issued. When Issued transactions would commence after the issue of a security is notified by the Central Government and it would cease at the close of trading on the date of auction.

The open position limits are prescribed in the directions. Banks may treat sale of a security held in the investment portfolio as a short sale and follow the process laid down in these directions. For the purpose of these guidelines, short sale would include 'notional' short sale.

Circular No. Short sales shall be covered within a period of three months from the date of transaction inclusive of the date. If securities are delivered out of its own portfolio, it must be accounted for appropriately and reflect the transactions as internal borrowing. It shall be ensured that the securities so borrowed are brought back to the same portfolio, without any change in book value. What are the basic mathematical concepts one should know for calculations involved in bond prices and yields?

An outline of the same with illustrations is provided in Box II below. Money has time value as a Rupee today is more valuable and useful than a Rupee a year later.

The concept of time value of money is based on the premise that an investor prefers to receive a payment of a fixed amount of money today, rather than an equal amount in the future, all else being equal. In particular, if one receives the payment today, one can then earn interest on the money until that specified future date. Further, in an inflationary environment, a Rupee today will have greater purchasing power than after a year.

It is a standard method for using the time value of money to appraise long-term projects. Used for capital budgeting, and widely throughout economics, it measures the excess or shortfall of cash flows, in present value PV terms, once financing charges are met.

Then they are summed. Where t - the time of the cash flow N - the total time of the project r - the discount rate the rate of return that could be earned on an investment in the financial markets with similar risk.

C t - the net cash flow the amount of cash at time t for educational purposes, C 0 is commonly placed to the left of the sum to emphasize its role as the initial investment. How is the Price of a bond calculated? What is the total consideration amount of a trade and what is accrued interest? The price of a bond is nothing but the sum of present value of all future cash flows of the bond. The interest rate used for discounting the cash flows is the Yield to Maturity YTM explained in detail in question no.

Accrued interest is the interest calculated for the broken period from the last coupon day till a day prior to the settlement date of the trade. Since the seller of the security is holding the security for the period up to the day prior to the settlement date of the trade, he is entitled to receive the coupon for the period held.

The last coupon date being Nov 25, , the number of days in broken period till Jan 29, one day prior to settlement date i. In the instant case, it is If market interest rate levels rise, the price of a bond falls. Conversely, if interest rates or market yields decline, the price of the bond rises. In other words, the yield of a bond is inversely related to its price.

The relationship between yield to maturity and coupon rate of bond may be stated as follows:. When the market price of the bond is less than the face value, i.

When the market price of the bond is more than its face value, i. When the market price of the bond is equal to its face value, i.

The three yield measures commonly used by investors to measure the potential return from investing in a bond are briefly described below:.

Coupon yield refers to nominal interest payable on a fixed income security like G-Sec. This is the fixed return the Government i. Coupon yield thus does not reflect the impact of interest rate movement and inflation on the nominal interest that the Government pays.

Coupon: 8. The current yield does not take into account the reinvestment of the interest income received periodically. The current yield for a 10 year 8. The price of a bond is simply the sum of the present values of all its remaining cash flows. Present value is calculated by discounting each cash flow at a rate; this rate is the YTM. Thus, YTM is the discount rate which equates the present value of the future cash flows from a bond to its current market price.

In other words, it is the internal rate of return on the bond. The calculation of YTM involves a trial-and-error procedure. YTM could be calculated manually as well as using functions in any standard spread sheet like MS Excel.

Manual or trial and error method is complicated because G-Secs have many cash flows running into future. This is explained by taking an example below. In the MS Excel programme, the following function could be used for calculating the yield of periodically coupon paying securities, given the price. Settlement is the security's settlement date. The security settlement date is the date on which the security and funds are exchanged.

Maturity is the security's maturity date. The maturity date is the date when the security expires. What are the day count conventions used in calculating bond yields? Day count convention refers to the method used for arriving at the holding period number of days of a bond to calculate the accrued interest.

As the use of different day count conventions can result in different accrued interest amounts, it is appropriate that all the participants in the market follow a uniform day count convention.

