www.kingandshaxson.com investment opportunities in tradable instruments: treasury bills,...
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Investment Opportunities in Tradable Instruments:Treasury Bills, Certificates of Deposit Gilts, Supranational and Corporate Bonds.
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A heightened focus on Treasury since the onset of the crisis:
- Risk aversion
- Counterparty lending lists
Principles of Treasury Management remain unchanged:
“Security, Liquidity, Yield…In that order!”(DCLG investment principles)
Investment Landscape
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Treasury Bills - Secure, Liquid and Yield more than the DMADF.
Certificates of Deposit (CD’s) - Negotiable deposit issued by banks, building societies
Gilts, Supranational and Corporate Bonds - Medium/longer term fixed flow of interest
What are the benefits of negotiable instruments?
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Liquidity
Certificates of Deposit Same Day 2 weeks - 1 Year
Treasury Bills Same Day 1 week - 6 Months
Gilts T+1 3 months - 50 years
Supranational bonds T+3 3 months - 50 years
Corporate bonds T+3 3 months - 40 years
Range of investments
Maturity
Custodian service required
Crest, for CDs, T bills and gilts
Euroclear, for Supranational and Corporate bonds
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Current Yields
Certificate of Deposit
Treasury bills
Gilts Supranational
1 month 0.68% 0.32%
3 months 1.06% 0.42%
6 months 1.38% 0.43%
1 year 1.89% 0. 41% 0.89%
5 years 1.58% 2.70%
10 years 2.00% 3.09%
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Treasury Bills
Short-term securities issued by HM Treasury on a discount basis
Issued below 100, but you get 100 back on maturity
Difference equals your interest return
Very low risk in both duration and credit: extremely liquid.
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Treasury Bills
Issued, by tender, usually to central, clearing and investment banks, 1, 3 and 6 month bills
Best rates available through primary market
Bids are submitted on a Friday, before 11.00am with settlement on the next working day
Secondary market can be expensive
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Treasury Bill – Worked Example : Purchase
Nominal: £10m
Deal Rate: 0.41%
Trade Date: 03/02/2012
Value Date: 06/02/2012
Maturity Date: 06/08/2012
Purchase / Sale Proceeds Calculation
Deal Rate x No of Days to Maturity36,500( )1 +
Nominal
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Treasury Bill – Worked Example : Purchase
Purchase / Sale Proceeds Calculation
Deal Rate x No of Days to Maturity36,500( )1 +
£10m
Nominal: £10m
Deal Rate: 0.41%
Trade Date: 03/02/2012
Value Date: 06/02/2012
Maturity Date: 06/08/2012
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Treasury Bill – Worked Example : Purchase
Purchase / Sale Proceeds Calculation
0. 41 x No of Days to Maturity36,500( )1 +
£10m
Nominal: £10m
Deal Rate: 0.41%
Trade Date: 03/02/2012
Value Date: 06/02/2012
Maturity Date: 06/08/2012
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Treasury Bill – Worked Example : Purchase
Purchase / Sale Proceeds Calculation
0.41 x 18236,500( )1 +
£10m
Nominal: £10m
Deal Rate: 0.41%
Trade Date: 03/02/2012
Value Date: 06/02/2012
Maturity Date: 06/08/2012
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Treasury Bill – Worked Example : Purchase
Purchase / Sale Proceeds Calculation
74.6236,500( )1 +
£10m
Nominal: £10m
Deal Rate: 0.41%
Trade Date: 03/02/2012
Value Date: 06/02/2012
Maturity Date: 06/08/2012
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Treasury Bill – Worked Example : Purchase
1.00204438356( )£10m
Nominal: £10m
Deal Rate: 0.41%
Trade Date: 03/02/2012
Value Date: 06/02/2012
Maturity Date: 06/08/2012
Purchase / Sale Proceeds Calculation
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Treasury Bill – Worked Example : Purchase
£9,979,597.87
Nominal: £10m
Deal Rate: 0.41%
Trade Date: 03/02/2012
Value Date: 06/02/2012
Maturity Date: 06/08/2012
Purchase / Sale Proceeds Calculation
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Treasury Bill – Worked Example : Purchase
£9,979,597.87
Nominal: £10m
Deal Rate: 0.41%
Trade Date: 03/02/2012
Value Date: 06/02/2012
Maturity Date: 06/08/2012
Receive at maturity
Purchase / Sale Proceeds Calculation
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Treasury Bill – Worked Example : Purchase
£ 9,979,597.87
Return is £10,000,000 - £ 9,979,597.87 = £20,402.13
Nominal: £10m
Deal Rate: 0.41%
Trade Date: 03/02/2012
Value Date: 06/02/2012
Maturity Date: 06/08/2012
Receive at maturity
Purchase / Sale Proceeds Calculation
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Nominal: £10m
Deal Rate: 0.41%
Trade Date: 03/02/2012
Value Date: 06/02/2012
Maturity Date: 06/08/2012
Treasury Bill – Worked Example : Purchase
£9,979,597.87
Purchase / Sale Proceeds Calculation
Return is £10,000,000 - £ 9,979,597.87 = £20,402.13
182 days
Receive at maturity
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Negotiable form of deposit. Interest rate remains fixed, there is no obligation to hold to maturity.
