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Sincerely yours. We have tried our best to follow your guidelines in every aspect on our report. This is the report on ³Pricing and bidding behavior of T-bills in Bangladesh that is a requirement for fulfillment of our FIN 424 course and it is our pleasure to present it before you. We are earnestly thankful to you for your guidance during the preparation of this report. Dear Sir. 2010 Dewan Mostafizur Rahman The Course Instructor FINANCIAL INSTITUTIONS BRAC University 66 Mohakhali. We enjoyed the challenges of preparing the report with an opportunity to increase our understanding of the Pricing and bidding behavior of T-bills in Bangladesh.Letter of Transmittal December 09. Amit Kumar Das Sunjun Aman Farhan Sadik 08304015 07204015 07304033 . Dhaka. We have collected what seems to be most important information to make our report as specific and coherent as possible. Subject: Submission of the term paper. We hope you will appreciate our combined effort put forth hereby.
link. Thanks to him for helping we with the relevant information about the Pricing and bidding behavior of T-bills in Bangladesh that we needed to prepare this report.Acknowledgement First of all we are graceful to almighty God for giving us the power to finish our term paper with a well established way and at a perfect or schedule time period. We would be thankful if this report comes to any benefit of our teacher as well as any students of our department. it would not have been possible for us to conduct this project work. We would like to acknowledge the encouragement and assistance given to our group by a number of people. K. Without his contribution. .M Asif. We would also like to express our gratitude to Mr. We are most grateful to our course instructor Dewan Mostafizur Rahman for providing us detailed feedback and support on this report. Assistant officer of Finance department. Bangladesh Bank. We would like to thank all the group members of our group for the sincere effort to complete this report. effort. Without the teamwork and supportive attitude of the group members it wouldn¶t have been possible to prepare this resourceful report. members¶ coordination and so on. Dhaka. In the preparation of this Project Report. To make a report it needs a lot of information.
In addition.ABSTRACT This paper examines the pricing mechanism and bidding behavior of T-bills in Bangladesh. In our analysis. Finally.1 INTRODUCTION The Bangladesh economy is within the mainstream of the continuously changing global financial system. we also focus on the pros and cons of local T-bills market. while the demand side comprises mainly the Deposit Money banks (DMBs) having SLR obligations. The money market currently existing has also developed due to certain needs. to carry out the day to day economic activities and obviously to meet and match need for short term lending and borrowing of the participants within the financial system. . Hence a financial system has developed here consisting mainly of the capital and the money market. some suggestions have been provided for strengthening and streamlining the T-bills market in Bangladesh. T-bill market is by far the largest component of the money market in Bangladesh. Domestic as well as international trade also characterizes Bangladesh economy. In general. The primary Tbills market in Bangladesh is still thin in the sense that the supply side is influenced by the budgetary financial requirements of the government. We analyze the yield patterns of different maturity T-bills from auction 222-273 including the secondary T-bills market. the concept of Repo and Reverse Repo has been introduced. For any underdevelopment country the existence of a well functioning money market is of paramount importance. these needs can be termed as need for short term liquidity within our financial system. 1.
section five describes Pricing of T-bills through auction. 64-day. Since they mature so quickly. If it is a six-month bill with a 5% discount rate. and 5-year government treasury bills are duly issued by the Bangladesh Bank through weekly auctions at rates determined by the market. section four describes T-bills auction. 2year. section six describes T-bill yields and Call Money Rate. Certificate of Deposits. Treasury bills are sold at discount. section three describes Overview of T-bills market in Bangladesh. The entire study is divided into nine sections. The biggest reason that T-Bills are so popular is because they are one of the few money market instruments that are affordable to the individual investors. Six types of T-bills are available in Bangladesh: 28-day. T-bills are indirect tools for monetary management of the central bank of a country. in Bangladesh. and 5) to averse highly risky investments. 4) to utilize properly huge idle cash in banks.Treasury bill or T-bill is a short-term debt issued by a national government with a maximum maturity of one year. T-bills are simply sold at a discount to their face value at maturity. Although the maturity of T-bill shouldn't be more than one year. 950. and section nine describes Suggestions and concluding remarks. 2) to maintain adequate liquidity 3) to earn yields. the investor pays 95% of the face value or Tk. the investor might not get back all of his or her investment if he or she cash out before the maturity date. The discount is determined by the interest rate. 91-day. .000 back in six months. such that the difference between purchase price and the value at maturity is the amount of interest. What's more. and then receives Tk. and money market funds will often give higher rates of interest. The principle objective of this study is to identify and analyze the pricing mechanism and bidding behavior of T-bills market in Bangladesh. investors invest in T-bills due to: 1) to maintain the Statutory Liquidity Reserve (SLR). 182-day. 1. section seven describes Repo and Reverse Repo. Treasury bills are fully guaranteed by the government and hence are free from default risk. section eight describes Secondary market for T-bills. 2-year and 5-year securities are also regarded as T-bills. Section two describes Creation of T-bills in Bangladesh. The only downside related to T-bill is that the investor won't get a great return because Treasuries are exceptionally safe. Corporate bonds. Basically.
