DISCOUNT RATES AND T BILL PRICES:

If d is the quoted yield for a T-bill, with a face value of $V and having Tm days to maturity, the dollar
discount D is given by

Given the discount, the price may be calculated as

 A T-bill with 90 days to maturity and a face value of $1,000,000 has a quoted yield of 4.8%. What is the
price in dollars?
EXAMPLE – T BILL;
EXAMPLE – T BILL;

 A one-year bill (364 days) has just been issued at a quoted yield of 5.4%. What is the
corresponding price in dollars?
EXAMPLE – T BILL;
COMMERCIAL BILLS

 Commercial bills are a type of financial instrument that are commonly used in business transactions. They
are essentially a promise to pay a specific amount of money at a future date, usually within 90 days. Commercial
bills can be used by businesses to finance their operations and manage their cash flow.
 A commercial bill definition includes all debt owed by one party to another. The party that owes the debt
is known as the drawer while the party that is owed the debt is known as the payee. It includes the amount of
money owed, the due date for payment, and any interest that will be charged if the debt is not paid on time.

Imagine Company A needs some quick cash for its operations but doesn't want to take out a bank loan. So, it
issues a commercial bill.
•Company A issues a commercial bill for $100,000 with a 90-day maturity.
•An investor (say, Company B) buys this bill at a discounted price of $98,000.
•In 90 days, Company A will pay Company B the full $100,000.
So, Company A gets $98,000 right now and pays $100,000 later. The difference, $2,000, is the interest or
profit for the investor, Company B.
BANK COMMERCIAL BILL

 A bank commercial bill is similar to a regular commercial bill but involves a bank's guarantee. It’s a short-term debt instrument used by
companies to raise funds, and the key difference is that a bank guarantees the payment, making it less risky for investors.

 Company A needs funds but doesn't want to take out a traditional loan, so it issues a commercial bill for $100,000 with a 90-day maturity.

 However, Company A approaches a bank (let’s call it Bank X) to get the bill guaranteed. The bank agrees to do this because it has confidence in
Company A’s creditworthiness.

 The bill is issued at a discounted price of $98,000 (meaning, Company B, the investor, will pay this amount now but will receive the full $100,000
in 90 days).

 Investors (Company B) buy the bank-backed bill for $98,000, knowing that even if Company A doesn't pay, Bank X will cover the $100,000 in 90
days.

 In 90 days, Company A repays $100,000 to Bank X, which then pays $100,000 to Company B (the investor).
COLLATERALIZED BORROWING AND LENDING OBLIGATION
(CBLO)

 The Reserve Bank of India (RBI) and the Clearing Corporation of India Limited (CCIL) operate the Collateralized
Borrowing and Lending Obligation (CBLO) in India. CBLO is a discounted instrument that allows members to borrow
and lend funds using collateral.

 The borrower sells a money market instrument with interest to the lender.
 The borrower must return the borrowed money on a specified future date.
 The interest rate is usually negotiated between the borrower and the lender.
 The borrower deposits eligible securities with the CCIL as collateral.
 The CCIL matches the borrowing and lending orders submitted by the members.
 CBLO was created in 2003 to provide liquidity support to non-bank entities that were restricted from accessing funds
from the Call Money Market.
INTERBANK RATE

 The interbank rate exists because regulators require all banks maintain a minimum amount of cash in
their reserves for customer withdrawals.
 In order to maintain this liquidity, financial institutions will borrow from each other if they're
experiencing a shortfall, or lend to each other in order to earn interest on their excess reserves.
 The interest they earn from this short-term lending is based on the interbank rate, which is also known
as the overnight rate.
 Transparency, market efficiency, product pricing.
LIBOR

 The London Interbank Offered Rate (LIBOR) was a benchmark interest rate for short-term loans between major
global banks.

 The London Interbank Offered Rate (LIBOR) was calculated by the Intercontinental Exchange (ICE) Benchmark
Administration (IBA).The IBA calculated LIBOR by asking a panel of major banks to submit their estimates of the
interest rates they would pay to borrow from other banks.

 LIBOR had existed for a long time, but over the years, it became associated with scandals and crises. This led to a
lack of trust in LIBOR rates, which eventually resulted in the decision to phase out LIBOR.
SOFR

 The Secured Overnight Financing Rate (SOFR) emerged as the preferred alternate rate. SOFR is a data-driven

lending benchmark.

 It's more reliable than its predecessor LIBOR and eliminates any manipulation by banks and provides more

transparency to borrowing costs.

 SOFR is a much more resilient rate than LIBOR was because of how it is produced and the depth and liquidity of

the markets that underlie it.

 SONIA (Sterling Overnight Index Average) is an interest rate benchmark that reflects the average interest rate

that banks pay to borrow money overnight.

 It's a key indicator of the overnight funding rates in the British sterling market.

 SONIA is a measure of the rate at which interest is paid on sterling short-term wholesale funds
MIBOR

 MIBOR, or Mumbai Interbank Offered Rate, is the interest rate at which banks in India borrow money from each
other overnight.
 It's a reference rate that's calculated from the average interest rates of a panel of banks.
 This panel has a mixture of public and private sector banks, as well as foreign banks. Public banks include State
Bank of India and Central Bank of India; private banks include Axis Bank Limited and HDFC Bank Limited; foreign
banks include Citibank and Deutsche bank; primary dealers include ICICI Securities Ltd and PNB GILTS Ltd.
 In 2015, it was decided that polled respondents could too easily manipulate MIBOR by exaggerating their rate
estimates for profitability purposes. The latest version of MIBOR is the Financial Benchmarks India Pvt Ltd (FBIL)
 FBIL-Overnight MIBOR is a range of rates calculated by observing transactions between banks rather than asking
them what rates they would charge and ask.
BOND MARKET

 A bond is a loan that the bond purchaser, or bondholder, makes to the bond issuer.
 Governments, corporations and municipalities issue bonds when they need capital.
 An investor who buys a government bond is lending the government money.
 If an investor buys a corporate bond, the investor is lending the corporation money.
 The bond market is a financial market where participants buy and sell debt securities, typically in the form of
bonds.
 A bond is essentially a loan made by an investor to a borrower (usually a government, corporation, or other
entity).
BOND MARKET

 A bond is like an IOU (I Owe You) from the issuer (borrower) to the bondholder (lender).
 When you buy a bond, you're essentially lending money to the issuer. In return, the issuer promises to:
• Pay you periodic interest payments (called coupon payments) at a fixed rate.
• Pay back the face value of the bond (called the principal) at the maturity date.
FIXED INCOME?

 Stable Income:
Bonds provide a predictable income stream, especially those with fixed coupon payments.
Risk involved:
Credit Risk (Default Risk): If the bond issuer faces financial difficulties, they may not be able to pay interest or
principal. This is more of a risk with corporate bonds, especially junk bonds.
Inflation Risk: If inflation rises faster than the coupon rate of the bond, the real value of your coupon payments
decreases. For example, if inflation is 6% and your bond yields 3%, you're actually losing purchasing power.
Liquidity Risk: Some bonds may be harder to sell on the secondary market if the bond issuer is in financial trouble,
or if the bond is specialized and not in high demand.