treasury bills popularly known as t-bills

Question

Treasury Bills, popularly known as T-bills, are issued in India by the RBI on behalf of the Government of India. T-bills are short-term securities with a maturity of 91,182 and 364 days. These are issued at a discount and are redeemed at par. Treasury bills are available for a minimum amount of Rs.25,000 and in multiples of Rs.25,000. The yield on T-bills is calculated on discount basis. We can determine the yield on T-bills with the help of the following formula:

         d = (1 - p) (360 / N_SM)                                                                                                    

Where,

         d          =     Yield on a discount basis.

         p          =     Settlement price per Rs.1 of maturity value.

         N_SM        =     Number of days to maturity i.e., difference between the maturity date and the

settlement date.

To understand it better, let us assume a treasury bill with settlement date of 05/01/2007. The maturity period of the bill is 15/05/2007 and at a price of 0.98794893. The number of days from the settlement date to the maturity date is 130. So, the yield on a discount basis is,

         d = (1 - 0.98794893) (360/130) = 3.34%

Once the yield on discount basis is determined, we can calculate the price of a bill (per Rs.1 of maturity value) with the help of the following formula:

         p = 1 - d (N_SM /360)                                                                                                        

         p = 1 - 0.0334 (130/360) = 0.98794893.