Issued by UK and international banks and building societies on a daily basis
Same interest calculation at maturity as a fixed deposit:
Certificates of Deposit (CD’s)
Interest CalculationPrincipal x Interest Rate
36,500( ) x Number of Days
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Secondary market access:
Ability to lend to counterparties that do not take cash in the form of fixed deposits – fulfilling unused counterparty limits.
The ability to liquidate an investment at any point;- To crystallise a capital return- Due to counterparty credit concerns- Or to raise cash – unexpected payment
Certificates of deposit (CDs)
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Fitch Moody's S&P
Counterparty ST LT ST LT ST LT
Barclays F1 A P-1 Aa3 A-1 A+
Lloyds F1 A P1 A1 A-1 A
RBS F1 A P-1 A2 A-1 A
Rabobank F1+ AA P-1 Aaa A-1+ AA
Standard Chartered F1+ AA- P-1 A1 A-1+ AA-
Nordea Bank (Finland) F1+ AA- P-1 Aa2 A-1+ AA-
Overseas Chinese Banking Corp. F1+ AA- P-1 Aa1 A-1+ AA-
Bank of Nova Scotia F1+ AA- P-1 Aa1 A-1+ AA-
Bank of Montreal F1+ AA- P-1 Aa2 A-1 A+
National Australia Bank F1+ AA P-1 Aa2 A-1+ AA-
ING Bank F1+ A+ P-1 Aa3 A-1 A+
Ratings correct as at 6th February
2012
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The CD market Yield Curve
00.20.4
0.60.8
11.21.4
1.61.8
2
1 week 2 week 3 week 1 month 2 month 3 month 6 month 9 month 1 year
Time
Yie
ld
Yield
The Yield Curve
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The Yield Curve
Buy at 1.06%
The CD market Yield Curve
00.20.4
0.60.8
11.21.4
1.61.8
2
1 week 2 week 3 week 1 month 2 month 3 month 6 month 9 month 1 year
Time
Yie
ld
Yield
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The Yield Curve – 6 weeks later
Buy at 1.06%Sell at 0.85%
The CD market Yield Curve
00.20.4
0.60.8
11.21.4
1.61.8
2
1 week 2 week 3 week 1 month 2 month 3 month 6 month 9 month 1 year
Time
Yie
ld
Yield
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Sale Proceeds Calculation36,500 + (Issue Rate x Original No of Days)
36,500 + (Deal Rate x Days to Run)( )Nominal x
CD – Worked Example : Sale
Nominal £10m
Issuer Standard Chartered
Issue Rate 1.06%
Issue Date 05/01/2012
Maturity Date05/04/2012
Deal Rate 0.85%
Deal Date 16/02/2012
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Sale Proceeds Calculation36,500 + (Issue Rate x Original No of Days)
36,500 + (Deal Rate x Days to Run)( )£10m x
CD – Worked Example : Sale
Nominal £10m
Issuer Standard Chartered
Issue Rate 1.06%
Issue Date 05/01/2012
Maturity Date05/04/2012
Deal Rate 0.85%
Deal Date 16/02/2012
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Purchase/Sale Proceeds Calculation 36,500 + (1.06% x Original No of Days)
36,500 + (Deal Rate x Days to Run)( )£10m x
CD – Worked Example : Sale
Nominal £10m
Issuer Standard Chartered
Issue Rate 1.06%
Issue Date 05/01/2012
Maturity Date05/04/2012
Deal Rate 0.85%
Deal Date 16/02/2012
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Sale Proceeds Calculation 36,500 + (1.06% x 91)
36,500 + (Deal Rate x Days to Run)( )£10m x
CD – Worked Example : Sale
Nominal £10m
Issuer Standard Chartered
Issue Rate 1.06%
Issue Date 05/01/2012
Maturity Date05/04/2012
Deal Rate 0.85%
Deal Date 16/02/2012
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CD – Worked Example : Sale
Nominal £10m
Issuer Standard Chartered
Issue Rate 1.06%
Issue Date 05/01/2012
Maturity Date05/04/2012
Deal Rate 0.85%
Deal Date 16/02/2012
Sale Proceeds Calculation 36,500 + (1.06% x 91)
