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 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

6. 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

7. 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

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. 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

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

17. 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

18. 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 Bankers Acceptance. Eligible Bills must have a life of less than 186 days. Self Liquidating.

19. 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

20. 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.

21. 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

22. 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?

23. 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

24. 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 =