Hence, in the case of T-Bills, which are essentially money market instruments, money market convention is followed. Hence the convention changes in different countries and in different markets within the same country eg. Money market convention is different than the bond market convention in India.

In simplest form, duration refers to the payback period of a bond to break even, i. Duration is expressed in number of years. A step by step approach for working out duration is given in the Box IV below. First, each of the future cash flows is discounted to its respective present value for each period.

Since the coupons are paid out every six months, a single period is equal to six months and a bond with two years maturity will have four time periods. Second, the present values of future cash flows are multiplied with their respective time periods these are the weights. That is the PV of the first coupon is multiplied by 1, PV of second coupon by 2 and so on. Third, the above weighted PVs of all cash flows is added and the sum is divided by the current price total of the PVs in step 1 of the bond.

The resultant value is the duration in no. Since one period equals to six months, to get the duration in no. This is the time period within which the bond is expected to pay back its own value if held till maturity. The weighted average term time from now to payment of a bond's cash flows or of any series of linked cash flows. The higher the coupon rate of a bond, the shorter the duration if the term of the bond is kept constant. It refers to the change in value of the security to one per cent change in interest rates Yield.

The formula is. Duration is useful primarily as a measure of the sensitivity of a bond's market price to interest rate i. It is approximately equal to the percentage change in price for one percent change in yield. In other words, duration is the elasticity of the bond's price with respect to interest rates. This ignores convexity explained in para It is the present value impact of 1 basis point 0.

It is often used as a price alternative to duration a time measure. Higher the PV01, the higher would be the volatility sensitivity of price to change in yield.

From the modified duration given in the illustration under In value terms that is equal to 1. Thus, if the yield of a bond with a Modified Duration of 1.

This is because the relationship between bond price and yield is not strictly linear. Over large variations in yields, the relationship is curvilinear i. This is measured by a concept called convexity, which is the change in duration of a bond due to change in the yield of the bond. The book value of individual securities in AFS and HFT categories would not undergo any change after marking to market.

Ltd FBIL has been advised to assume the responsibility for administering valuation of Government securities with effect from March 31, Going forward, FBIL will undertake a comprehensive review of the valuation methodology.

Other market participants who have been using Govt. Brief details of valuation methodology is provided in Box V. However, sufficient care has been exercised, by way of the imposition of a set of objective criteria, to make sure that i off-market data are excluded, and ii no incentive for market manipulation is provided reducing the possibility of the so called Type 2 error. What are the risks involved in holding G-Secs? What are the techniques for mitigating such risks?

G-Secs are generally referred to as risk free instruments as sovereigns rarely default on their payments. However, as is the case with any financial instrument, there are risks associated with holding the G-Secs. Hence, it is important to identify and understand such risks and take appropriate measures for mitigation of the same. The following are the major risks associated with holding G-Secs:. This will result in valuation losses on marking to market or realizing a loss if the securities are sold at adverse prices.

Small investors, to some extent, can mitigate market risk by holding the bonds till maturity so that they can realize the yield at which the securities were actually bought.

These cash flows need to be reinvested whenever they are paid. Hence there is a risk that the investor may not be able to reinvest these proceeds at yield prevalent at the time of making investment due to decrease in interest rates prevailing at the time of receipt of cash flows by investors. Liquidity risk refers to the inability of an investor to liquidate sell his holdings due to non-availability of buyers for the security, i. Usually, when a liquid bond of fixed maturity is bought, its tenor gets reduced due to time decay.

For example, a year security will become 8 year security after 2 years due to which it may become illiquid. The bonds also become illiquid when there are no frequent reissuances by the issuer RBI in those bonds. Bonds are generally reissued till a sizeable amount becomes outstanding under that bond. However, issuer and sovereign have to ensure that there is no excess burden on Government at the time of maturity of the bond as very large amount maturing on a single day may affect the fiscal position of Government.

Hence, reissuances for securities are generally stopped after outstanding under that bond touches a particular limit. Due to illiquidity, the investor may need to sell at adverse prices in case of urgent funds requirement. However, in such cases, eligible investors can participate in market repo and borrow the money against the collateral of such securities.

