Still trying to understand bank bills

My brain is still completely tied in knots about bank bills and how you use them in property investing.

I'm imagining something like this:

You have a property debt-free. Hypothetically, let's say the property is valued at $500k. You take out a LOC against it for, say, $300k, at 5.5% interest.

You then buy a bank bill for $300k, (or $270k or something because of the discount to the face value?) at 3%. You use this bank bill to pay out your LOC. You now have no LOC, no available cash, and a bank bill that you're paying 3% on every time it rolls over.

Doesn't sound particularly useful. What am I missing?

Or can you buy a bank bill using equity and then use it like cash? E.g., same example, but use your equity to purchase $300k bank bill at 3% instead of LOC at 5.5%, and then use that bank bill as deposit on another property? Can you split a bank bill and use it as two deposits?

So confused. :confused:
 
I have used BB in lieu of a term loan. Interest is prepaid and included in the amount forwarded by the bank. Eg: $500k BB for 180 days includes interest at x% + bank margin. At the end of the 6 months, you take out a new BB (if the bank will offer you one). It is in effect a loan and is secured against an asset/s.

I have found that they have been cheaper than commercial loans but a PIA that they are rolled over every few months. Great in a rising market - it buys you time if you refinance at a higher valuation.
 
I have used BB in lieu of a term loan. Interest is prepaid and included in the amount forwarded by the bank. Eg: $500k BB for 180 days includes interest at x% + bank margin. At the end of the 6 months, you take out a new BB (if the bank will offer you one). It is in effect a loan and is secured against an asset/s.

I have found that they have been cheaper than commercial loans but a PIA that they are rolled over every few months. Great in a rising market - it buys you time if you refinance at a higher valuation.

When you say 'in lieu of a term loan' do you mean you bought a property and you got a bank bill over it instead of a mortgage?
 
My brain is still completely tied in knots about bank bills and how you use them in property investing.

I'm imagining something like this:

You have a property debt-free. Hypothetically, let's say the property is valued at $500k. You take out a LOC against it for, say, $300k, at 5.5% interest.

You then buy a bank bill for $300k, (or $270k or something because of the discount to the face value?) at 3%. You use this bank bill to pay out your LOC. You now have no LOC, no available cash, and a bank bill that you're paying 3% on every time it rolls over.

Doesn't sound particularly useful. What am I missing?

Or can you buy a bank bill using equity and then use it like cash? E.g., same example, but use your equity to purchase $300k bank bill at 3% instead of LOC at 5.5%, and then use that bank bill as deposit on another property? Can you split a bank bill and use it as two deposits?

So confused. :confused:

I think you're essentially misunderstanding what a bank bill is. Think of it as a term deposit of sorts. Instead of receiving your money back plus interest at the end of term you buy it at discount to it's face value (the amount you receive on maturity).
 
I think you're essentially misunderstanding what a bank bill is. Think of it as a term deposit of sorts. Instead of receiving your money back plus interest at the end of term you buy it at discount to it's face value (the amount you receive on maturity).

So how do people use it in property investing? I know it sounds like I'm really obtuse, but do you think you could give me a step by step example?
 
So how do people use it in property investing? I know it sounds like I'm really obtuse, but do you think you could give me a step by step example?

It doesn't sound like you're being obtuse at all.

I have no idea how people use BBs in property investing. I wasn't aware they did, and I can't imagine how they would. What has made you ask about them?

I've never used BBs but I'd imagine the process is similar to any other investment/deposit in a bank.

Scott's example makes no sense to me, but then I have a cold so my head might be in melt down. BBs are a 'deposit' with the bank not a 'loan' from the bank.

http://www.comsec.com.au/learningcentre/cbb_what_are_bank_bills.htm
http://www.deposits.org/dictionary/term/bank-bill/
 
You have a property debt-free. Hypothetically, let's say the property is valued at $500k. You take out a LOC against it for, say, $300k, at 5.5% interest.

You then buy a bank bill for $300k, (or $270k or something because of the discount to the face value?)


Luce,

You take out $270k from LOC at 5.5%.

