Ecuaciones modelo y detalles computacionales

Treasury Bills/Gilts

Treasury Bills are short term securities issued by HM Treasury. The rate you buy is the rate you receive at maturity. Treasury Bills have the same credit ratings as the UK government. Advantage

Low risk in both credit and duration. Very liquid as there is a very active secondary market for them. There is no additional credit risk if held to maturity and no cost to bid.

Certificates of Deposits

These are highly liquid instruments issued by UK and International banks and Building Societies on a daily basis. Rates are comparable to fixed deposits, there is no obligation to hold them to maturity and rates remain fixed until maturity. They are generally ranked like fixed deposits.

Advantage – access to more counterparties and in the event of a down grade of the

counterparty or unexpected cash flow requirement they can be sold on the secondary market Index-linked gilts

These are gilts indexed to inflation.

Bonds

Bonds like any transferable security can be purchased and sold on the secondary market. This attribute therefore makes them highly liquid. Bonds generally provide access to a much wider range of counterparties (like Corporates, government agencies and housing

associations) to suit the investors credit criteria and provide a means to respond to perceived interest rate fluctuations. Enhanced security as some counterparties are AAA rated

counterparties or sovereigns. Some bonds like covered bonds have added security thereby assisting with bail-in risk mitigation. Bonds can be fixed or floating.

There are different types of bonds which can be issued by HM Treasury (UK Gilts), Supra- nationals (join & several liability of leading developed nations e.g. World Bank or EIB or issued by Corporates.

Major risks of bond investments are credit or counterparty risk, liquidity risk, interest rate risk and event risk.

- Conventional fixed bonds

These are debt instruments which guarantee to pay the holder a fixed interest payment (coupon). The coupon reflects interest rates at time of issue.

When investing in conventional fixed bonds the council will ensure that it understands the ranking of the instrument, only bonds of highly rated counterparties are lent to.

- Floating rate notes (FRN’S)

A bond with a floating /variable rate of interest which re-fixes over a reference rate e.g. LIBOR. These instruments generally protect investors against rising interest rate. Generally they carry a maximum interest rate exposure of 3 months therefore investors will generally re-fix every three months at a margin over 3 months LIBOR if they intend to hold for longer.

- Covered Bonds

These are bonds fixed or floating that are backed by a separate pool of securities, usually prime residential mortgages. The rating of the bond would be higher than that of the issuer, normally AAA. However the covered rating can be no more than 6 notches above that of the issuer. It should be noted that the issuer remains responsible at all times to pay the coupons and repay the capital.

- Retail Bonds

Retail Bonds are another form of ‘new issue’ where corporates look to raise extra capital by borrowing from the investor at a fixed rate for a set period.

Commercial Paper Issued by Corporate Institutions

These are unsecured, short-term debt instrument issued by a corporate to meet short-term liabilities. Maturities on commercial paper rarely range any longer than 270 days. The debt is usually issued at a discount, reflecting prevailing market interest rates.

Commercial paper is not usually backed by any form of collateral, so only corporates with high-quality ratings will easily find buyers.

POOLED FUNDS

There are a number of Pooled Funds such as bond funds, equity funds and property funds. Pooled funds generally have higher management costs that simple vanilla investments. Generally investments are long term (5 to 7 years). Yields are higher and most appreciate in value but there are entry and exit fees as well as annual management charges.

- Pooled Property Funds

This is generally expected to be held for the medium or long term. They are classified as non-specified investments. Pooled property funds may invest in the UK only or Europe or Globally.

range of bonds in one pot. The investor buys units in the fund. Management fees are deducted from fund value before passing to investor.

- Equity Funds

Portfolio of equity shares in one pot. The investor purchases units in the fund. OTHERS

Lending to Community Organisations, Local Authority Owned Companies, Social Enterprise, Other Third Parties and Registered Social Landlords (RSL).

Example of such arrangements are the provision of a loan facility by the Council which the RSL can draw down as and when required within the stipulated time frame.

Rates will be charged at two levels – when the facility has been drawn down from and lower rate for having the facility in place. There is usually an agreed number of times a year the RSL can draw down the facility.

APPENDIX 5 The Treasury Management role of the section 151