Money Market Instruments in pakistan

Money Market Instruments In Pakistan Group Number : 2 Tayyaba Karim F06B004 Aamna Mukhtar F06B020 Rabia Nawaz F06B025

Money Market The money market exists for the purpose of 

´

issuing and trading of short-term instruments, that is, instruments where the term remaining from the date when trading takes place to the date of maturity, is of a short-term nature.µ

Characteristics

Of Money Market Instruments

 Short-term

borrowing and lending

 Low

credit risk

 High  High

liquidity

volume of lending and borrowing

INSTRUMENTS IN PAKISTAN! 

Treasury Bills

 Commercial  Repurchase 

Papers

Agreements

Banker·s acceptance

 Eurodollar

Deposits

 Federal Funds

Treasury Bills -bills  T -bills

are the Government debt

securities that matures in one year or less from their issue date.µ 

 A treasury bill differs from other

types of investments in that they do not pay interest in the traditional way. When an investor wishes to purchase a treasury bill, he buys it at a discount rate.

Features

 Issued

through bidding bi dding process  Zero Coupon bonds sold at a discount to their face values  Purchased by individuals, institutions and corporate bodies including banks irrespective of their residential status  Can be traded freely in the country·s secondary market. Physical delivery could be affected if required

Types of T-Bills 

They are are issue issued d with the matur maturitie itiess of  12-months (one-year) 6-months (24Weeks)

3-months (12-Weeks)

Investment Characteristics Of Treasury Bills

Default risk

 T-bills

are on the guarantee of  government, so they have minimum default risk.

 T-bills

Liquidity

Minimum denomination

are highly liquid instrument of financial market. Securities can be liquidated when ever the holder wants

 T-bills are trade on the face value of Rs.100 in Pakistan and in

denominations of multiples of 100

How 

to calculate return on T-Bills?

T-Bills are sold at a discount dis count from their par value

 Yield  Y ield is based on their appreciation appreci ation in price p rice b/w



time of issue time they mature or are sold by the investor i nvestor 

Bill yield are determined by the discount method; treats the par value as the investment base uses a 360-day year for simplicity

 Suppose

you buy a 12 Weeks T-bill at Rs.98 and keep it until maturity having face value of rs.100. Then the discount rate on this bill can be calc ca lcul ulat ated ed as as::

How

T-Bills are traded in Pakistan?

 At start Treasury bills were issued on fixed rate. eg; six months at 6 percent per year In April 1991 

Introduce

the American-style

auction-based system. 

The role of primary market restrict to fortnightly auctions.



Primary dealers were appointed.

State

Bank of Pakistan use following fol lowing two methods to trade T-bills.

Auction System Open Market Operations(OMO)

Auction System SBP

announces the T-Bill auction

Primary dealers submit the bids  After the submission deadline, bids will open MOF decides the cut off price.  After one or two days of finalizing price, securities are issued.

OPEN MARKET OPERATION  In

OMO Government fix the discount

rate before the announcing the new securities and can be issued when they need funds. 

Through OMO Government can sell as well as buy back securities.



Trading T-Bills in OMO is mainly to control the circulation of money in the market.

COMMERCIAL

PAPER

Commercial

Paper

 Short-term,

unsecured promissory notes issued by well-known companies carrying high credit rating

 Used



to meet immediate cash needs

Funds raised from commercial paper are commonly used for current transactions

 SBP

and SECP started process of creating commercial paper market in Pakistan in 2003

Maturity Period 

Between 30 days and one year from the date of subscription

Issuer Of Commercial Paper  Highly

rated companies and financial institutions with minimum equity of Rs. 100 million 



Minimum current current ratio of 1: 1 and debt/equity ratio of 60: 40.

Minimum credit rating of the issuer shall be A- 

No overdue loan or defaults

Size And Denomination 

Minimum size of the issue of commercial paper shall not be less than Rs.10 million

 In

case of private placement, CP would be denominated in Rs. 100,000 or in multiple thereof

 In

case of offer to general public, CP may be denominated in Rs. 5,000 or in multiples thereof

Mode Of Issue And Discount Rate  In



the form of a promissory note

Discount to face value is determined by the issuer keeping in view the prevailing T-bill rates, K IBOR and issuer·s credit rating

Calculation

DRcp

Of Rate Of Return

= (Par Value  Purchase Price) / Par Value x 360 / Days to Maturity

Investor of Commercial Paper  Can

be issued by way of Public offer  and/or to Scheduled Banks

 Large Institutions

as the issue size is often too high for individual investors

Advantages For Investor 

Higher

yields than time deposits

 Safe investment

REPURCHASE AGREEMENT

Repurchase Agreement 

Repurchase agreements are agreements between a borrower and a lender 



Borrower sells securities to the lender  with the stipulation that the securities will be repurchased on a specified date and at a fixed price and interest

 Securities

serve as collateral for loan

Types Of Repo (In Term of Maturity) 1.

Overnight

repos 2. Term repos 3. Open repo

Major Borrowers And Lenders 

Major borrowers include government bond dealers of Treasuries and federal agency securities, and large banks

Active lenders include state and local governments, insurance companies, Large banks, non-financial corporations, and foreign financial institutions



 Government

securities are the main collateral for most repos

Repo Interest Income The difference between the underlying securities current price and repurchase price is the amount of interest paid by the borrower to the lender 



RP

Interest income = Amount of loan x Current Repo Rate x (Repo Term in days/360 days)

Purpose of Repo 

To meet deposit reserve requirements

 In

order to purchase interest bearing securities

 Companies

lend to avoid losing even a single days interest.

Advantages Of Repo 

Repo rate is less than borrowing from a bank



Benefit to lenders is that the maturity of the Repo can be precisely tailored to the lender's needs

BANKER·S ACCEPTANCE

Banker·s Acceptance 



Acceptance means a vow to pay a definite amount of money

The person who will pay is called as the promissory while the one who will receive is the beneficiary

Requirements of the Time Draft 





Promissory Signature

The word accepted on top of his signatures and

The date on which the amount will be paid.

Banker·s Acceptance  If

the time draft is formally accepted by a bank then it becomes a bankers acceptance



The maturities of bankers acceptance mostly range from 30 to 180 days



The promissory uses the banks credit worthiness instead of his own