You buy a 180 day bank bill for $270,000

At the end of 180 days you sell it for the (maturity) face value of $300,00

You pay back the loan of $270k PLUS $7,425 in interest

You pocket $300k - $270k - $7.425k = $22.575k profit.

The Y-man
 
Luce,

You take out $270k from LOC at 5.5%.

You buy a 180 day bank bill for $270,000

At the end of 180 days you sell it for the (maturity) face value of $300,00

You pay back the loan of $270k PLUS $7,425 in interest

You pocket $300k - $270k - $7.425k = $22.575k profit.

The Y-man

Ahhhh, so I had it round the wrong way. You use property/equity to help you purchase bank bills (and hopefully profit from them at maturity) just like you could use LOC to buy shares or other investments, not bank bills to help you buy property. I thought it was like a mortgage-alternative and I didn't understand how it worked.
 
Ahhhh, so I had it round the wrong way. You use property/equity to help you purchase bank bills (and hopefully profit from them at maturity) just like you could use LOC to buy shares or other investments, not bank bills to help you buy property. I thought it was like a mortgage-alternative and I didn't understand how it worked.

I have used them to finance property - from Y-man's example but....

You take out $270k from LOC at 5.5%.

You buy a 180 day bank bill for $277,425 - Essentially, you capitalise the interest.

At the end of 180 days you refinance it for the face value of $277,425 + ?? interest for the next period or you can pay the interest amount.
 
A bank bill is just a securitised loan. The bank issues the bill to raise the $$ to lend. The bank owns the bill and sells it to an investor who holds onto it as a negotiable instrucmnet. On maturity they can demand the face value...Usually interbank rate or slightly aboveas its a bank "cash rate" ie 90 days bill rate, 30 days rate etc.... So the bank has to write the loan at the bill rate + margin.

Typical margins on a BB are 2.5-5% and are risk assessed. The bank takes normal loan security etc. Banks also charge a fixed fee for each rollover and all sorts of other fees. can get VERY expensive. Banks like this debt as its easily sold. Same day. Thats the bank bill market. Companies like Myer etc will have $1b facilities...Treasury dealers sell the bill to another bank, several other banks, investors etc. The bank guarantees the security - Thats why they take a margin. Bank guarantees the paper in exchange for a promise to bank by the borrower. Difference is risk. High risk = High margin. Banks love it cause they can sell it for cash and onlend all over again.

Bank Bill interest isnt "prepaid" - Thats the most common mistake people make. The price of a bill is discounted. Its like the mirror opposite of a term deposit. With a TD you invest $1m at 3.5% for 90 days you get $1,008,630.13 aftrr 90 days. With a bank bill you invest $991,443.70 for 90 days at 3.5% and get $1m back after 90 days. By using a discount formula the bank can sell to another bank at day 1. One Day two they buyer could need the cash therselves and onsell to another bank...The discount basis means the owner always buys the face value...So its easy to work a price to buy it. You cant do that with a term depoist.

Formula : http://www.comsec.com.au/LearningCentre/Bankbills.htm

The lending approach is the mirror opposite. The banks lends you $X and you pay back X + 90 days interest after 90 days. Its called a rollover.

If you were borrowing using a bill and need $1m you dont draw a $1m bill. You draw down a $1.1m bill and get the discounted price using the formula in the link above. If you do a 180 day bill the discount might mean a bigger bill value is needed.

I'm an ex-treasury dealer from a major bank lender,.
 
This place never ceases to amaze me :)

<<I'm an ex-treasury dealer from a major bank lender,.>>

I have never found so many clever people in one spot that are willing to help each other with some free advice or shared knowledge :D

So I am in the opposite camp, would there be any benefit to me in purchasing a bank bill rather than taking a term deposit ? I did look at it a few years ago after an article in the paper but was not sure I understood it well enough.

It appeared that the interest rate was less than TDs and there was no government deposit guarantee, is that right or did I screw up ?
 
A term deposit has a fixed term and a fixed earning rate usually around 0.90% above the bank bill rate. If you wish to break a TD the bank will heavily penalise that choice. The earning rate could be as low as 0.01%. Break costs can be ibncurred even where the bank doesnt incur a cost (Dont start me on this rort.)

