time value of money & money market

8/2/2019 Time Value of Money & Money Market

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Introduction TimeValue

of

Money

MoneyMarket

Instruments

MoneyMarke

t

Calculation ofTVM

Time Value of Money&

Money Market

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Financial Markets AndServices

Presented By:-

12002 - AbhishekUnnithan12012 - Ashwin Tripathy

12022 - Kuldeep Singh12045 - Sonali Agrawal12055 - Vishwanath Rana


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Time Value Of Money

A rupee today is more valuable than arupee a year hence. Reasons :-

InflationReinvestment opportunity

Expected rate of returns

Applied in decision making byindividuals , business firm etc.

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Timelines

qA timeline is a graphical device used toclarify the timing of the cash flows for aninvestment

q Each tick represents one time period

0 1 2 3 4 5

PV FV

Today

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Abbreviations

r = rate of return

t = time period

n = number of time periodsPMT = payment

CF = Cash flow (the subscripts t and 0 mean attime t and at time zero, respectively)

PV= present value (PVA = present value of anannuity)

FV = future value (FVA = future value of an

annuity) 55


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Example of FV of a LumpSum

How much money will you have in 5 years if youinvest Rs.100 today at a 10% rate of return?

0 1 2 3

Rs.100

?i = 10%

4 5

Formula:

FVt = CF0 *(1+r)t

Solution:FV = 100 * (1+.1)5FV = Rs.161.05


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Example of PV of a LumpSum How much would $100 received five years from

now be worth today if the current interest rate is10%?

0 1 2 3 4 5

$100?i = 10%

Formula :

PV = CFt / (1+r)t

Solution:PV = 100 / (1 + .1)5PV = $62.09


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Annuities

An annuity is a series of nominally equalpayments equally spaced in time

Annuities are very common:

Rent

Mortgage payments

Car payment

Pension income

Example of a 5-year, $100 annuity:

0 1 2 3 4 5

100

100

100

100

100

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Example of PV of anAnnuity Assume that Sally owns an investment that will

pay her $100 each year for 20 years. The currentinterest rate is 15%. What is the PV of thisannuity?

0 1 2 3 . 19 20

$100$100$100 $100 $100

?

i = 15%


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Solution:PVA = $100 * {[1-(1+.15)-20]/.15}

PVA = $100 * 6.2593

PVA = $625.93

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Example of FV of anAnnuity

Assume that Sally owns an investment that will pay her$100 each year for 20 years. The current interest rate is15%. What is the FV of this annuity?

1. Draw a timeline

0 1 2 3 . 19 20

$100$100$100 $100 $100

i = 15%

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Solution:

FVA20 = $100 * [(1+.15)20 1]/.15

FVA20 = $100 * 102.4436

FVA20 = $10,244.36 1212


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Money Market

A segment of the financial market inwhich financial instruments that are

close substitutes for money andhaving maturity period of one orless than one year are traded.

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Characteistics

Market of Short-term debt instrument.

No Physical location

Creditworthiness of the participants isimportant

Main Players

RBI, DFHI

Banks and NBFCs

Corporate investors1414


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Functions

Balance demandand supply of short-term funds

Influence liquidity

and level of interestrates in the economy

Provides reasonable

access to suppliersand users.

Benefits

Provides a stablesource of funds tobanks and Govt

Encourage

development of non-bank entities

Makes effective

monetary policyactions

Helps in pricingdifferent floating

interest products 1515


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Role Of RBI

To maintain liquidity and interest rates inaccordance with the monetary policyobjectives

To ensure adequate flow of credit to theproductive sectors of the economy

Bring order in Foreign Exchange market

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Money MarketInstruments

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Treasury Bills

short-term instruments used by the government toraise short-term funds

Issued By RBI

Denomination Min face value Rs.25000 and in multiplesthere of.

Maturity 91 days ,182 days and 364 days.

Rate of interest At discounted rate

Other features Highly liquid and safe investment Sold on auction basis every fortnight bycalling bids from banks, State Govt. etc

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Commercial Papers(CPs)

Unsecured short-term promissory notes

Issued By creditworthy corporates, primary dealersand All India financial institutions

Denomination min Rs. 5 Lac and multiples thereof

Maturity 7 days to 1 year

Rate of interest 0%, Provided at discount

Other features Negotiable and transferableCan be issued to individuals, banks,companies etc.

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Certificates OfDeposits(CDs)Unsecured, short-term tradable time

deposits

Issued By Commercial Banks and financialinstitutions

Denomination min Rs. 1 Lac and multiples thereof

Maturity 7 days to 1 year


Other features Negotiable and transferableCan be subscribed by individuals,corporations, companies, trusts etc.

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Call/Notice Money Market

The call money market is an integral part of theIndian Money Market, where the day-to-daysurplus funds (mostly of banks) are traded.

The loans are of short-term duration varying from1 to 14 days.

The money that is lent for one day in this marketis known as "Call Money", and if it exceeds oneday (but less than 15 days) it is referred to as"Notice Money".

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Call Money Market

Banks borrow in this market for the followingpurposes

To fill the gaps or temporary mismatches infunds

To meet the CRR & SLR mandatory

requirements as stipulated by the Central bankTo meet sudden demand for funds arising out of

large outflows.

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Commercial bills

Commercial bills are generally associated withbusiness lending or high-end investment lending.

The interest rate, or floor rate, is based on twothings, the Bank Bill Swap Rate (BBSW), and amargin added by the lender of 1.00-3.00% calledthe facility fee.

The rollover period may be 30, 60, 90, 180 days, 6monthly or even annually. Interest is paid at each2323


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o a era se orrow ngand Lending Obligation

(CBLO)Offered By CCIL members Banks, FIs, Primarydealers, MFs and Cooperative Banks

Denomination min order lot for auction Rs. 50 Lac and in

multiples of Rs. 5 Lac thereofMaturity 1 day to 1 year


Other features Provide liquidity to non-bank entitiesRegulated by RBI

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time value of money & money market

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