Facets of CMBs or, Cash Management Bills

Facets of CMBs or, Cash Management Bills

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Cash management bills, or CMBs, are short-term securities issued by the government to manage the short-term cash balance. These bills are typically issued for duration of less than 91 days and are considered to be one of the safest investments available. Thus, cash management bill description includes all those bills that mitigate cash flow shortfalls on a temporary basis. They are sold at a discount from their face value, and when they mature, the investor receives the full face value of the bill. The difference between the purchase price and the face value represents the investor's return on investment.

Cash management bills are issued by the Reserve Bank of India to manage the government's cash balance. They are typically issued when the government needs to raise cash quickly, such as during a government shutdown or when the debt ceiling needs to be raised. Because cash management bills have a shorter duration than traditional Treasury bills, they provide the government with more flexibility in managing its cash balance.

Cash management bills duration is less than three months. This short duration makes them an ideal investment for institutional investors that need to park their cash for a short period of time. Because they are so short-term, they are considered to be one of the safest investments available. However, because they are so safe, the returns on cash management bills are typically lower than other short-term investments, such as commercial paper or certificates of deposit.

A typical cash management bills example is provided here for better understanding. Let's say an institutional investor has Rs.10 Crores that it needs to park for four weeks. The investor could purchase cash management bills directly from the RBI. If the current discount rate is 1.5%, the investor would pay $9,850,746.27 for Rs.10 Crores worth of cash management bills. At maturity, the investor would receive the full face value of Rs. 10 Crores, earning a return of Rs. 149,253.73, or 1.5% over four weeks.

Thus, cash management bills are a useful tool for the government to manage its cash balance, and they are a safe investment option for institutional investors that need to park their cash for a short period of time. Their safety and liquidity make them an attractive option for investors.