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Investments

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

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Investments

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  1. Investments Short Term

  2. 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

  3. 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

  4. 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

  5. Short Term InvestmentsDiscount 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

  6. Short Term InvestmentBond 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

  7. Short Term InvestmentsMoney Market YieldMMY • 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

  8. 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

  9. 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

  10. 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.

  11. 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

  12. 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

  13. 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.

  14. Treasury Bills • Need to be careful as T Bills could be settled on: - • A Yield to Discount basis P = N x 1 – n x y 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

  15. Treasury Bills Or • Money Market basis • P = N 1 + y x n 360/365

  16. 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.

  17. 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

  18. 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.

  19. 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 • SLY principle should drive policy

  20. 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?

  21. 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

  22. 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 =

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