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
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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
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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
Rate of interest 0%, Provided at discount
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
Rate of interest 0%, Provided at discount
Other features Provide liquidity to non-bank entitiesRegulated by RBI
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