TREASURY BILLS

Treasury Bills (TB) are an instrument issued by Govt. of India for financing its short – term liquidity requirements. Presently, Treasury bills are being issued by the Govt. of India for three tenors i. e. 91 days, 182 days and 364 days. The Reserve Bank of India issues treasury bills for and on behalf of the Govt. of India.

The Govt. of India borrows funds to finance its fiscal deficits.  Process Flow Chart of Treasury Bills: Treasury bills are zero coupon securities and pay no interest. It is generally issued at a discount price e. g. a days‟ treasury bills of Rs.100 (face value) may be issued at a discount of Rs.1.80. It means T – bills issued at Rs.98.20 and will be redeemed at Rs.100/-. 

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 maximize 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 development of idle funds for very short periods as well. 

In short, it is a tool of monetary management in the economy. 

Example: ABC Ltd. has a surplus cash of Rs.500/- crores to be deployed for a project over a period of two months. However, the company does not require the funds at one go but requires them at different points of time as given below:- 

Funds available as on 1st June, 2013 = Rs.500 crores

Deployment of funds:

05.06.2013 = Rs.100 Crores
14.06.2013 = Rs.50 Crores
02.07.2013 = Rs.100 Crores
10.07.2013 = Rs.250 Crores 

The company has two options for effective management of the funds: 

Option I: Funds deposit with Bank  The Bank does not give any interest on the deposits less than 15 day. Accordingly, the Company will not get any interest amount on Rs.150/- Crores till the date of 14th June, 2013 since Rs.150 Crores are required within the first 15 days of deposits. 

The Company will get only interest on Rs.350 Crores.  Option II: Investment in the Treasury bills  The company will get interest on its entire fund i. e. Rs.500 Crores.  From the above example, ABC Ltd. will definitely go with the

option – II and will invest the entire fund in the Treasury Bills and will earn more interest. 

Types of Treasury Bills: 

(i) 14 – day T bill: This Treasury bill matures in 14 days and its auction is on every Friday of every week. The notified amount for this auction is Rs.100 crores.

(ii) 91 – day T bill: This Treasury bill matures in 91 days and its auction is on every Friday of every week. The notified amount for this auction is Rs.100 crores.

(iii) 182 – day T bill: This Treasury bill matures in 182 days and its auction takes place on every alternative Wednesday (which is not a reporting week). The notified amount for this auction is Rs.100 crores. 

(iv) 364 – day T – bill: This Treasury bill matures in 364 days and its auction takes place on every alternate Wednesday (which is a reporting week). The notified amount for this auction is Rs.500 crores. 

A considerable part of the government‟s borrowings is financed through T – bills of various maturities. T – bills are issued at a discount can be traded in the market. Most of the time, unless the investor requests specifically, these are issued not as securities but as entries in the Subsidiary General Ledger (SGL) which is maintained by RBI. The transactions cost on T – bill are non – existent and trading is considerably high in each bill, immediately after its issue and immediately before its redemption. 

Benefits of T – Bills:

(i) T – Bills are highly liquid.

(ii) No tax deducted at source.

(iii) No risk of default as its being issued by the Govt. of India.

(iv) Better returns especially in the short – term.

(v) Transparency.

(vi) Low transaction cost.

(vii) The yield on T – bills is assured.

(viii) Simplified settlement.

(ix) High degree of tradability and active secondary market facilitates meeting unplanned fund requirements.

Features of Treasury Bills:

(i) 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 dematerialized form. 

(ii) Minimum Amount of Bids: Bids for treasury bills are to be made for a minimum amount of Rs.25,000/- only and in multiples thereof. 

(iii) 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 organizations, Nepal Rashtra Bank and even individuals are eligible to bid and purchase Treasury bills. 

(iv) Repayment: The treasury bills are repaid at par on the expiry of their tenure at the office of the Reserve Bank of India. 

(v) Availability: All treasury Bills are highly liquid instruments available both in the primary and secondary market. 

(vi) Day Count: For treasury bills the day count is taken as 365 days for a year. 

(vii) Yield Calculation: The yield of a Treasury bill is calculated as per the following formula:-  Y = (     )   Where Y = Discounted yield   P = Price D = Days to maturity  

Example: A co – operative bank wishes to buy 91 Days‟ Treasury Bill on Oct. 12, 2012 which is Maturing on Dec. 6, 2012. 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 = (           )         (           )        = 5.70%  

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