Posts tagged ‘Debt Dealing Basics’

Commercial Paper / Certificate of Deposit Valuation – for Debt/Fixed Income Dealers

Commercial paper and Certificate of Deposit are one of the most prominent instruments in money market. Banks, corporates, Asset Managers, NBFCs and Insurance companies are the main players in this market.  As we all know there exist adequate infrastructure for equity trading on exchanges but in case of debt instrument, OTC (Over the Counter Trade) works well.  In this segment of market buyer and seller are brought to a deal by a Broker/Dealer who in turn charges for the same. Every deal done over the counter is to be reported on FIMMDA platform within a stipulated period of time (currently 15mins).  Below is the valuation methodology for CP CD pricing which might help prospective dealers and other participants in the market. Method doesn’t matter unless you are correct in your calculation.

 CD CP Calcualtion

Value date: This is nothing but the date when funds will be credited to the seller and security will be delivered in buyers account. Remember value date is not always the date of dealing. Normally if deal is executed after 1pm then value date is most probably the next day. It is on Buyer and seller when they wish to exchange the security for cash.  Trade happen on 2-Jan-2013 can have value date at 4-Jan-2013 if both buyer and seller wish so.

Maturity Date: CD/CP instrument cannot have maturity of more than a year (CP in some case can be of more than a year).

Days: This is the number of days buyer will be holding the security or say number of days to maturity from value date. (Maturity Date less Value Date in Excel)

Yield: This cell needs to be left blank for the dealer to check price of the instrument (CD/CP) whereby dealer can play with rates and check the price for varying yields

Price: Many try to complete all steps in one cell but it’s better to go step by step which not only helps you understand crux of valuation but also reduces the probability of errors.

Once it is ready Dealer can edit the level of yields (which is done in the example) to get the price of the security.  Yes, once the sheet is ready one can also edit Value date and Maturity date (to price new CD/CP).Yields are inversely related to price of the instrument. Hence when the yield rises from 8.50 to 8.60%, price of the instrument falls from 245966750 to 245943500 (i.e. price falls by Rs.23500). This signifies that buyer has to pay ~24.59Cr and will get the par value i.e. 25Crs on maturity making the differential amount.

I am also attaching excel sheet for you perusal.:) CD CP Valuation Sheet

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