Rebalancing the portfolio wherein the securities are sold once they become short term and new securities of longer tenor are bought could be followed to manage the portfolio risk. However, rebalancing involves transaction and other costs and hence needs to be used judiciously.

Market risk and reinvestment risk could also be managed through Asset Liability Management ALM by matching the cash flows with liabilities. ALM could also be undertaken by matching the duration of the assets and liabilities. Advanced risk management techniques involve use of derivatives like Interest Rate Swaps IRS through which the nature of cash flows could be altered.

However, these are complex instruments requiring advanced level of expertise for proper understanding. Adequate caution, therefore, need to be observed for undertaking the derivatives transactions and such transactions should be undertaken only after having complete understanding of the associated risks and complexities.

Money market transactions are generally used for funding the transactions in other markets including G-Secs market and meeting short term liquidity mismatches. By definition, money market is for a maximum tenor of one year. Within the one year, depending upon the tenors, money market is classified into:. This market is predominantly overnight and is open for participation only to scheduled commercial banks and the primary dealers.

Predominantly, repos are undertaken on overnight basis, i. Settlement of repo transactions happens along with the outright trades in G-Secs.

The overall effect of the repo transaction would be borrowing of funds backed by the collateral of G-Secs. This is similar to repo in G-Secs except that corporate debt securities are used as collateral for borrowing funds. Commercial paper, certificate of deposit, non-convertible debentures of original maturity less than one year are not eligible for this purpose.

These transactions take place in the OTC market and are required to be reported on FIMMDA platform within 15 minutes of the trade for dissemination of trade information. They are also to be reported on the clearing house of any of the exchanges for the purpose of clearing and settlement.

All the repo eligible entities are entitled to participate in Triparty Repo. Bills are typically sold at a discount from the par amount par amount is also called face value ; rarely, they have sold at a price equal to the par amount.

When a bill matures, you are paid its par amount. If the par amount is greater than the purchase price, the difference is your interest. You can buy bills from us in TreasuryDirect. You can also buy them through a bank or broker. We no longer sell bills in Legacy Treasury Direct, which we are phasing out. G-secs are a barometer for interest rates in the economy and currently the yield on various tenures is higher than basic FD rates.

There is also a chance to earn capital gains by selling the G-sec before maturity if the market price moves up. Moreover, G-secs are probably the safest credit quality as they are directly issued by and repaid by the government of India. With no credit risk and relatively better payout, these make for a good investment option for your fixed income allocation.

The broker charge is lower than what you might pay as expense ratio in a short-term debt fund as well. The one shortcoming is that the bonds are listed with a market price—just like the price can go up, it can fall in the interim as well.

You may see interim volatility especially in long-term bonds. Start with investing amounts that you are likely to hold till maturity to avoid the impact of this volatility, at least till you are better versed with nuances of these securities. So far, G-secs are mostly traded in large amounts by corporates and institutional investors, making it hard for retail investors to bid small amounts.

Provident funds, by their very nature, need to invest in risk free securities that also provide them a reasonable return. Government securities, also called the gilt edged securities or G-secs, are not only free from default risk but also provide reasonable returns and, therefore, offer the most suitable investment opportunity to provident funds.

The Government securities comprise dated securities issued by the Government of India and state governments as also, treasury bills. As an agent of the Government, the Reserve Bank of India manages and services these securities through its public debt offices located in various places. Treasury bills T-bills offer short-term investment opportunities, generally up to one year. They are thus useful in managing short-term liquidity. At present, the Government of India issues four types of treasury bills, namely, day, day, day and day.

T-bills are available for a minimum amount of Rs. T-bills are issued at a discount and are redeemed at par. While day and day T-bills are auctioned every week on Fridays, day and day T-bills are auctioned every alternate week on Wednesdays. The Reserve Bank of India issues a calendar of T-bill auctions. It also announces the exact dates of auction, the amount to be auctioned and payment dates by issuing press releases prior to every auction.

Payment for purchase of 14 and day T-bills by successful bidders has to be made on the Saturday following the Friday auction; and payment by successful bidders for day and day T-bills has to be made by successful bidders on the following Thursday. Provident funds can participate in 14 and day T-bill auctions as non-competitive bidders.