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 Securities Include –

Common Stock
Commercial Papers
Banker’s Acceptance
Treasury Bills
Certificate of Deposit
other money market instruments

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 a 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 –

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 –

Bond Equivalent Yield formula 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 – 17^th May 2018
Date of Maturity – 15^th 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?

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

Calculation of Net Amount –

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.

Net Amount = 97277560.87

Example #3 – Certificate of Deposit

XYZ Company has due payment of Rs3 Crores on September 15^th 2018. The company has extra cash today that is 15^th 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:

CD’s are issued at a discount price and the discount amount is paid at the time of 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-

D= 1×(8.25/100)×(91/365)

D= Rs 0.020568493

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

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,

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 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 –

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 cusip 912796UM9 with the principal amount of 25,000,000 with the 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 –

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 United States Treasury Bill and it is 24,851,875.

Conclusion

Cash and Marketable Securities are the liquid assets 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, this features and advantages of marketable securities makes 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 risk associated with marketable securities. In short Marketable Securities is an investment option for the organization to earn returns on existing cash while maintaining cash flow due to high liquidity.