Short Dated Investment

Short Dated Instruments

Instruments available to financial institutions to borrow and/or lend for period less than a year (or short-dated) are numerous. These include, but not limited to, the following;

  1. Bankers Acceptances (BAs)
  2. Negotiable Instruments of Deposits (NIDs)
  3. Treasury and Bank Negara Bill
  4. Commercial Papers (CPs)

Bankers Acceptances (BAs)

The full description of BAs are provided in ‘Guidelines On Bankers Acceptances (2004)” issued by Bank Negara Malaysia (BNM) in April 2004. It is described as an instrument “which is a bill of exchange drawn on and accepted by a bank in Malaysia in accordance with these Guidelines”. BAs are generally used “to finance the drawer’s business- related purchases from or sales of goods to another person who may be a resident or non-resident, evidenced by proper and adequate documentation”.

BAs have a secondary market in which they are traded. Each BA has a face value and will be different from another since it depends on the financing requirement of the drawer. BNM provided the discounting and rediscounting formula as below;

\( \begin{align} P &= FV\left(1-\dfrac{r_dt}{365}\right) \\ \textrm{where } P &= \textrm{proceed/ value/ present value}\\ r_{d} &= \textrm{discounted rate}\\ t &= \textrm{remaining days to maturity} \end{align} \)

Equation 1-11

BA is a financial instrument that pays only the face value on maturity date. Other examples of short term financial instruments that have the same features are treasury bills, Bank Negara Malaysia bills and commercial papers. These instruments have secondary market in which they are sold and purchased by market participants. The calculation of proceed for payment of a purchase of any of these instruments shares the same equation i.e. Equation 1-11. Instruments using this equation are often referred to as discounted instruments.

Treasury Bills (T-bills) and Bank Negara Malaysia Bills (BNM bills)

BNM manages Treasury and Bank Negara Malaysia bills issuance although the actual issuers are different. The government issues Treasury Bills while Bank Negara Bills are issued by BNM to manage MYR liquidity in the market. Both instruments are scriptless, i.e. no physical certificate will be issued to the buyer. Instead, the ownership is tracked by the RENTAS (Real Time Electronics Transfer of Funds and Securities) maintained by BNM. Members of RENTAS are primarily banks who acted as Authorised Depository Institutions (ADIs) for safekeeping of various debt securities including Treasury bills, Bank Negara Malaysia bills, commercial papers and private debt securities.

Both T-bills and and BNM bills are considered discounted instruments and the calculation of proceeds utilises Equation 1-11.

Commercial Papers (CPs)

Commercial papers are short-term debt instruments issued by corporations to finance short term requirements. CPs are often tied to facilities such as CP/MTN program whereby the corporation issues CPs as a prelude to issuance of private debt securities (PDS), a bond type instrument. Standalone CPs facilities are also provided by banks to enable corporations to tap the debt market for funds instead of relying on rollover credit (RC) facilities. The instrument is considered as discounted instrument for the purpose of calculating proceed of a purchase (or sale) transaction.

Negotiable Instruments of Deposits (NIDs)

NIDs are coupon-bearing instruments in bearer’s form issued by the banks to depositors. Despite being issued to the depositor, the physical certificate is often kept for safe keeping by the issuing bank and a register is kept to track changes in ownership of the certificate. Unlike a fixed deposit certificate, NID certificates are negotiable and can be sold to another party subject to NID guidelines issued by BNM and operational procedure of the respective banks.

There is a secondary market for NID, although it may not be as liquid as the money market. NIDs are generally traded on yield basis and its proceed is simply calculated using \(P=\dfrac{1}{\left(1+\frac{rt}{365}\right)}\). It is not the formula provided by BNM but proofs will be given that the two are actually the same.