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money market instruments in Pakistan term paper

money market instruments in Pakistan term paper

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Published by aamna123456
instruments,borrowers & lenders,their tradings,calculation of interest rates,advantages
instruments,borrowers & lenders,their tradings,calculation of interest rates,advantages

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Published by: aamna123456 on Nov 04, 2009
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11/15/2013

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MONEY MARKET INSTRUMENTS
TREASURY BILLSn 
“T-bills are the Government debt securities that matures in one year or less from their issue date.
A treasury bill differs from other types of investments in that they do not pay interest in the traditional way. Whenan investor wishes to purchase a treasury bill, they buy it at a discountrate.”
Concept taken from What is a Treasury Bill.http://www.wisegeek.com/what-is-a-treasury-bill.htm
 The Government of Pakistan raise large portion of floating and permanentdebt through the auctions of short term Government of Pakistan Market Treasury Bills (MTBs) T-bills are issued through a competitive bidding process rather thanpaying fixed interest payments for a price that is less than their face (par)value and when they mature; the government pays the holder the full parvalue.Finally, the interest is the difference between the purchase price of thesecurity and what you get at maturity. T-bills are considered to be thesafest investments, because in these Government confirms the holder of security to pay back face value. Returns are less because Treasuries areusually safe.
TYPES OF T-BILLS
 They are issued with the maturities of 
 Three-months (12-Weeks / 90-days)
Six-months (24-Weeks)
 Twelve-months (one-year)
INVESTMENT CHARACTERISTICS OF TREASURY BILLS
Default Risk 
-T-bills are on the guarantee of government, so theyhave minimum default risk.
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MONEY MARKET INSTRUMENTS
Liquidity-
 T-bills are highly liquid instrument of financial market.Securities can be liquidated when ever the holder wants.
Minimum Denomination
-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?
“As we have studied earlier that T-Bills do not carry any interest rate butinstead are sold at a discount from their par value or face value. Thustheir yield is based on their appreciation in price between time of issueand the time they mature or are sold by the investor.Bill yields are determined by the discount method; which ignores thecompounding of interest rates, treats the par value as the investmentbase, and uses a 360-day year for simplicity.”
Concept taken from (Rose & Marquis 2005) .
 The Discount Rate for T-Bills can be calculated by the following formula:
Discount Rate =
 
x
 
Explained With Example:
Suppose you buy a 12 Weeks T-bill at Rs.98 and keep it until maturityhaving face value of rs.100. Then the discount rate on this bill can becalculated as:Dr = x 
= 0.06
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360
Par Value-PurchasePrice
 
Par Value
 
Number of Days toMaturity360
(100 - 98)
 
100
 
90
 
MONEY MARKET INSTRUMENTS
 This shows that for this T-bill the discount rate will be 6% .
HOW T-BILLS ARE TRADED IN PAKISTAN?
“At start, Treasury bills were issued on ‘tap basis’ for six months at 6percent per year. Afterwards when the government moved to a market-based system as part of the process of economic deregulation,disinvestment, and decentralization in April 1991 then the followingchanges were made:
Introduce the American-style auction-based system.
 The role of primary market restrict to fortnightly auctions, instead of “on tap,” allowing for the development of a secondary market.
Primary dealers were appointed.”Information taken from (Naz Chohan 1991)State Bank of Pakistan use following two methods to trade T-bills.
Auction System
Open Market Operations(OMO)
PRIMARY DEALERS
Only primary dealers can participate in the auctions and OMOs.All the commercial banks (having account with SBP)NBFIs (Non Banking Financial Institutions)If the primary dealer wants to buy a T-bill, must submit a bid that isprepared either;
Non-Competitively
Competitively The Non-competitive bids are normally submitted by the small investorswho agree to accept the price determined by the auction.
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