Alternative investment opportunities in Money Market

Treasury bill

Characteristics

A Treasury Bill is a short term debt instrument issued by the Government of Sri Lanka under
the local Treasury Bill Ordinance with maturities of 91 days, 182 days, 364 days.

Government issues Treasury Bills through weekly auctions and interest is decided based on
the bids received by Central bank.

Treasury Bills are issued at discount prices. Minimum investment is Sri Lanka Rupees 10,000

 Treasury Bills are a secure investment. The investor assumes the credit risk of the
Government. This is known as Sovereign Risk and is presumed to be the safest in the
country
 Bills are issued in tenures 91,182 and 364 days respectively
 Bills are tendered for every Wednesday and are issued on Friday, hence the maturity
of a Bill will always be on a Friday. Central Bank accepts/rejects bids at the auction
and the results are published
 Treasury bills that have been issued at earlier auctions are also available for purchase
in the Secondary market
 Primary dealers provide liquidity in the secondary market by quoting a two-way price
 A 364-day basis is used to calculate prices

Current Trend

With increasing demand for 3 month maturity t bills, the demand for 6 & 1year maturities are
tend to be declined.

Repurchase

Characteristics

  A repurchase agreement or Repo is an agreement of a simultaneous sale and purchase

of security. Repurchase agreements should be backed by security, generally
Treasuries
 Repo deposits are a money market instrument and could be of varied tenures. Hence
this sort of instrument is widely used to invest short term and medium term funds
 Interest is paid on maturity

Rev- repurchase Agreement

Characteristics

A purchase of securities with an agreement to resell them at a higher price at a specific future
date. This is essentially just a loan of the security at a specific rate.

Current Trend

Aug 20: Sri Lanka’s CB reduced its reverse repo rate from 9.75% to 9.5% while keeping the
repurchase rate unchanged.

Commercial papers

Description

Commercial paper is the most prevalent form of security in the money market, issued
at a discount, with a yield slightly higher than Treasury bills. The main issuers of
commercial paper are finance companies and banks, but also include corporations
with strong credit, and even foreign corporations and sovereign issuers. The main
buyers of commercial paper are mutual funds, banks, insurance companies, and
pension funds.

Characteristics

Commercial paper are unsecured promissory notes for a specified amount to be paid at a
specified date, and are issued by finance companies, banks, and corporations with excellent
credit. They are issued at a discount, with minimum denominations of $100,000. The main
purchasers are other corporations, insurance companies, commercial banks, and mutual
funds. Terms range from 1 to 270 days.

Current trend

LOLC proposed commercial paper issue was related Fi by Fixed rating indicating the
strongest capacity.

Banker Acceptance

 A banker acceptance (BA) is a money market instrument short-term discount

instrument that usually arises in the course of international trade.

A draft is a legally binding order by one party (the drawer) to a second party (the drawee)
to make payment to a third party (the payee). A simple example is a bank check which is
simply an order directing a bank to pay a third party. The three parties don't have to be
distinct. For example, someone might write himself a check as a simple means of transferring
funds from one bank account to another. In this case, the drawer and payee are the same
person. When a draft guarantees payment for goods in international trade, it is called a bill of
exchange.

Eurodollar

Characteristics

US dollar denominated deposits of US commercial banks with banks in foreign countries.

These IOUs are actively traded in all international exchanges based on current exchange
rates.

Alternative investment opportunities in Capital Market

Common Stocks

Characteristics

Common stock holders are the owner of corporation: proportional share of residual after
claims of debt holders and preferred stock holders has been paid

Claim on income: residual income after creditors and and preferred stock holders has been
paid

Claim on assets: common equity cushion against possible losses in liquidation for the other
claimants of the firm

Voting rights: appointments to the board of directors who then select management

Pre-emptive rights: right to purchase new common stocks in same propotion as current
ownership

Current Trend

IPO by Sri Lanka Retailer ODEL offered 16.7million shares

NDB is taking PC house to raise 630 million rupees

Preferred stocks

An unlimited maturity quasi-debt instrument with a fixed dividend.

Corporate Bonds

No ownership, fixed payment of principal and interest.

Sri Lanka Development Bond

Fixed payment on maturity, US dollar denominated

Rupee Loans

A fixed rate of interest. Medium and long term borrowing from 2 to 8 years maturities.

Mutual funds Deposits

Portfolio of stocks, bonds or other instruments. Funds companies are owned by investors
( there are no shareholders). Shares are offered by the fund company in the primary market.
Redeemable at market value, fixed periodic payment of interest

Whole – life insurance policy

Life insurance with saving element

Treasury Bond

Descriptions

A Treasury Bond is a medium to long term debt instrument issued by the Government of Sri Lanka
under the Registered  Stock and Securities Ordinance with maturities of 2 – 10 years.

Characteristics

 Treasury Bonds in Sri Lanka are currently issued in tenures of 2,3,4,5 and 6 years
 These bonds carry a semi-annual coupon
 Bonds are auctioned regularly by the Central Bank on behalf of the government, and
bids are accepted only via Primary Dealers
 There is an active Secondary Market for Bonds with Primary Dealers providing
liquidity via two-way pricing
 Minimum investment in Sri Lanka Rupees 500,000

 
D.G.D.C. Wijerathna

Department of Finance

MC 58003

CPM 5877