22097609 Money Market Instruments in Pakistan

Money Market Instruments In Pakistan

Group Number : Tayyaba Karim Aamna Mukhtar Rabia Nawaz 2

F06B004 F06B020 F06B025

Money Market
 

The money market exists for the purpose  of       “  issuing  and  trading  of  short­term  instruments,  that  is,  instruments  where  the  term  remaining  from  the  date  when  trading  takes  place  to  the  date  of  maturity,  is  of  a  short­term  nature.” 

Characteristics Of Money Market Instruments

• Short­term borrowing and lending • Low  credit risk • High liquidity • High volume of lending and borrowing

• Treasury Bills • Commercial Papers • Repurchase Agreements • Banker’s acceptance • Eurodollar Deposits • Federal Funds 

Treasury Bills
• T­bills 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. When an investor  wishes to purchase a treasury bill,  he buys it at a discount rate.


• Issued through bidding 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 issued with the maturities of  •

Investment Characteristics Of Treasury Bills

How to calculate return on T-Bills?
T­Bills 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;  treats the par value as the investment base uses a 360­day year for simplicity

• Suppose  you  buy  a  12  Weeks  T­bill  at  Rs.98  and  keep  it  until  maturity  having  face  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 per year In April 1991 § Introduce the American­style  auction­based system. § The role of primary market  restrict to fortnightly auctions. § Primary dealers were appointed.

 

State Bank of Pakistan use following two  methods to trade T­bills.

Auction System

• 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 T­Bills in OMO is mainly to  control the circulation of money in  the market. 


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 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  T­bill 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 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 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, nonfinancial 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
 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

Mechanism of Banker’s Acceptance

Mechanism of Banker’s Acceptance

Secondary Market for the Banker’s Acceptance
 The issuing bank can either keep it in his portfolio or sell the bankers acceptance in the money market. •  It is sold at a discount from the value which will be payable on maturity. •

Secondary Market for the Banker’s Acceptance

The net proceeds after the sale =

The face amount of the acceptance –  the discount rate (interest rate*days into maturity*face amount)  - the bank’s acceptance commission
  

The combination of these is called the “all in” rate.


Eurodollar Deposits
 Eurodollars are the deposits of US dollars in banks which are located outside United States.

 Generally, the "euro" prefix can be used to indicate any currency held in a country where it is not the official currency.

 The Eurodollar deposits are always moving in the form of loans. •

Mechanism of Eurodollar Deposits

Eurodollar Deposits
 The chain of Eurocurrency and Eurodollars will remain functioning until they are in demand. •  Many are held for one month that is the usual time period for the shipment of goods. •  There is no central location for the trading of the Eurocurrency deposits.

Eurodollar Deposits
 They are volatile and sensitive to fluctuations in interest rates and currency values. •  Difference of Interest rate •  Changes in Currency Value •  Political Risk •

Eurodollar Deposits
  

Daily Cost of Funds derived from Eurodollars:
 

Amount to be loaned * interest rate * 1/360


Federal Funds
 Federal funds refer to the overnight borrowings which are undertaken in order to meet the state bank’s reserve requirements. •  The funds are not physically transferred. •  Commercial banks are the principle borrowers

Federal Funds
 Meet the Legal Reserve Ratio requirement. •  Interest rates highly fluctuate daily depending on the volume of funds which are surplus in the market and the volume of fund needed by the market. •  Borrower’s need of funds is fulfilled while the lender earns interest income on his funds. •


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