savio13
Savio Cabral
TREASURY BILLS
Treasury bills are obligations of the government. They are sold on a discount basis for that reason. The investor does not receive an actual interest payment. The return is the difference between the purchase price and the face (par) value of the bill.
The treasury bills are issued only in bearer form. They are purchased, therefore, without the investor’s name upon them. This attribute makes them easily transferable from one investor to the next. A very active secondary market exists for these bills. The secondary market for bills not only makes them highly liquid but also allows purchase of bills with very short maturities. As the bills have the full financial backing of the government, they are, for full practical purposes, risk free. This negligible financial risk and the high degree of liquidity make their yield lower than on marketable securities. Due their virtually risk-free nature and because of active secondary market for them, treasury bills are one of the most popular marketable securities even though the yield on them is lower.
Discount of bills
A bill arises out of a trade transaction. The seller of goods draws the bill on the purchaser. The bill may be either clean or documentary (a documentary bill is supported by a document of title to goods like a railway receipt or a bill of lading) & may be payable on demand or after a usance period which does not exceed 90 days. On acceptance of the bill by the purchaser the seller offers it to the bank for discount/ purchase. When the bank discounts/ purchases the bill it releases the funds to the seller. The bank presents the bill to the purchaser (the acceptor of the bill) on the due date& gets its payment.
The reserve bank of India launched the new bill market scheme in 1970 to encourage the use of bills as an instrument of credit. The objective was to reduce the reliance on the cash credit arrangement because of its amenability to abuse. The new bill market scheme sought to promote an active market for bills as a negotiable instrument so that the lending activities of a bank could be shared by the other banks. It was envisaged that the bank, when short of funds, would sell or rediscount the bills that it has purchased or discounted. Likewise, a bank which has surplus funds would invest in bills. Obviously for such a system to work there has to be lender of last resort who can come to the succour of the banking system as a whole. This role naturally has been assumed by the reserve bank of India, which rediscounts bills of commercial banks upto a certain limit. Despite the blessings & support of the reserve bank of India, the new bill market scheme has not functioned very successfully in practice.
Treasury bills are obligations of the government. They are sold on a discount basis for that reason. The investor does not receive an actual interest payment. The return is the difference between the purchase price and the face (par) value of the bill.
The treasury bills are issued only in bearer form. They are purchased, therefore, without the investor’s name upon them. This attribute makes them easily transferable from one investor to the next. A very active secondary market exists for these bills. The secondary market for bills not only makes them highly liquid but also allows purchase of bills with very short maturities. As the bills have the full financial backing of the government, they are, for full practical purposes, risk free. This negligible financial risk and the high degree of liquidity make their yield lower than on marketable securities. Due their virtually risk-free nature and because of active secondary market for them, treasury bills are one of the most popular marketable securities even though the yield on them is lower.
Discount of bills
A bill arises out of a trade transaction. The seller of goods draws the bill on the purchaser. The bill may be either clean or documentary (a documentary bill is supported by a document of title to goods like a railway receipt or a bill of lading) & may be payable on demand or after a usance period which does not exceed 90 days. On acceptance of the bill by the purchaser the seller offers it to the bank for discount/ purchase. When the bank discounts/ purchases the bill it releases the funds to the seller. The bank presents the bill to the purchaser (the acceptor of the bill) on the due date& gets its payment.
The reserve bank of India launched the new bill market scheme in 1970 to encourage the use of bills as an instrument of credit. The objective was to reduce the reliance on the cash credit arrangement because of its amenability to abuse. The new bill market scheme sought to promote an active market for bills as a negotiable instrument so that the lending activities of a bank could be shared by the other banks. It was envisaged that the bank, when short of funds, would sell or rediscount the bills that it has purchased or discounted. Likewise, a bank which has surplus funds would invest in bills. Obviously for such a system to work there has to be lender of last resort who can come to the succour of the banking system as a whole. This role naturally has been assumed by the reserve bank of India, which rediscounts bills of commercial banks upto a certain limit. Despite the blessings & support of the reserve bank of India, the new bill market scheme has not functioned very successfully in practice.