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 te rm 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 liquidity  High volume of l ending and borrowing

 

INSTRUMENTS IN PAKISTAN!  Treasury Bills  Commercial Papers  Repurchase Agreements  Banker·s acceptance  Eurodol lar Deposits  Federal Funds

 

Treasury 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 tha t they do not pay interest in the traditional way. When an investor wishes to pu rchase a treasury bill, he buys it at a discount rate.

 

Features  Issued through bidding process  Zero Coupon bonds sold at a discount to their fac e values  Purchased by individuals, institutions and corporate bodies including b anks irrespective of their residential status  Can be traded freely in the countr y·s secondary market. Physical delivery could be affected if required

 

Types of T-Bills  They are issued with the maturities of 12-months (one-year) 6-months (24Weeks) 3-months (12-Weeks)

 

Investment Characteristics Of Treasury Bills  T-bills are on the guarantee of government, so they have minimum default risk. Default risk Liquidity

 T-bills are highly liquid instrument of financial market. Securities can be liqu idated when ever the holder wants Minimum denomination

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

 

How to calculate return on T-Bills?  T-Bills are sold at a discount from their par value

Yield is based on their appreciation in price b/w time of issue time they mature or are sold by the investor  Bill yield are determined by the discount method; tr eats 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 fac e value of rs.100. Then the discount rate on this bill can be calculated as:

 

How T-Bills are traded in Pakistan? At start Treasury bills were issued on fixed rate. eg; six months at 6 percent p er year In April 1991   Introduce  Introduce the American-style auction-based system.   The  The rol e of primary market restrict to fortnightly auctions.   Primary  Primary dealers were appoi nted.

 

State Bank of Pakistan use following 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 MO F decides the cut off price. After one or two days of finalizing price, securiti es 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 circula tion of money in the market.

 

COMMERCIAL PAPER

 

Commercial Paper Short-term, unsecured promissory notes issued by well-known companies carrying h igh credit rating Used to meet immediate cash needs Funds raised from commercial  paper are commonly used for current transactions SBP and SECP started process o f 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 ratio of 1: 1 and debt/equity ratio of 60: 40. Minimum credit rating of the issuer shall be ANo overdue loan or defaults

 

Size And Denomination Minimum size of the issue of commercial paper shall not be less than Rs.10 milli on In case of private placement, CP would be denominated in Rs. 100,000 or in mu ltiple 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 iss uer keeping in view the prevailing T-bill rates, KIBOR and issuer·s credit rating

 

Calculation Of Rate Of Return DRcp = (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 Institution s 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 se lls securities to the lender with the stipulation that the securities will be re purchased 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 finan cial institutions Government securities are the main collateral for most repos

 

Repo Interest Income The difference between the underlying securities current price and repurchase pr ice is the amount of interest paid by the borrower to the lender RP Interest inc ome = 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 secur ities 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 matu rity 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 acce ptance The maturities of banker s acceptance mostly range from 30 to 180 days Th e promissory uses the bank s credit worthiness instead of his own