T-Bills in Bangladesh

I. INTRODUCTION
The Bangladesh economy is within the mainstream of the continuously changing global financial
system. Domestic as well as international trade also characterizes Bangladesh economy. Hence a
financial system has developed here consisting mainly of the capital and the money market. For
any underdevelopment country the existence of a well functioning money market is of
paramount importance. The money market currently existing has also developed due to certain
needs. In general, these needs can be termed as need for short term liquidity within our financial
system, to carry out the day to day economic activities and obviously to meet and match need for
short term lending and borrowing of the participants within the financial system. T-bill market is
by far the largest component of the money market in Bangladesh.
Treasury bill or T-bill is a short-term debt issued by a national government with a maximum
maturity of one year. Treasury bills are sold at discount, such that the difference between
purchase price and the value at maturity is the amount of interest. Although the maturity of T-bill
shouldn't be more than one year, in Bangladesh, 2-year and 5-year securities are also regarded as
T-bills. Treasury bills are fully guaranteed by the government and hence are free from default
risk. The biggest reason that T-Bills are so popular is because they are one of the few money
market instruments that are affordable to the individual investors. Basically, investors invest in
T-bills due to: 1) to maintain the Statutory Liquidity Reserve (SLR), 2) to maintain adequate
liquidity 3) to earn yields, 4) to utilize properly huge idle cash in banks, and 5) to averse highly
risky investments. Since they mature so quickly, T-bills are simply sold at a discount to their face
value at maturity. The discount is determined by the interest rate. If it is a six-month bill with a
5% discount rate, the investor pays 95% of the face value or Tk. 950, and then receives Tk. 1,000
back in six months. T-bills are indirect tools for monetary management of the central bank of a
country. Six types of T-bills are available in Bangladesh: 28-day, 91-day, 182-day, 64-day, 2year, and 5-year government treasury bills are duly issued by the Bangladesh Bank through
weekly auctions at rates determined by the market. The only downside related to T-bill is that the
investor won't get a great return because Treasuries are exceptionally safe. Corporate bonds,
Certificate of Deposits, and money market funds will often give higher rates of interest. What's
more, the investor might not get back all of his or her investment if he or she cash out before the
maturity date. The principle objective of this study is to identify and analyze the pricing
mechanism and bidding behaviour of T-bills market in Bangladesh. The entire study is divided
into nine sections. Section two describes Creation of T-bills in Bangladesh, section three

describes Overview of T-bills market in Bangladesh, section four describes T-bills auction,
section five describes Pricing of T-bills through auction, section six describes T-bill yields and
Call Money Rate, section seven describes Repo and Reverse Repo, section eight describes
Secondary market for T-bills, and section nine describes Suggestions and concluding remarks.
II. LITERATURE REVIEW
Treasury Security auctions have been empirically examined in different contexts by other
studies. Cammack (1991), Spindt and Stolz (1992), and Simon (1994a) find that securities tend
to beunderpriced at auction compared with prices in the when-issued market. Simon (1994b),
Nyborg and Sundaresan (1996), and Goldreich (2003) relate underpricing to auction technique,
whether single price or multiple price. No prior study examines price-equivalent discount rate
classes and the implications of such classes for bidding behaviour, presumably because the issue
only became particularly relevant in 2001 with the Treasury introduction of four-week bills. In
the late 1970s, the large purchases of treasury bills by individuals may have driven bill rates
down relative to the rates on other money market instruments (Cook 1981). The literature in this
area has found that the average return in the bill market increases at a decreasing rate out to
around six months, and then flattens out (McCulloch 1987; Cook and Hahn, 1990). Amihud and
Mendelson (1991) compared Treasury notes (known to be less liquid than bills) and Treasury
bills with approximately the same maturity date. With less than six months to maturity, notes
provide the same cash flows to investors as bills.
III. CREATION OF T- BILLS IN BANGLADESH
Bangladesh Bank (BB), the central bank of Bangladesh, operates throughout the country with its
nine branches. Government receipts and payments are overseen and managed by
BANGLADESH BANK. Where there is no BANGLADESH BANK branch but transactions of
government occur, different branches of Sonali Bank (SB) are assigned to take part in these
transactions on behalf of BANGLADESH BANK. These branches are known as 'Chest
Branches'. In a district, there may be one chest and some sub-chests. BANGLADESH BANK
directly monitors Chest branches. This function is known as 'Feed'. Chest branches feed subchests. There are 464 chest branches throughout the country. However, it should be remembered
that chest branches aren't regarded as chest banks. there are some other small units working for
BANGLADESH BANK, which are known as 'Booth'. Booth is a counter of receipt or payment.
Booth may be of any bank's branch. Government's main source of revenue is tax, and with this
revenue government expends mainly for various establishments. While expenditures exceed
revenues, there is a deficit. Government meets this deficit through creation of T-bills. Let's have
a look on the following example.
Here in the example, Tk 200 million is deficit. This deficit will be met up from T-bill creation.
However, for small amount of deficit, a petty cash account is maintained by Bangladesh Bank.
This is called 'Ways and Means Advance'. Government can borrow a maximum of taka 64 crore
from this account of Bangladesh Bank. Government generally borrows first from Ways and
Means and then through T-bills. Bangladesh Bank charges the Government a floating interest
rate (Bank rate + 1%) for this advance, while present bank rate is 6%. Let's have a look on the
creation of T-bills for the above example.