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Sem 5 Prep
← Money & BankingThe money market and its instruments

Formulas for this chapter

T-bill yield (general form)

YT = ((SP - PP) / PP) x (365 / n)

Any bill bought at one price and sold or redeemed at another. n is the days you held it, not the bill's original tenor.

SP
Selling price, or par value if held to maturity
PP
Purchase price, the money actually invested
n
Number of days held

T-bill yield (Indian percentage form)

Y = ((100 - P) / P) x (365 / D) x 100

The professor's own form, for a bill quoted per 100 of face value and held to maturity. Answer comes out directly in per cent.

P
Discounted price at which the security is purchased
D
Tenure of the bill in days

T-bill price

Price = par / (1 + r x n/365) One-year bill: Price = par / (1 + r)

When the required return is given and the price is asked. The value of a T-bill is the present value of the par value.

r
Investor's required annualised return, as a decimal
n
Days to maturity

Ask discount to price and yield (360-day basis)

Discount = Face x d x n/360 Price = Face - Discount Yield = (Discount / Price) x (360/n) x 100

Section B's numerical, and any question quoting a bill on a discount basis. Note the 360-day year and that the discount rate uses face value while the yield uses price.

d
Quoted ask discount rate, as a decimal
n
Days to maturity
Face
Face value, usually 100

Repo margin and repurchase price

Number of bonds = Cash lent / Repo value per bond (round up) Margin = (Number of bonds x Market value) - Cash lent Repurchase price = Repo value x (1 + repo rate x n/360)

Any repo problem giving both a market value and an agreed repo value. Interest accrues on the repo value; the margin comes from the market value.

Repo value
Agreed value of the collateral for repo purposes, per unit of face
Market value
Traded price of the collateral, per unit of face
n
Repo period in days
Step 4 of 25
The real wordsTheory

Where the return comes from

The slide's own illustration. Take a 91-day T-bill with a par value of ₹100, issued to you at ₹97. After 91 days you get back ₹100, so you make ₹3.

It is like buying a stock at 97 and selling it at 100, with one difference: this transaction is guaranteed.

Two numbers describe that trade and they are not the same. The discount is the ₹3. The yield is what that ₹3 works out to as an annual rate on the ₹97 you actually paid.

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