Btm T2 Full - the Different Between Domestic Deposit and Eurocurrency Deposit

TUTORIAL 2

Question 1

-Eurocurrency has three features which is no connection with the Euro (EUR) the currency of the European Monetary Union.

-It is the general term for any currency deposited in Banks outside the country where it is the national currency.

-Market for such Eurocurrency deposits started in Europe in 1950s, and as a result, it was known as Eurocurrency deposits.

Eurdollars  

- U.S. dollar-denominated deposits at foreign banks or at the overseas branches of American banks. By being located outside the United States, eurodollars escape regulation by the Federal Reserve Board, including reserve requirements. Dollar-denominated deposits not subject to U.S. banking regulations were originally held almost exclusively in Europe, hence the name eurodollar. They are also widely held in branches located in the Bahamas and the Cayman Islands.

The different between domestic deposit and eurocurrency deposit

-The presence of arbitrage activities ensure a close relationship between interest rates in national and international

-Currency controls or risk explain any substantial differences between domestic and external interest rates ( if exchange control are effective, the national money can be isolated or segmented from its international counterpart.

-Eurocurrency spreads are generally narrower and lower than those in domestic which is the lending rates can be lower because eurocurrency lending is characterized by high volumes, resulting in lower margins and transaction cost. Next, Deposit rates can be higher because they must be to attract domestic deposits.

Question 2

A yield instrument is interest bearing. The examples of yield instruments are Certificate of Deposits (CD), Negotiable Certificate of Deposits (NCD), Notes and Bonds. For example, XYZ invests USD 10 million in Negotiable Certificate of Deposits (NCD) for 90 days at 5.75% p.a. On maturity XYZ will receives principal and interest, which is 10,000,000 + (10,000,000 x 5.75% x 90/360), which XYZ will receives the amount of USD 10,143,750. XYZ earns exactly 5.75%, so 5.75% is a “true yield”. In another condition, if yield instruments are sold off before maturity at the current market or agree yield, formula to calculate the sales proceeds, P is [365 + (Coupon rate, r x Original tenure, t)] divided by [365 + (Current market or agreed yield, y x Number of days remaining to maturity, d)].

A discounted instrument is non-interest bearing. The examples of discounted instruments are Treasury bills, Banker Acceptance (BA) and Commercial Papers. For example, a customer wishes to draw a Banker Acceptance (BA) for RM 1,000,000 for 60 days. The rate of discount is 5% p.a. The discounted proceed is using the Face Value – [(Face Value x Discounting Rate x Number of days) / 365], which is use 1,000,000 – [(1,000,000 x 0.05 x 60) / 365], so the discounted proceeds equal to RM 991,780.82. Discounted proceeds also MP. Add on one condition, if the bank holds the Banker Acceptance (BA) for 20 days and then sells the Banker Acceptance (BA) at a rate of 4.5% p.a. In this condition need to recalculate a new discounted proceeds, MP1, which use 1,000,000 – [(1,000,000 x 0.045 x 40) / 365] equal to RM 995,068.49. To calculate the effective return, need to use [(MP1 – MP) / MP] and then times (365 / Number of days held), equal to [(995,068.49 – 991,780.82) / 991,780.82] x (365 / 20). So, the effective return of Banker Acceptance (BA) is 6.05%.

Queation 3

The introduction of the Kuala Lumpur Interbank Offer Rate (KLIBOR) as indicator of interbank interest rates for variable money market instruments. It is the interbank lending rate, and is the interest rate charged by banks when lending rate. As such, it form a large part of a bank’s cost of funds and thus is likely a better indicator of a bank’s true cost of funds.

Explain the interest rate to be charged on the loan of RM1 million

Basis point refer to changes in interest rate and bond yield. If a loan is quoted at KLIBOR plus 160 basis points. If KLIBOR is 3.65%, then interest rate will be 3.65% + 1.6% = 5.25% (1 basis point is 1/100%)

Question 4

Sales proceed, C is equal to [36500 + (coupon rate, CPN x Original tenor expressed in number of days, DIM)] divided by [36500 + (yield at which purchase or sales is agreed, YLD x Number of days remaining to maturity, DSM)] after that times Principal or Nominal amount, NV. Sub the number into the formula, which is [36500 + (10.2 x 180)] divided by [36500 + (9 x 55)] after that times 100,000. So, the sales proceed of NID is RM 103,624.81.

There are four types of Negotiable Instruments of Deposits (NID), which are Short term Negotiable Instruments of Deposits (SNID), Long term Negotiable Instruments of Deposits (LNID), Zero coupon Negotiable Instrument of Deposits (ZNID) and Floating rate Negotiable Instruments of Deposits (FRNID).

Short term Negotiable Instruments of Deposits (SNID) has a tenor range from 1 month to 12 months. The interest is based on the fixed coupon rate paid on maturity together with principal.

Long term Negotiable Instruments of Deposits (LNID) has a tenor at least 12 months up to 120 months. The coupon payments is paid based on semi-annually or quarterly except for 1st interest payment which could be earlier than 3 or 6 months. LNID can traded on price basis, for example quoted in terms of “price per nominal value”.

Zero coupon Negotiable Instruments of Deposits (ZNID) has no coupon paid and the tenor 1 month up to 120 months. There has a full value to be paid by issuer at maturity. ZNID can be traded on yield basis for papers with remaining maturity for less than 365 days and on price basis for those exceeding 365 days to maturity.

Floating rate Negotiable Instruments of Deposits (FRNID) has tenor at least 12 months up to 120 months. The interest payments every 3 or 6 months intervals based on KLIBOR + or – margins fixed every interest payment date. FRNID can be traded on price basis.