Question

Commonwealth Bank agrees to establish a 270-day bill facility using 90-day bank bills. The face value of the facility is $10 million, and the issuer is charged an acceptance fee of 60 basis points. Calculate the net cash flows from 1) the issuer’s and 2) the bank’s perspective, respectively. Briefly explain what each of the cash flows stands for. (The first parcel is issued at a market yield of 4.80% p.a., the second at 4.65% and the third at 5.00%.)

Answer 1

In this case, we have the below mentioned inputs

Bill Value = $10 million

Bank charges = .60%

Hence Total Bill charges = $10000000*.60%

= $60000

Therefore, the issuer will receive = Bill value less Bank charges

= $10000000-$60000

= $9940000

Now, lets calculate the receipt of Bank on maturity of Bill discounted.

Scenario 1 which is interest rate of 4.8% p.a.

We have to calculate interest on $1 million for 90 days and formula will be $10000000*4.8%*90/360 ( assuming 1 year = 360 days)

Total interest = $480000*90/360

= $120000

Answer = The value of first parcel @4.8% = Bill Value+Interest= $10000000+$120000 = $10120000

Scenario 2 which is interest rate of 4.65%

We have to calculate interest on $1 million for 90 days and formula will be $10000000*4.65%*90/360 ( assuming 1 year = 360 days)

Total interest = $465000*90/360

= $116250

Answer = The value of first parcel @4.65% = Bill Value+Interest= $10000000+$116250 = $10116250

Scenario 3 which is interest rate of 4.65%

We have to calculate interest on $1 million for 90 days and formula will be $10000000*5.00%*90/360 ( assuming 1 year = 360 days)

Total interest = $500000*90/360

= $125000

Answer = The value of first parcel @5.00% = Bill Value+Interest= $10000000+$125000 = $10125000

Hence from the above calculation, we found that from Issuer's perspective the value will be $9940000

And from Bank;s perspective the value of first, second and third parcel will be $120000, $116250 and $125000 respectively