A bank bill investment is also a fixed term and known (but not fixed) interest rate unless it is held to maturity. The bank bill can be sold to another investor at any tyime. There is a very liquid market for terms of 7-10, 30, 60, 90, 120, 150 and 180 days and even longer.

Lets says its a CBA bill. I buy it for 2.7% for 90 days for a $1m bill. Cost is $993,386.50. After 60 days I need the cash. I call CBA Treasury and their 30 days buy rate is the 30 days rate here. . Say 2.65%. CBA buys my bill for $997,826.65

So what did I earn? Difference between two prices is $4440.15 for 60 days. 2.71% earning rate.

If I used Westpac term deposits they would have paid me 3.15% BUT when it was broken that would have been adjusted to .63% for the 60 day period.

So a bank bill is about converting to liquidity using a broad and well formed market that determines variable rates on a day to day basis. ANY bank etc can buy your bill. However a term dposit is subect to the one relevant banks rules and their rate table.
 
I missed the govt deposit guarantee issue... Yes not covered. Only insured deposits of up to $250k per bank per person is...You know your super fund isnt insured either !! The guarantee is a load of fluff intended to give confidence. The reality is customers are losing the fee APRA charge as a tax. NOBODY has ever claimed. Govt Bonds arent covered either. Or cash.

However if a bank bill guarantee fails (Bill of Exchange Act says its an indebedness at call on the issuer) and the bank fails and the big 4 banks allow it, the financial system would collapse and we would all be fighting zombies in the dark for scraps of food and seagulls by day. Nobody would have a job. We would become Somalia.
 
I missed the govt deposit guarantee issue... Yes not covered. Only insured deposits of up to $250k per bank per person is...You know your super fund isnt insured either !! The guarantee is a load of fluff intended to give confidence. The reality is customers are losing the fee APRA charge as a tax. NOBODY has ever claimed. Govt Bonds arent covered either. Or cash.

However if a bank bill guarantee fails (Bill of Exchange Act says its an indebedness at call on the issuer) and the bank fails and the big 4 banks allow it, the financial system would collapse and we would all be fighting zombies in the dark for scraps of food and seagulls by day. Nobody would have a job. We would become Somalia.

I can see that the $250k guarantee is an image thing but it does work IMO. With Rabobank they give extra interest up to $250k then it starts to reduce. I assumed that their risk factor was less up to $250k so they offered more %.

It surprises me that government bonds aren't covered, I thought that was their main attraction.

If my SMSF has a bank deposit (TD) that is not covered by the govt guarantee up to $250k and the cash in our pocket is only as good as the Reserve Bank is.

All very interesting, I would think that most SMSF owners would believe their bank deposits were guaranteed up to $250k

cheers
 
When you say 'in lieu of a term loan' do you mean you bought a property and you got a bank bill over it instead of a mortgage?

Yes - you 'borrow' a bank bill, this is a short term loan with the interest prepaid.

I think you're essentially misunderstanding what a bank bill is. Think of it as a term deposit of sorts. Instead of receiving your money back plus interest at the end of term you buy it at discount to it's face value (the amount you receive on maturity).

It is the bank using it as a term deposit - (instead of you taking out a term deposit and the bank either prepaying you interest or paying during the term/at the end), the bank is giving you money and expecting its money back in X days.

So how do people use it in property investing? I know it sounds like I'm really obtuse, but do you think you could give me a step by step example?

I need $1m for a new CIP. Interest rate on the standard commercial loan will be 7.5% pa but my commercial manager at the bank says they can do it for the BB swap rate of 3.35% + 2.65% (risk etc) = 6.00% on a floating 180 days with interest paid up front.

I then take out a BB for $1,030,000 which I must pay back to the bank in 6 months. Essentially a form of short term debt (current liability vs non-current liability ie 25 yr mortgage).

In 6 months time, I can either choose to refinance with a standard commercial loan, take out a new BB at the prevailing rate for $1.03m + int or lesser amount if I want to retire some debt.

It doesn't sound like you're being obtuse at all.

I have no idea how people use BBs in property investing. I wasn't aware they did, and I can't imagine how they would. What has made you ask about them?

