Lecture 1

Presented by Amir Khan

 Brief Profile: Amir Khan
 Currently working as Head of Fixed Income Sales, Vice President – Treasury and Capital
Markets, at National Bank of Pakistan

 Also, visiting faculty at Institute of Business Administration. Courses taught: Fixed Income
Investments, International Finance, Financial Management, Financial Modelling, Security
Analysis and Capital Markets

 Previously worked as Debt Capital Market Expert for USAID project of Financial Market
Development in Pakistan and Senior Dealer at HBL Treasury

 Qualification: MBA from College of William & Mary USA and BSc Honors from LUMS,
attended Harvard University HPAIR Program, completed courses of MIT Just Money:
Banking as if Society Mattered, IMF Financial Market Analysis and World Bank Debt
Management
 Monetary Policy Statement Takeaways
 Upside risks to the current growth projection of 2% in FY21

 Inflation expected to fall within the range of 7-9% for FY21 and trend towards 5-
7% in the medium-term

 MPC expects monetary policy settings to remain unchanged in near term

 Current account surplus at $1.1 million in first half of FY21 as compared to deficit
of over $2 billion during same period last year

 SBP’s foreign exchange reserves have risen to $13 billion

COVID-19 Potential Implications for the Financial Markets
 COVID-19 is disrupting the operations of financial markets globally.

 Financial market firms should reexamine their crisis readiness, run tests,
reexamine governance and streamline decision-making

 Actively consider the short and medium term financial, risk and regulatory
compliance implications from the continuing uncertainty around COVID-19

 Design new operating models and accelerate migration to digital channels and
connectivity
 COVID-19 Impact on Liquidity Management
 Central banks have intervened in the money market to ensure adequate
market liquidity

 Some banks have already invoked contingency funding plans. Due to

market volatility, there could be limit/threshold breaches

 Current plans and activation should be in place for a liquidity crunch. Few
banks have already experienced increased liquidity tightening.
COVID-19 Impact on Capital Management
 Risk-weighted assets (RWA) may be impacted by higher charges from
increased volatility levels and higher counterparty risks

 With changes in economic assumptions, provisioning of non-performing

loans will change

 The current economic and market environment warrants additional stress

testing
 Stress Testing Under COVID-19
 Banks should analyze how the COVID-19 stress might evolve for their
institution and estimate overall capacitates for liquidity and capital
 Banks need to build numerous models for analysis of relevant
macroeconomic and microeconomic risks and correlating major factors
that affect a bank’s financial statement with external drivers
 Reverse Stress Test: Scenarios that will make a bank to be bankrupt or
insolvent – i.e. break the bank and bank business unviable
Unprecedented Portfolio Outflows
• At times of financial distress, emerging markets risk bearing
the heaviest burden. In fact, emerging markets have
experienced the sharpest portfolio flow reversal on
record—about $100 billion or 0.4 percent of their GDP—
posing stark challenges to more vulnerable countries.
• The global spread of COVID-19 may require the imposition of
tougher and longer-lasting containment measures — actions
that may lead to a further tightening of global financial
conditions should they result in a more severe and prolonged
downturn.
• Such a tightening may, in turn, expose financial vulnerabilities
that have built in recent years in the environment of extremely
low interest rates. This would further exacerbate the COVID-19
shock.
• For example, asset managers facing large outflows may be
forced to sell into falling markets—thus intensifying
downward price moves. In addition, levered investors may face
further margin calls and may be forced to unwind their
portfolios; such financial deleveraging may aggravate selling
pressures.
 Hot Money Outflow from Emerging Markets
Foreign investors pulled $83 billion
out of emerging market debt and
equities between January and March
2020 as shown in the diagram. This is
more than three times the equivalent
cross-border outflows in the three
months following September 2008.
 Fixed Income Background
 Fixed income is another word for the bond market

 Fixed Income is the biggest market with over $100T worth of traded bonds
(world GDP is $72T and world stock markets are worth $65T)

 Fixed income does not mean fixed APR or fixed price. It only means fixed
amount of money returned.
 Fixed Income Fundamentals
 Fixed Income Security – Issuer (borrower) agrees to make income payments fixed
by contract
 Bonds (debt obligations) – Borrower makes interest payments
 Preferred Stock – An equity issue with fixed income payments of dividends

 Term to Maturity – Date when debt ceases, with maturity being that exact date and
term denoting the number of years till that date

 Par Value (Maturity value, Face value) – Amount issuer agrees to pay at maturity
 Fixed Income Fundamentals
 Coupon – Periodic interest payment made to bondholders

 Coupon Rate – Rate of interest usually paid semiannually for U.S. issues;
multiplied by par value yields dollar value of coupon

 Zero-Coupon Bonds – No periodic interest payments; principal and

interest paid at term

 Floating Rate Security – Coupon rate is reset periodically

 U.S. Treasury Securities
 Bills – Matures in one year or less, issued at a discount

 Notes – Matures between 2-10 years, issued as a coupon security

 Bonds – Maturities longer than 10 years

 Treasury Inflation Protection Securities (TIPS) – Principal is indexed

to CPI
Cash Flows for a Plain Vanilla Bond
 Bond Indenture
 Written in the name of the issuer

 Contains features of the bond issue, such as the principal value, the
interest rate or coupon rate, maturity date and contingency provisions

 Specifies any collaterals, credit enhancements or covenants