while present bank rate is 6%. and with this revenue government expends mainly for various establishments. Government's main source of revenue is tax. the central bank of Bangladesh.1. Booth is a counter of receipt or payment. Bangladesh Bank charges the Government a floating interest rate (Bank rate 1%) for this advance. However. for small amount of deficit. which are known as 'Booth'. it should be remembered that chest branches aren't regarded as chest banks. there may be one chest and some sub-chests. Booth may be of any bank's branch.2. However. Chest branches feed sub-chests. BANGLADESH BANK directly monitors Chest branches. there are some other small units working for BANGLADESH BANK. operates throughout the country with its nine branches. CREATION OF T. In a district. Where there is no BANGLADESH BANK branch but transactions of government occur. there is a deficit. Government meets this deficit through creation of T-bills. While expenditures exceed revenues. This deficit will be met up from T-bill creation. Government generally borrows first from Ways and Means and then through T-bills. Here in the example. These branches are known as 'Chest Branches'. Government can borrow a maximum of taka 64 crore from this account of Bangladesh Bank. There are 464 chest branches throughout the country. This function is known as 'Feed'. Expenditure Revenue Tk 1000 million Tk 800 million Tk 64 million (Ways and Means Advance) Tk 136 million (Creation of T-bills) . Let's have a look on the following example. Government receipts and payments are overseen and managed by BANGLADESH BANK. a petty cash account is maintained by Bangladesh Bank. This is called 'Ways and Means Advance'. Let's have a look on the creation of T-bills for the above example. different branches of Sonali Bank (SB) are assigned to take part in these transactions on behalf of BANGLADESH BANK.BILLS IN BANGLADESH Bangladesh Bank (BANGLADESH BANK). Expenditure Revenue Tk 1000 million Tk 800 million. Tk 200 million is deficit.
which serve as conduits for the auctions. There are six types of T-bills that prevail in Bangladesh.75 crore was borrowed from T-bills. Repo and Reverse Repo will be discussed later on. They are the most well known of all Government securities. government securities dealers and brokers. OVERVIEW OF T-BILLS MARKET IN BANGLADESH The market for Bangladesh Treasury bills has a complex structure and involves numerous participants--Ministry of Finance. If one wanted to exit before maturity. 4) 364 days T-bill 5) 2 years T-bill 6) 5 years T-bill. Marketable Treasury securities are issued through regularly scheduled auctions in what is called the primary market. However. which in simple terms means that we have to pay for the bills less the interest receivable during the term of the bill and receive the face value of the bill at the end of the period. T-bills of total taka 50000 crore are issued. Bangladesh Bank. two and five year securities are also regarded as T-bills since they are zero coupon securities. on an average. the total par value of outstanding Treasury bills stood at about Taka 22000 crore approximately. These are 1) 28 days T-bill 2) 91 days T-bill 3) 182 days T-bill. Treasury bills are not listed at the Stock Exchange. Each year. Till date.1. The process importantly involves the Bangladesh Bank.4. rediscounting isn't possible at the Central Bank. rather he or she may take part in the Repo auction. Treasury bills are sold on a discount basis. Treasury bills are designated by the number of days to their maturity. in Bangladesh. Currently. Treasury bills are short-term Government debt securities with maturity of a period less than one year. . a total of taka 58358. During 2002-2003 fiscal. government has outstanding borrowing of Taka 22000 crore from issuance of T-bills. and other holders of Treasury securities. The Bangladesh government finances its expenditures in excess of tax receipts through the sale of debt obligations.
