Cashflows and Liquidity Management

Cash flows and Liquidity management – Securities Products

Each security has by its structure a set of associated cashflows. Most common products are cash securities.

Cash Securities

These typically have a set of cashflows that are created during the product life cycle. Some examples are:

  • Foreign Exchange (FX) – where there is a promise to exchange foreign currency cashflows
  • Fixed Income / Bonds  – the issuance of a bond and receiving cash, payment of periodical cashflows (coupon interest) and the repayment of the bond at maturity (just like a loan)
  • Equities – Issuance of equities by subscription and payment of cash and then the optional distribution of dividends. In case of buyback, payment of cash. Buy/Sale of equities result in cashflows (net of commissions, fees, exchange taxes, brokerage, etc.)
  • Loans – Lending / borrowing of a principal amount and payment of periodical interest and finally the repayment of the loan amount


Cashflows in derivative contracts are determined by the specific type and the underlying assets and are linked to events. There is a difference in the nature of  Exchange Traded and OTC derivatives.

  • Forward Rate Agreemnet (FRA) –  usually the cashflow will be settled based on the difference between the fixed rate and the floating rate that is determined on the specified date.
  • Futures – cashflows in exchange traded futures are typically the posting of initial margin and then the daily variation margin (based on mark-to-market MTM). Closing of the contract will also result in the cashflow in or out.
  • Options – The main cashflows are the premium cashflows at the start of the contract. On exercise there can be a cashflow, if cash settled, for the difference between strike price and market price
  • Swaps – fixed cashflows and floating cashflows (which are determined when the rates are fixed for each period). Swaps are derivatives and hence the notional face values do not result in cashflows. However, there could be collateral cashflows

What this means is that for every trade or contract the bank enters into, it can generate the future projected cashflows for the securitiy or contract – hence projected cashflows.

Let take a look at a few examples related to Cash Securities


  1. Bonds

A bond is a borrowing and is a promise to repay it at maturity. In a simple bond, the interest payments are paid regularly (e.g. Six montly payments).

So once there is a bond contract, the projected cashflows are the remaining coupon interest cashflows (interest rate X principal amount) and the maturity amount cashflows (principal amount).

So at given time, all the open bond contract have associated future cashflows and all these can be stored and can be aggregated. The dates of these cashflows are know and hence can be aggregated by dates and currency.

  1. Fx Spot

An FX spot contract is a contract for the exchange of two foreign currency cashflows at settlement date. A spot contract settles in T+2 days (trade date + 2 business days)

Lets have the bank enter into a spot contract to buy USD vs GBP.  Let say the spot rate is 1.41. The bank will receive 1.41 USD and deliver 1 GBP. If the total contract is for 1 million GBP, then on T+2 the bank will receive  $1.41 million and delivery GBP 1 million

The projected cashflows will then be


+1,410,000 USD

– 1,000,000 GBP

These entries are the actual  cashflows that will happen in the future. In this case in T+2 days

These cashflows are usually stored in a cashflow database.

All Fx spot contracts done on T will all be generating projected cashflows and the cashflow database can provide a collective view of all the cashflows that are to be paid / received on T+2 after netting.



India 10 year Govt bond yields

Bond yields in India

What this graph shows the interest yield on the 10 year Indian Government bond over the past 5 years. We can clear see that yields, after a bottom near 2013 of about 7.3%, have now (~2017) come to a value of 6.5% after hitting highs of 9%. This means that overall interest rates are down and is because of significant lower rate of inflation

india govt bond 10 y

Bond Basics #2

A basic coupon bond has the following features

  • On issue date, initial bond face value is paid to issuer (investor buys a bond)
  • Regular coupon payments received by investor (represents the interest)
  • At maturity, bond face value is redeemed (returns the loan)


An illustration

  • Consider a coupon bond with a face value of $100,000;
  • Bond maturity: 5 years
  • Coupon Rate: 4%;
  • Coupon Payment: Semi-annual
  • image.png

Why is it called a bond coupon? Read more at Coupon

Most governments raise a lot of debt (short, medium and long term) to finance investment and expenditure.

Some basic government bonds

Gilts (UK)

  • A gilt is a UK Government liability in sterling, issued by HM Treasury and listed on the London Stock Exchange
  • The term “gilt” or “gilt-edged security” is a reference to the primary characteristic of gilts as an investment: their security
  • This is a reflection of the fact that the British Government has never failed to make interest or principal payments on gilts as they fall due
  • These have a maturity of 5, 10, 30 and 50 years

US Treasury – Bills, Notes and Bonds

The US treasury issues a number of securities to raise money required for various government program

These are three key types of securities

  • Treasury Bills (T-Bills) have a maturity of < 1 year
  • Treasury Notes (T-Notes) have a maturity of 2, 3, 5, 7 and 10 years
  • Treasury Bonds (T-Bond) have a maturity of 30 years

Japanese Government Bonds (JGB)

JGB’s are issued by the Japanese government, which is responsible for interest and principal payments

Payment is guaranteed by the Government

  • JGB’s are a financial product traded in the market. So, you don’t need to wait for maturity.
  • The principal amount will be paid at maturity
  • Maturities can vary from 2 to 40 years

Government Securities and Types

Selected Countries

FI Country Bonds


The next topic will be on Fixed Income Security types and features.

Bonds Basics

A bond is a borrowing (or lending) and is a loan in structure.

Let us look at a loan transaction.
Lender: Gives Money. For a period of time. At a rate of interest.

Borrower: Borrows for this period of time. Has to pay regular interest and finally the principal amount at maturity.

fincome 1

What are the challenges?

Lender does not get his money till maturity – Liquidity Risk
This is the chief problem in a loan transaction which is one to one (OTC).
Borrower may default – Credit Risk. We will look at this later.

What is a Bond?

A bond also called a Fixed Income Security .

  • A bond is a financial security that promises to pay a fixed income stream at fixed dates in the future
  • Issued by governments, state agencies municipalities and corporations
  • When a corporation or government wants to borrow money, it often sells a bond


So we have the issuer of a bond (borrower) and the investor of the bond (lender)

Key Features

The borrower promises to give the investor:

  • Regular interest or coupon payments every period until the bond matures.
  • The face value of the bond when it matures

Bonds are characterized by

  • Maturity date
  • Face, par or principal value
  • Interest Rate (or Coupon Rate)
  • Number of interest payments per year (typically 2; also called coupon payments)

Loans are classified by the initial maturity or tenor of the borrowing

Fincome Loan types

Loans are also classified by the Issuer of the loan

Fincome Issuer

Combining the two we see a loan has two key principal characteristics – issuer and duration of borrowing

Fincome IssuerMaturity

What are the benefits of bonds to investors?

  • Investors receive ‘coupon’ also known as the interest payment.
  • On maturity, investors receive back the principal which they had originally invested
  • Depending on the quality of the borrower, the investor derives a measure of comfort regarding the safety of his investment.