I've never used BBs but I'd imagine the process is similar to any other investment/deposit in a bank.

Scott's example makes no sense to me, but then I have a cold so my head might be in melt down. BBs are a 'deposit' with the bank not a 'loan' from the bank.

http://www.comsec.com.au/learningcentre/cbb_what_are_bank_bills.htm
http://www.deposits.org/dictionary/term/bank-bill/


Hopefully my comment above clears up your misunderstanding Ed B.

I think Scott might talking about loans that are linked to the BB swap rate

http://www.westpac.com.au/business-...rcial-business-loans/bank-bill-business-loan/

The Y-man

Spot on Y-man :thumbs up:


Luce,

You take out $270k from LOC at 5.5%.

You buy a 180 day bank bill for $270,000

At the end of 180 days you sell it for the (maturity) face value of $300,00

You pay back the loan of $270k PLUS $7,425 in interest

You pocket $300k - $270k - $7.425k = $22.575k profit.

The Y-man

This is the likely scenario if you are buying long term government bonds which have a face value and are traded on the open market. If you buy a Govt Bond (or other bond as opposed to a Bill), you can either redeem it or trade it prior to the redemption date. The bond pays you interest at a predetermined (fixed) rate.
The issue with Y-man's example is finding someone willing to pay 15.5% interest for 6 months.
 
I can see that the $250k guarantee is an image thing but it does work IMO. With Rabobank they give extra interest up to $250k then it starts to reduce. I assumed that their risk factor was less up to $250k so they offered more %.

It surprises me that government bonds aren't covered, I thought that was their main attraction.

If my SMSF has a bank deposit (TD) that is not covered by the govt guarantee up to $250k and the cash in our pocket is only as good as the Reserve Bank is.

All very interesting, I would think that most SMSF owners would believe their bank deposits were guaranteed up to $250k

cheers

Govt bonds ARE covered. They are sovereign debt and already a Govt guaranteed debt on demand on the maturity date. They arent insured as it is like Suncorp insurance taking out a policy with Suncorp. Bonds are insured for their full face value in general terms. No limit. Hundreds of millions or more.... Thats why its such a low rate. Low risk. If the Banks go the govt would be in trouble anyway.

Industry funds, retails funds etc NONE are insured deposits...Not quite true. Each fund would recover $250K per institution...Not a lot.
 
Yes - you 'borrow' a bank bill, this is a short term loan with the interest prepaid.



It is the bank using it as a term deposit - (instead of you taking out a term deposit and the bank either prepaying you interest or paying during the term/at the end), the bank is giving you money and expecting its money back in X days.



I need $1m for a new CIP. Interest rate on the standard commercial loan will be 7.5% pa but my commercial manager at the bank says they can do it for the BB swap rate of 3.35% + 2.65% (risk etc) = 6.00% on a floating 180 days with interest paid up front.

I then take out a BB for $1,030,000 which I must pay back to the bank in 6 months. Essentially a form of short term debt (current liability vs non-current liability ie 25 yr mortgage).

In 6 months time, I can either choose to refinance with a standard commercial loan, take out a new BB at the prevailing rate for $1.03m + int or lesser amount if I want to retire some debt.




Hopefully my comment above clears up your misunderstanding Ed B.



Spot on Y-man :thumbs up:




This is the likely scenario if you are buying long term government bonds which have a face value and are traded on the open market. If you buy a Govt Bond (or other bond as opposed to a Bill), you can either redeem it or trade it prior to the redemption date. The bond pays you interest at a predetermined (fixed) rate.
The issue with Y-man's example is finding someone willing to pay 15.5% interest for 6 months.

All the above is WRONG.


The BANK issues a bank bill when it lends to a customer who borrows. The borrower pays a FIXED RATE incl of margins etc. The bank then sells the bill to an investor. They will sell it as a market based rate....ie They lend at say 8.5% and sell at 4.7%. The investor can also sell it if they need the cash. The final owner surrendurs the bill on the maturity date and receives the face value. It is a bearer instrument and just needs a written endorsement on the back and the bank pays that party a bank chque.

