What is a BOT?

Treasury Bills

BOTs (Buoni Ordinari del Tesoro), Treasury Bills, are credit instruments issued by the Treasury in order to finance the public debt in the short term.  These instruments there have a duration of 3, 6 or 12 months. At maturity the investor receives a some of money equal to the overall nominal value of the securities held.  In other words, the amount to be received at maturity is known at the time of buying the securities.

The remuneration of the investment is based on the difference between the security’s nominal value (which as said is the redemption amount) and the purchase price; in other words the investor, when subscribing, will pay a smaller amount than will be received on maturity.  Technically speaking the interest, which therefore does not entail an actual payment of sums of money in favour of the investor, is considered paid in advance: this is confirmed by the fact that the withholding tax on the interest is already applied at the time of subscription.

BOTs come under the “zero coupon” category of securities.

Issuance is the phase during which the security starts its life, when it transfers from the hands of the Government (issuer) to the investor (subscriber) via its intermediary (purchase on the primary market).  Issuance takes place by auction with the participation of authorised intermediaries, and the price determined during such auction is referred to as the issue price.
Issuance generally takes place half-way through and at the end of every month.  In our next article we shall be looking in detail at the auction mechanism.

On the other hand, buying and selling of a BOT at any intermediate moment during its life normally takes place on the MOT, the electronic bonds and Government securities market.  On such market it is therefore possible to find securities with a certain residual life, at a current market price (quote) which almost certainly will be different to the issue price.
Owing to the large-scale circulation of BOTs and their presence on the MOT regulated market, this category of financial instruments is extremely liquid: it is generally always possible to find numerous buyers and sellers.

The security’s yield to maturity, as mentioned, derives from the difference between the purchase or issue price and the redemption price.  For example, in the case of a twelve-month BOT with issue price equal to 97, the yield to maturity on each security will be 100 – 97 = 3 euro, i.e. equal to 3.09% per annum.  In the event that the BOT has a duration of less than 12 months, the formula for calculating the effective yield to maturity on an annual basis is a little more complex:

Multiplication of the result by 100 gives the percentage for the corresponding annual yield, namely the yield that would be achieved in a year by reinvesting the proceeds obtained at the same initial terms and conditions.

It should be noted that in this case the yield to maturity is known beforehand.  The same mathematical operation is carried out in cases where the security is purchased on the secondary market: the only difference is that clearly the denominator is represented by the purchase price as opposed to the issue price.

The annual yield to maturity is a guaranteed yield and is incorporated in the security in question.  On the other hand, a decision to sell prior to the end of the security’s life entails a potential risk: in fact, at the time of buying the investor does not know how much profit can be made, since this will depend on the price established by the market at the time of liquidating the position.