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Government Securities
Government Securities are
issued by the Government of Sri Lanka. These instruments are used to
fund the Government’s budget deficit. The public debt department of
Central Bank of Sri Lanka administers the issue of Government
Securities.
Government Securities are of two
types:
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TREASURY BILLS |
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Treasury Bills are for a period of up to 1 year. These are issued in a weekly auction conducted by the Central Bank of Sri Lanka and held on Wednesdays. Acuity Securities will bid at these auctions. The auctions are restricted to primary dealers only. The treasury bills purchased at the auction are sold thereafter to investors including HNB Branch customers.
Treasury Bills are discounted instruments, which mean that the investor pays the discounted value (the investment value) and receives the face value on maturity. The features of a Treasury Bill is similar to that of a traditional Certificate of Deposits.
Eg. if an investor wants to invest in Rs. 1,000,000.00 face value one year treasury bill at 13.00%, the investment amount would be Rs. 884,955.75
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TREASURY BONDS |
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Treasury Bonds are issued for a period of 2 years or more,
to date Central Bank has issued up to 15 year treasury bonds.
Treasury Bond’s features are different to that of treasury bills.
Treasure Bonds carries a coupon (interest), which is paid on a half
yearly basis Rs. 5,000,000.00 is paid as interest. The interest rate
the investor would require will depend on the current market
interest rates, as such the market rate might be higher or lower
compared to the coupon rate.
If the market rate is higher than the
price (investment value) the investor will be paying will be lower
than the face value. For
eg. if the coupon rate is 10% and the
market rate is 14%, the investor will have to pay only Rs. 98.14
where as on maturity he/she will be receiving Rs. 100.00 Therefore
the investor’s return is two fold, the income from the coupon
payments and the difference between the price paid and the face
value. In the scenario where the market rates are lower than the
coupon rate then the price payable on investment would be more than
hundred rupees for a face value of Rs. 100.00 Interest income from
the coupon interest is higher than the market rate, therefore, the
investor will be paying a “premium” to compensate for the higher
coupon rate. |
Primary Dealers and Banks purchase treasury bills and bonds in large quantities. In order to fund these purchases, they enter REPOs whereby the lender (investor) advances funds on the security of the Treasury Bills and Bonds. They are for a term less than the maturity of the underlying Treasury Bill or Bonds. The duration of the Repo can be anywhere between one day to the maturity date of the Treasury Bill/Bond. For the investor it offers flexibility, particularly if the investment period is very short term.
This is where the customer can place the Tbill/ Tbond/ Repo as collateral and borrow against that. The applicable interest rate depends on the current money market rates.
Determination of interest
rates
For Treasury Bills, Bonds and Repos the main determinant of interest rates is the market. If the market rates are declining then interest on the above instruments would be lower and vice versa.
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GLOSSARY |
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Face value |
The value stated on the face
of the Treasury Bill or Bond, in other words the maturity
value of the instruments. |
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Coupon |
The half yearly interest
payable by the government to the holders of Treasury
Bonds. The coupon value is computed on the Face Value of
the Bond. It is a detachable slip which forms part of a
bond and which is presented in order to claim the owner’s
entitlement to interest. |
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Yield |
This is the effective return
on investment the investor gets on the Treasury Bill or
Bond. |
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Premium |
The purchase of a Bond for
more than its face value. The price which investors are
prepared to pay for a bond can be more than its face value
if Coupon rate of Interest on the Bond exceeds current
market interest rates. |
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Discount |
The purchase of a Bond for
less than its face value. This is exactly the opposite of
“Premium” explained above. |
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Clean Price |
The discounted value of the
Bond. It denotes the actual cost of investment. |
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Full/Dirty Price |
Clean Price plus the portion
of coupon accrued paid to the seller. |
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