Marketable Securities Examples
The following marketable Securities example
Marketable securities also called as Short terms investment and are favored of major corporates.
Examples of Marketable Securities Include –
- Common Stock
- Commercial Papers
- Banker’s Acceptance
- Treasury Bills
- Certificate of Deposit
- other money market instruments
Here is the complete list of marketable securities examples-
List of Most Common Examples of Marketable Securities
Let’s see some simple examples of marketable securities to understand it better.
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%
Marketable Securities 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?
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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
Marketable Securities Example #3 – Certificate of Deposit
XYZ Company has due payment of Rs3 Crores on September 15th 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:
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%
Marketable Securities 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.
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