Marketable Securities Examples

Marketable Securities Examples

Marketable securities also called as Short terms investments and are favored by major corporations. The following marketable securities examples provide an outline of the most common Marketable Securities. It is impossible to provide a complete set of examples that address every variation in every situation since there are thousands of such securities.

Examples of Marketable SecuritiesMarketable SecuritiesMarketable securities are liquid assets that can be converted into cash quickly and are classified as current assets on a company's balance sheet. Commercial Paper, Treasury notes, and other money market instruments are included in it.read more Include –

  1. Common Stock
  2. Commercial PapersCommercial PapersCommercial Paper is a money market instrument that is used to obtain short-term funding and is often issued by investment-grade banks and corporations in the form of a promissory note.read more
  3. Banker’s AcceptanceBanker's AcceptanceBanker’s acceptance is a financial instrument guaranteed by the bank for the payments at a future date. The bank accepts the liability to pay the third party in case the account holder defaults. It is commonly used in cross border trade for assuring exporters against counterparty default risk.read more
  4. Treasury Bills
  5. Certificate of DepositCertificate Of DepositCertificate of deposit (CD) is a money market instrument issued by a bank to raise funds from the secondary money market. It is issued for a specific period for a fixed amount of money with a fixed rate of interest. It is an arrangement between the depositor of money and the bank.read more
  6. other money market instrumentsMoney Market InstrumentsThe money market is a market where institutions and traders trade short-term and open-ended funds. It enables borrowers to readily meet finance requirements through any financial asset that can be readily converted into money, providing an organization with a high level of liquidity and transferability.read more
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List of Most Common Examples of Marketable Securities

Example #1 – Treasury Bills

Calculate the current price and the Bond equivalent yield (Using simple compounding) of money market instruments with a face value of Rs100 and discount yield of 8% in 90 Days.

Solution:

Take year = 360 days.

Discount Yield uses 360 Days in a year, and it is calculated on fare value that’s is face value here.

DY = [ ( FV – P)/FV) ] × ( 360/n)× 100

Here,

FV = Rs 100, n = 90 days, DY = 8, P = current price

Calculation of Current Price –

Marketable Securities Example 1

So, by putting above all figure In formula will get the current price.

8 = [(100-P)/100] × (360/90) × 100

Current Price = Rs 98

Calculation of Bond Equivalent Yield –

Example 1.1

Bond Equivalent Yield uses 365 Days in a year and is calculated on actual investment.

BEY = [ ( FV – P)/FV) ] × ( 365/n)× 100

=[(100-98)/100] × (365/90) × 100

BEY = 8.11%

Example #2 – Commercial Paper

ABC public limited company initiated a Commercial Paper in the market details of which as mentioned below.

  • Date of initiate – 17th May 2018
  • Date of Maturity – 15th August 2018
  • Number of Days – 90
  • Coupon Rate – 11.35%

What is the net amount ABC limited received after initiating 90 days of commercial paper?

Solution

The company has to provide a yield of 11.35% to investors on his investment over one year. Therefore here we will use 365 days and calculate the difference between the price and face value over his investment. The formula is as follows,

Yield = [( FV – A)/A) ] × ( 365/Maturity)× 100

Here,

  • A – Net Amount received from investors
  • FV – It is assumed to be Rs 100

Maturity – 90 Days

Yield (interest) – 11.35%

So by putting the above-mentioned figures in the formula will get the Net Amount for 100Rs face value commercial paper.

Calculation of Net Amount –

Marketable Securities Example2

11.35% = [(100-A)/A] × (365/90)×100

Solving the above equation will get A = 97.28 Rs

So if a company-issued commercial paper worth Rs 10 Crores, the Company would receive only 97,277,560.87 Crores.

Example2.2

Net Amount = 97277560.87

Example #3 – Certificate of Deposit

XYZ Company has a due payment of Rs3 Crores on 15th September 2018. The company has extra cash today that is 15th June 2018, and after considering all fact and figure, it decided to put surplus cash in Certificate of Deposit of a one of Government Bank at 8.25% per annum. Calculate Amount of Money needs to be invested in a certificate of deposit today to make due payment? Here year to be taken as 365 days.