36,500 + (0.85% x Days to Run)( )£10m x
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CD – Worked Example : Sale
Nominal £10m
Issuer Standard Chartered
Issue Rate 1.06%
Issue Date 05/01/2012
Maturity Date05/04/2012
Deal Rate 0.85%
Deal Date 16/02/2012
Sale Proceeds Calculation 36,500 + (1.06% x 91)
36,500 + (0.85% x 49)( )£10m x
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Sale Proceeds Calculation 36,500 + (96.46)
36,500 + (41.65)(
)£10m x
CD – Worked Example : Sale
Nominal £10m
Issuer Standard Chartered
Issue Rate 1.06%
Issue Date 05/01/2012
Maturity Date05/04/2012
Deal Rate 0.85%
Deal Date 16/02/2012
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Sale Proceeds Calculation 36,596.46
36,541.65)( )£10m x
CD – Worked Example : Sale
Nominal £10m
Issuer Standard Chartered
Issue Rate 1.06%
Issue Date 05/01/2012
Maturity Date05/04/2012
Deal Rate 0.85%
Deal Date 16/02/2012
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Sale Proceeds Calculation
1.00149993226( )£10m x
CD – Worked Example : Sale
£10,014,999.32=
Nominal £10m
Issuer Standard Chartered
Issue Rate 1.06%
Issue Date 05/01/2012
Maturity Date05/04/2012
Deal Rate 0.85%
Deal Date 16/02/2012
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CD – Worked Example : Summary
Purchased 05/01/2012 at 1.06%
Sold 16/02/2012 at 0.85%
Held for 42 Days
Cost £10,000,000.00
Sale proceeds £10,014,999.32
Gain £14,999.32
Return 1.30% p.a.
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CD – Worked Example : Summary
Purchased 05/01/2012 at 1.06%
Sold 16/02/2012 at 0.85%
Held for 42 Days
Cost £10,000,000.00
Sale proceeds £10,014,999.32
Gain £14,999.32
Return 1.30% p.a.
Return = 1.30% pa for 42 days.
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The Yield Curve – 6 weeks later
Re-invest anywhere along the curve
Reinvest at 0.68
The CD market Yield Curve
00.20.4
0.60.8
11.21.4
1.61.8
2
1 week 2 week 3 week 1 month 2 month 3 month 6 month 9 month 1 year
Time
Yie
ld
Yield
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Types of fixed bond:
UK Gilt: HM Treasury AAA-rated, Sterling-denominated bond.
Supranational: Joint and several liability of leading developed nations e.g. World Bank or EIB.
Corporate bond: Issued by Banks, Building Societies and Corporate institutions.
Conventional Fixed and Corporate Bonds
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Guarantees to pay holder a coupon every 6 months until maturity on same dates each year
Fixed flow of interest income and at maturity a fixed capital repayment.
Coupon refers to the cash payment per £100 nominal that holder will receive each year.
Conventional Fixed and Corporate Bonds
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Fixed income – accrued interest
A holder of £1,000,000 nominal of UKT 5.25% 2012:
- Receives two coupon payments of £26,250 a year on 7th March and 7th September
- Interest accrued since last interest payment date is paid in addition to the capital price.
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Fixed income – accrued interest
UKT 5.25% 2012 example : Last coupon payment: 7th December 2011Next coupon payment: 7th June 2012
Purchased on 6th February 2012.
Accrued Interest Calculation =
Nominal x
Coupon 2
(Days in coupon period
x No of days accrued)( )
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Fixed income – accrued interest
UKT 5.25% 2012 example : Last coupon payment: 7th December 2011
Next coupon payment: 7th June 2012
Purchased on 6th February.