started functioning during FY07. which was formed in the last fiscal year. which was made by auto monetization through ad hoc Treasury Bills was discontinued. Ministry / Division wise accounting system was introduced with effect from 1 July 2006. the system of automatic .2.2.1. For this purpose. These ares- 1) 28 days T-bill 2) 91 days T-bill 3) 182 days T-bill. Many important steps were taken in FY07 for the purpose of increasing efficiency and maintaining discipline in the management of cash and debt of the Government. Mythology of issuing Treasury Securities in Bangladesh With regard to treasury management. TYPES OF T-BILLS IN BANGLADESH There are six types of Treasury securities issued by Bangladesh Bank in Bangladesh. 4) 364 days T-bill 5) 2 years T-bill 6) 5 years T-bill 2. various reform measures were taken in FY07 for the purpose of prudent management of cash and debt of the Government. Earlier. Formation of Cash and Debt Management Committee (CDMC) and separation of Government Cash and Debt Management: A Cash and Debt Management Committee (CDMC). Deficit financing. These were as follows: Structural change of record keeping system of Government transactions: The record keeping system of Government transactions was changed for ensuring transparency and accountability.
and through identification of sources of financing budget deficit through specific debt instrument. 2006. Government debt management was separated from cash management through enhancing Ways and Means Limit and arrangement of drawing facilities with Bangladesh Bank beyond this limit. It was decided that 15-year and 20-year Treasury Bonds would be issued from FY08. Priority was given to Treasury Bonds as a means of deficit financing to ease the burden of shorter-term debt obligation of the Government. Paving the way for a completely market based primary auction system: A volume based system of auctions of Government Treasury Bills and Government Treasury Bonds was introduced in FY07 through publishing auction calendar for both Treasury Bills and Treasury Bonds stating auction date and amount to be auctioned. In FY07. Outstanding amount of ad hoc Treasury Bills was transferred to OD-Blocked Account and repayment of outstanding amount was decided to be made according to an amortization schedule. . The CDMC prepared the first pre-announced volume based Auction Calendar of FY07 with effect from September. It was decided that the amount exceeding the Ways and Means limit would be treated as Current Overdraft bearing interest rate of Reverse-repo + 1% and the rate of interest for the amount within the Ways and Means Limit would equal to the interest rate of Reverse-repo. It was decided that amount borrowed through auctions of Treasury Bills / Bonds and repayment of principal and interest of the same instruments would be credited and debited directly to and from Government account with effect from 1 July 2006. Treasury Bills was evened out for minimizing Refinance Risk arising from the issuance of shorter-term Bills.monetization through ad hoc Treasury Bills used to cater to both the Government's borrowing to finance budget deficit and its financing requirement to meet cash flow mismatches. Ways and Means Limit was raised from Taka 64 crore to Taka 1000 crore with effect from 1 July 2006 for the purpose of eliminating difference of intra-year cash. Priority to Treasury Bonds as a means of deficit financing: The system of issuing 2-year and 5-year Treasury Bills was abolished to match the tenor of Treasury Bills with international convention with effect from 1 September 2006. Moreover. This system has ensured transparency in the auction of Government Securities and has also helped determine competitive price.
which to date depends largely on short-term bank loans for financing. many are of ³cottage size´ and most are in the garment industry. MARKET PARTICIPANTS Market participants can be divided into issuers. These enterprises could benefit from longer-term funding but are neither large enough nor well known enough to issue bonds. and more than 70% of the labor force is engaged in agricultural activities. investors.Devolvement and Private Placement of Treasury Bills and Treasury Bonds: A system devolvement and private placement of Treasury Bills and Treasury Bonds with Bangladesh Bank was introduced in FY07 to mitigate the risk of inadequate response from the market. 2. the average size of industrial and commercial enterprises is rather modest. Its economy continues to be agriculturally based. Issuers: The foremost impediment here is that Bangladesh lacks a significant number of potential. Most of the large-scale industrial units and commercial enterprises are state owned. The industry and service sectors contribute 20% and 50%. agriculture accounts for nearly30% of the country¶s GNP. Ensuring active participation of Primary Dealers in securities market: Steps were taken to ensure active participation of the Primary Dealers in the securities market for the development of a vibrant bond market through revision of existing guidelines for the Primary Dealers. respectively.3. Their shares are not listed. and they do not offer debentures since their financing needs are met by the government or by the state-owned NCBs. but compared with landholdings. and intermediaries. Introduction of issuance of Treasury Bonds at Face Value: It was decided that the Treasury Bonds would be issued at Face Value through Yield based auctions from 1 July 2007 instead of fixed coupon bonds issued at a discount to lessen long-term Government debt liability arising from issuance of bonds. Most private sector enterprises are small and owner-run. These state-owned firms . good-quality issuers.