Solution:

CDs are issued at a discount price, and the discount amount is paid at the time of the issue itself.

Formula For CD’s

D = 1×(r/100)×(n/365)

Here,

  • D – Discount
  • r– the rate of discounting
  • n– Month/ Days

Calculation of CD-

Marketable Securities Example3

D= 1×(8.25/100)×(91/365)

D= Rs 0.020568493

Amount to be received on Face Vale Rs 1 will be –

Example3.1

Amount to be received on Face Vale Rs 1 = Rs 1 + Rs 0.020568493

=Rs 1.020568493

Amount to be Invested will be –

If the amount to be received is Rs 3 crore then,

Example3.2

Amount to be Invested Is = (3 Crores/1.020568493) = Rs29,395,381.30

Amount to be Invested = Rs29,395,381.30

Example #4 – (Commercial Paper with Description on NSDL as AARTI INDUSTRIES LIMITED)

Aarti industries limited issued a Commercial Paper with Description on NSDL as AARTI INDUSTRIES LIMITED 90D CP 20FEB19 and with the below details.

  • Face Value – Rs5,00,000
  • Issue Price – Rs4,80,000
  • Issue Date – 22/11/2018
  • Maturity Date – 20/02/2019
  • Credit Rating A1+

What is the cost or yield of Commercial Paper?

Solution:

We know that

Yield = (Face Value – Issue Price/Issue Price)× (360/Days of Maturity)

So Here, Maturity Days is 90 Days,

Calculation of Yield –

Marketable Securities Example 4

Yield = (5,00,000 – 4,80,000/4,800,000)×(360/90)

Yield = (20,000/4,80,000)×4

Yield = 0.042×4

Yield = 0.167 or 16.7%

So yield or cost of commercial paper is 16.7%

Example #5 (United States Treasury Bill)

The United States Treasury Bill was issued for cusipCusipCUSIP is an abbreviation for the Committee on Uniform Securities Identification Procedures. It is a unique identification code assigned to most financial instruments, including stocks registered with all American and Canadian corporations, commercial papers, and US government and municipal bonds.read more 912796UM9 with the principal amount of 25,000,000 with a maturity period of 90 Days and coupons rate or discount yield of 2.37%. Calculate the current price of Treasury Bill? Take year as 360 Days.

Solution:

Here,

  • Face Value – 25,000,000
  • Maturity – 90 Days
  • Discount Yield – 2.37%
  • P( Current Price)-?

Discount Yield uses 360 Days in a year, and it is calculated on fare value that’s is face value here.

Calculation of Current Price –

Marketable Securities Example 5

DY = [ ( FV – P)/FV) ] × ( 360/n)× 100

2.37 = [(25,000,000 – P)/25,000,000] × (360/90) × 100

Current Price = 24851875

So Solving the above equation will get the current price of the United States Treasury Bill and it is 24,851,875.

Conclusion

Cash and Marketable Securities are the liquid assetsLiquid AssetsLiquid Assets are the business assets that can be converted into cash within a short period, such as cash, marketable securities, and money market instruments. They are recorded on the asset side of the company's balance sheet.read more of companies, and effective cash and Marketable Securities management are very important for the companies. Many companies invest in marketable securities because it is a Substitute for hard Cash, Repayment of short term liabilities, Regulatory requirements, these features, and advantages of marketable securities make them popular. Holding Marketable Securities for a company is totally depends on the solvency and financial condition of a company. There are some limitations to Marketable Securities like low returns, default risk, and inflation riskInflation RiskInflation Risk is a situation where the purchasing power drops drastically. It could also be explained as a situation where the prices of goods and services increase more than expected. Inflation Risk is also known as Purchasing Power Risk.read more associated with marketable securities. In short Marketable Securities is an investment option for the organization to earn returns on existing cash while maintaining cash flowCash While Maintaining Cash FlowCash Flow is the amount of cash or cash equivalent generated & consumed by a Company over a given period. It proves to be a prerequisite for analyzing the business’s strength, profitability, & scope for betterment. read more due to high liquidity.

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