Accrued Interest Calculation
£1m x
5.25%2(183
x 61)( ) = £8,750.00
183 days
61 days have accrued since 7th Dec
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Corporate Bond Issues
Issuer
Rating Coupon Maturity Yield
Fitch (Fixed)
BNG (Bank Nederlandse Gementeen) AAA 2.375% 23rd Dec 2015 1.98%
UK Rail AAA 1 ¼% 22nd Jan 2015 1.10%
IBRD (The World Bank) AAA 1.125% 10th Dec 2013 0.63%
EBRD (European Bank for
Reconstruction & Development) AAA 1.875% 10th Dec 2013 0.86%
British Petroleum A 4% 29th Dec 2014 1.80%
Lloyds TSB A 6 3/8% 15th Apr 2014 4.39%
RBS A 6 3/8% 29th Apr 2014 4.30%
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FRN’s Floating Rate Notes
Dealt at a spread over LIBOR (Published after 11am by the BBA)
Re-set at a fixed margin over LIBOR every 3 months, until maturity.
E.g. The EIB 19th February 2015 FRN re-sets at +0.10% over 3 month LIBOR until maturity.
Last coupon payment: 20/02/2012
3m Libor at re-fix; 1.07081
Current coupon rate: 1.17081
Next coupon payment: 21/05/2012
3 month return.
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Floating Rate Notes
IssuerRating
CurrentCoupon
Maturity
Fitch Discount Margin
Barclays Bank A 1.96519% 18th Mar 2013 90 bp over 3mth Libor
HSBC AA 1.66475% 16th Jun 2014 70 bp over 3 mth Libor
Rabobank AA 1.54513% 6th June 2014 50 bp over 3 mth Libor
ANZ (Australia and New Zealand Banking Group)
AA 2.18300% 31st Oct 2014 93 bp over 3 mth Libor
CBA(Commonwealth Bank of Australia) AA 1.23006% 30th Sep 2015 90 bp over 3 mth Libor
Republic of Finland AAA 1.10781% 25th Mar 2015 5 bp over 3 mth Libor
Svenska Handelsbanken AA- 2.08956% 20th Jan 2015100 bp over 3 mth
Libor
CADES (French)(Caisse d’Amortissement de la Dette Sociale)
AAA New Bond 16th Feb 2015
130 bp over 3 mth Libor
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SummaryNegotiable instruments offer additional avenues of investment, including:
• Increased Liquidity
• High quality credit, without sacrificing yield
• Counterparty diversification.
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Contact Details
King & Shaxson Limited5th Floor, Candlewick House120 Cannon StreetLONDON, EC4N 6AS Telephone: 020 7929 5300Fax: 020 7283 6835
Alan SimkinsTelephone: 020 7426 5966Email: [email protected]
Paul TurnerTelephone: 020 7929 8529Email: [email protected]
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King & Shaxson Capital Limited Reg. No. 2863591and King & Shaxson Limited Reg. No. 869780, members of the London Stock Exchange, and King & Shaxson Asset Management Limited Reg. No. 3870667. The Registered Office for all companies is 6th Floor, Candlewick House, 120 Cannon Street, London, EC4N 6AS. All companies are registered in England and are part of the PhillipCapital Group.
King & Shaxson Capital Limited (FSA Reg. No. 169760), King & Shaxson Limited (FSA Reg. No. 179213), and King & Shaxson Asset Management Limited Reg. No. 3870667 (FSA Reg. No. 193698) are Authorised and Regulated by the Financial Services Authority, 25 The North Colonnade, Canary Wharf, London E14 5HS.
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Disclaimer
General
Past performance is no guarantee of future performance and the value of investments and the income from them may go down as well as up and is not guaranteed. The value of foreign currency dominated investments may be affected by exchange rates. The level of yield may be subject to fluctuation and is not guaranteed.
No Offer
The information contained in this document does not constitute and offer to buy or sell securities of any type. Nothing in this document should be construed as an offer, or the solicitation of an offer, to purchase or subscribe to sell any investment or to engage in any other transaction.
No basis for decision making
All information contained in this presentation has been prepared by King & Shaxson on the basis of publicly available information, internally developed data and other sources believed to be reliable. It is for general information purposes only and should not be considered an individualised recommendation or personalised investment, tax or legal advice. The information is subject to change without notice. Reasonable care has been taken to ensure that the materials are accurate and that the opinions stated are fair and reasonable. All opinions and estimates constitute our judgement as of the date of publication and do not constitute general or specific investment advice. All numbers are unaudited unless otherwise stated. Furthermore, please note that King & Shaxson and/or its affiliates and employees may have interests or positions in relevant securities or may have a relationship with the issuers.