Bonds are a form of LONG TERM bill. The major difference is that the interest arte is a fixed (low) rate. But the price factors in the earning rate until maturity by adjusting the sale price. Its a bearer security (now its electronic) with a know face value PLUS a coupon (the quarterly interest). The danger with a bond is if market rates fall .01% then the investor loses the face value x0.01% for the whole remaining term off the face value but they lose the loss today when they sell to another investor. Thats how market rates are set....So if rates crash the investor may lose a LOAD of MONEY...eg $1,000,000 15 years x .01 % = $1500. If rates fall .25% its a loss of $37,500.

With bank bills interest IS NOT paid in advance. The face value is discounted so the security is exchangeable - It has a fixed face value and the issue price varies with market rates. If a borrower wants to finance $1m they need a $1.03k bill or they need a $1m bill when they want to borrow $993K....This is called the discount. On maturity its the interest cost. Think of a bank bill like a $100 note. You get $100 in 90 days. If I "sell" it to you (the investor) today I may sell it to you for $93. You lend me $93 knowing you earn $7 in 90 days recovering your $100. You cant issue it to me though as 1) You arent a bank 2) I dont trust your name and (3) You cant print money. This issue explains "junk bonds" which blew the US financial markets apart in the 1990's. ...Junk bonds were issued by neville nobody companies who failed and left the debt unpaid. They were worth nothing but idiots bought them for the greedy margins..

Whether you use a loan, a bank bill finance loan etc the rates should be around the same....It also dependent of what the loan ecurity is and who the lender is. Major banks do bills. Non-majors dont since they are perceived as junk debt in the financial markets.
 
I can see that the $250k guarantee is an image thing but it does work IMO. With Rabobank they give extra interest up to $250k then it starts to reduce. I assumed that their risk factor was less up to $250k so they offered more %.

It surprises me that government bonds aren't covered, I thought that was their main attraction.

If my SMSF has a bank deposit (TD) that is not covered by the govt guarantee up to $250k and the cash in our pocket is only as good as the Reserve Bank is.

All very interesting, I would think that most SMSF owners would believe their bank deposits were guaranteed up to $250k

cheers

No the reason they reduce interest after 250K guarantee is they have to pay a fee to have guarantee above 250K.

Any institution can guarantee deposited above 250K but they have to apply for it and pay a fee to the government ...sort of like insurance policy.

Government bonds isn't guarantee ... that just oxymoron if they do because
what the point of you guarantee yourself :)

You only get the situation where your government bonds default is when your government is totally broke, bonds usually rank very high up on the government agenda and they have to make good on bond interest payment before everything else.

Cant see Australian government going broke any time soon unless people stop paying tax or dodging tax becomes our national sport like Greece.

All license banks will guarantee your SMSF 250K deposit, if only when you deal with dodgy deposit institution where they are not licensed then it is not covered and there are plenty around and most people cant tell the differences.

Bank Bills and Bonds aren't risk free, it carries some risk as the face value can decline due to the nature of interest rate movement in the market.

The easiest path for retails investors who has a bit of appetite for risk in return for a few % point above deposit rate is hybrid notes ...warning some are down right risky but with enough knowledge research you can pick up decent notes that relatively safe and pay 7-8%.
I dabble in them when money liquidity is an issues and some institution offered some serious cool rate for their notes and when the days are better I sell them up on the ASX.

more infor here

http://www.asx.com.au/products/hybrid-securities.htm

if you have a share brokering account you can lookup something like
WOWHC

that is woolies debt, most hybrid notes has face value of $100 and trades on ASX like shares,
high quality hybrid usually trades above their face value as the notes perceived to be very safe by the market and you get higher return than TD.

so if you can get them during a float you not only pocket the interest you pocket capital gain.

WOWHC is insecure but unless Woolies goes belly up soon you can enjoy awesome income each year and it keep roll over and over every 5-15 years depending on the life of the notes and if you need the cash you can sell it on market at any time.

this stuff can get complex so you got to read the term of the debt and how they are rank etc..
but knowing this stuff can make your retirement income supercharge better than TD
 
Last edited:
Back
Top