. most are either prevented from investing in corporate bonds by restrictive guidelines or are not professionally managed. selfmanaged by public and private corporate entities. About 80% of the base here is made up of retail investors. The interest rate distortion due to the GSCs mentioned earlier raises the ongoing cost of borrowing. Third. to date only a small number of wellknown issuers have used the market. The mutual fund industry in Bangladesh is the exclusive domain of ICB. which in turn reduces credibility and investor confidence. the absence of a yield curve makes pricing difficult. The investor community does not seem to find this market too attractive owing to weak disclosure by the issuers. and the ICB¶s monopoly has prevented new investor companies. In addition. from developing in Bangladesh. The pension obligations of the government are not funded. Fourth. few investors are sophisticated enough to think about investing in bonds. The privatization program for state-owned companies works too slow to influence the market. although Bangladesh has a debenture market. companies find that issuing debt is costly.5% of the issue value). Yet another problem is that most potential issuers are unwilling to take the opportunity cost involved in issuing a longterm bond. while various up-front costs amount to about 7% of the value of the issue (these include registration costs²that is. it is difficult to persuade issuers to disclose sufficient information about their companies (although prospectus requirements for listed debentures do seem fair). There are no private mutual funds to mobilize savings toward the debt market. but none are professionally managed. corporate debentures. The major institutional investors are the Investment Corporation of Bangladesh²a government-owned financial institution²and the insurance companies. that is. mutual funds. There are provident and pension funds (total assets managed amount to Tk 6.7 billion. and private money market instruments. Second. stamp duties²totaling about 2. The Trust Act of 1882 prohibits those funds from being invested in equities. whose primary concerns include the equity at the stock exchange or the government savings certificate. Investors: On the investor side. The liquidity in those debentures at the stock exchange is insignificant because of the small number of investors and their buy-and-hold mentality.generally stay outside the capital market. both in monetary and nonmonetary terms. see The Financial Express). Of the few institutional investors that could support a bond market.
As for the general public. both for private placements and for public offerings. Few are able to identify issuers and investors and bring them to the market. At the same time. given the current situation in Bangladesh. the country should focus on developing a well-run primary market. Even if they are able to participate. and the intermediaries are not much help because few engage in research on markets. most investors lack a trading mentality and just buy and hold because of SLR requirements or because they do not know how to trade. Intermediaries: Intermediaries in Bangladesh lack many of the skills needed to foster an active local corporate bond market. Nevertheless.In addition. no protective laws are in effect to ensure that investors will get their dividend and capital back. Hence the market is illiquid. Overall. the fee structure and pricing are high enough to allow intermediaries to make money. Furthermore. the intermediaries seldom make money. They provide little or no research analysis on industries or companies to encourage investment in the local debt market. That means several steps need to be taken to fix the inside elements of the market. commercial banks dominate the financial sector and not enough intermediaries are skilled in securities. mainly because of the weak disclosure by the borrowers. Conclusion : The various impediments to bond markets in Bangladesh pose a large challenge for policymakers. some suggestions can be made for dealing with them. . intermediaries are reluctant to take any risk in dealing. but because transactions are so limited. it has little understanding of debt products. Few foreign investors are attracted to this. As mentioned earlier. and industries to encourage investment. in addition to some changes around and across the financial system. Nor do any feel motivated to become a market maker for an issue. companies. Missing are higher audit standards together with SEC regulations on disclosure standards in prospectus along with arbitrary institutions. Too few private merchant banks are able to conduct financial advisory and trust services. with large spreads.
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