Investments - Download as PowerPoint

							Investments

 Short Term
       Short Term Investments
There are many ways to invest. A selection is shown
  below
• Certificates of Deposit
  - Eurodollar - Sterling
• Commercial Paper
  - Euro - Sterling
• UK Treasury Bills/ US Treasury bills
• Bills of Exchange
• Money Market Funds
• Money Market Deposit
      Short Term Investments
• We need to be careful about the convention
  used to quote yields, there is more than one.
• Using the same instrument
  – Face value USD 1,000,000
  – Discount Rate 5 % (.05)
  – Tenor 91 days
      Short Term Investments
• To find discount amount
  1,000,000 x .05 x 91/360 = 12,638.89

  Purchase price (or proceeds)
  1,000,000 – 12,638.89 = 987,361.11
      Short Term Investments
          Discount Rate
• Discount rate =
• Discount Amount x 360 or 365
   Face Value      Days to Maturity

  12,638.89 x 360 = 5.00 %
 1,000,000    91
        Short Term Investment
        Bond Equivalent Yield
                (BEY)
• BEY = Applies an actual /365 day count
 Discount Amount x 365 x 100
  Purchase Price    91

 12,638.89 x 365 x 100 = 5.134
 987,367.11 91
       Short Term Investments
        Money Market Yield
               MMY
• MMY
• Discount Amount x 360           x 100
  Purchase Price Days to Maturity
 12,638.89 x 360 x 100 = 5.064
987,361.11 91
                Investments
• Certificate of Deposit
  Receipts issued by domestic banks, building
  societies and foreign banks in London as evidence
  of a deposit of GBP (or eurodollars) for a stated
  period of time at a stated rate of interest.
  GBP50,000 and then 10,000
  USD 25,000 and then 1,000
  One month to five years
  Secondary market
        Certificates of Deposit
• Proceeds of a CD, example
  GBP CD issued for one year at a face value of
  1,000,000 and an interest rate of 7%.
  End value = 1,070,000
  Sold with 75 days to run with interest rates at 6%
               1,070,000 = 1,056,968.9
             1+ .06 x 75
                      365
          Commercial Paper
• Short-term unsecured promissory notes
  issued by corporations as evidence of funds
  lent to those corporations. A promissory
  note is an unconditional promise by the note
  maker to pay at a specified future time, a
  certain amount of money to a designated
  person or to the bearer of the note.
           Commercial Paper
• Typically unsecured so need a good rating
• Issued with face value payable at maturity
• Discounted at the current market yield
• E.g. Sterling CP, maturity 7-364 days, min
  GBP100,000 and the norm GBP1,000,000.
• Price =     Face Value
             1+ yield x days to maturity
                        365
          Commercial Paper
• Example
• Xco Issues SCP with face value of
  £10,000,000, a life of 92 days and a yield of
  4.5%
• Proceeds = 10,000,000
              1+ 0.045 x 92
                           365
   = 9,887,848
               Treasury Bills
• UK Treasury Bills are obligations of the British
  Government issued on a weekly basis by and
  payable at, the Bank of England. Issued in
  denominations of GBP
  5,000/10,000/25,000/50,000 and 250,000.
  Normally repayable 91 days after issue but
  maturity can be from one day to 364 days. Issued
  at a discount and in book form.
• Regarded as the most liquid of money market
  instruments.
               Treasury Bills
• Need to be careful as T Bills could be settled on: -
• A Yield to Discount basis
  P=Nx 1– nxy
               360/365
P = Settlement proceeds
N = Nominal or Face value
y = yield, quoted as a percentage
n = number of calendar days from the settlement
    date to maturity
                T Bills
       Yield to Discount Basis
• US T-bill purchase where
  – N = 1,000,000
  – y = discount yield of1.64
  – n = 101
                      .9953989
  P = 1,000,000 x 1- .0164 x 101 = 995,398.9
                          360
           Treasury Bills
  Or
• Money Market basis

• P=         N
          1+ yxn
             360/365
               T-Bills
          Money Market Basis
• N = 1,000,000
• y = 1.64
• n = 101

P=    1,000,000
 1 + 0.0164 x 101   = 995,419.97
         360
     1.0046011
          Bills of Exchange
        (Bankers Acceptance)
• A Bill of Exchange is a negotiable discount
  security with a face value payable at a date
  in the future. Bills discounted at the lowest
  discount rates are those accepted by an
  Eligible Bank. This is called a Banker’s
  Acceptance. Eligible Bills must have a life
  of less than 186 days. Self Liquidating.
          Bills of Exchange
• Example. A Bill with a face value of
  GBP1,000,000 is issued for 182 days at a
  rate of 4.5% pa. What is the return to the
  investor?
• 1,000,000 x .045 x 182/365 = 22,438
• Therefore invest today 977,562
• Yield is 22,438/977,563 x 365/182 = 4.6032
• Or 4.5/1-(.045x182/365) = 4.6032
         Money Market Funds
• A Money Market Fund is a stand alone pooled
  investment vehicle which actively invests its
  assets in a diversified portfolio of high grade,
  short term money market instruments and which is
  governed by the three fundamental principles of
  Safety, Liquidity and Yield.
• Minimum investment amounts tend to be lower
  than in wholesale money markets. GBP 100,000
  or lower.
        Caveats for Investments
• In order to determine the yield of an investment it is
  important to know whether you are dealing with an
  instrument that pays on the basis of:
   – Coupon/simple interest – one payment of interest at
      maturity
   – Discount – invest a discounted amount and receive face
      value at maturity
   – Yield to redemption - multiple interest payments are
      made throughout the life of the investment
           Caveats for Investments
             Coupon or Simple Interest

Interest = Principal x Interest Rate x Days
                                        365 *
* Or 360


EXAMPLE: A three month (90 day) time deposit
  for £100,000 earning 10% will earn?
          Caveats for Investments
                      Discount Instruments

Annualised Return = Discount Amount x 365 * x 100
                           Price Paid  Days
* Or 360

EXAMPLE: A bank bill is issued in the UK at 97.70 for 3 months (90
  days). 100 will be received at maturity. What is the annualised return?

          2.3 x 365 x100 = 9.547
         97.7   90
      Caveats for Investments
• 360 or 365 days basis
• To convert 360 to 365
   rate x 365
   360
• e.g 9 % on 360 day basis 9 x 365 = 9.125
                          360
And for 365 to 360 rate/365 x 360 =