FIXED INCOME

INSTRUMENTS IN
PAKISTAN
INTRUCTOR: YASMEEN AMBER KHUHRO
 FIXED INCOME
INSTRUMENTS
▰ T-Bills
▰ PIBs
▰ Sukuks
▰ International Bonds

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 TBILLS
▰ Issued by SBP
▰ Currency: PKR
▰ Short term security
▰ Tenors Available: 3 Months, 6 Months, & 1 Year
▰ Mark to Market: Through Pakistan Revaluation Rates issued by MUFAP
(PKRV)

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 PIBs
▰ Issued by SBP
▰ Currency: PKR
▰ Long-term security
▰ It can be fixed or floating
▰ Tenors Available: 3 Years, 5 Years, 10 Years, 15 Years & 30 Years
▰ Mark to Market: Through PKRV by discounting coupon and principal
payment.
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 Sukuks

▰ Issued by SBP or other FIs

▰ Currency: PKR
▰ Short & Long-term security
▰ It can be fixed or floating
▰ Tenors Available: Varies
▰ Mark to Market: Through prices issued by MUFAP.

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 International Bonds
▰ Issued by governments & multilateral agencies
▰ Issued in Various Currencies generally USD
▰ Usually Long-term
▰ Mark to Market: Through prices of actual trades occurred on last day.

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Risks Associated with
FIS
 RISKS

▰ Government Securities: Risk of change in Interest Rate

▻ Inflation Rate
▻ Economic Factors
▻ Foreign Direct Investment
▰ International Bonds: Risk of change in interest & Credit Spread
▻ Future outlook of the country
▻ Risks associated with the country
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Auction Process - TBills
 Auction Process

▰ SBP announces the auction target, highlighting

▻ Auction Date
▻ Settlement Date
▻ Maturing Amount
▻ Target

▰ TBILL Auction occurs two times in a month, so total 24 auctions in a year.

Auction calendar: https://www.sbp.org.pk/ecodata/Auction-TreasuryBills.pdf

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 Auction Process
▰ Primary dealers can only participate in the auction through Bloomberg Online
Auction Module
▰ Two types of Bids
▻ Competitive
▻ Non Competitive
▰ Competitive bids: Investor quote their expected rates
▰ Non Competitive bids: Investor gets weighted average yield of the auction.

▰ Face Value is quoted

Primary Dealers List: https://www.sbp.org.pk/dmmd/2021/C11.htm

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 Auction Process

1. SBP Announces Auction

2. Primary Dealers participate it in Auction
1. Individuals and non-primary dealers have to participate through Primary
dealers by opening an IPS (Investor Portfolio of Securities) account with
primary dealers.
3. SBP decides the cut-off yield for the auction to shortlist the best deals.
4. Competitive bid holders below the cut-off yield are awarded with their requested
amount.
5. Non-competitive bid holders get it on weighted average yield of all accepted deals
Latest Auction Report: https://www.sbp.org.pk/ecodata/auction-tbills.pdf
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 Issuance

▰ Investors are informed by the primary dealers regarding the deals accepted by
SBP.
▰ Primary dealers request bidders to deposit the funds on the settlement date
(First Half Usually).
▰ Bank transfers the securities from their IPS account with SBP to individual or
other FI’s IPS account with bank.
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 Issuance - Example
▰ ABC applied for 3 Months Tbills in non-competitive bids, amounting to PKR
500,000 (Face Value). How much settlement amount would bank request from
bidder assuming the weighted average yield was 7.2103%? Actual DTM: 90
Days.

Settlement Amount (PV) = 500,000 / (1+(7.2103%/365)^90

Settlement Amount (PV) = 491,190

Profit Amount at maturity Before Tax= (500,000 – 491,190) = PKR 8,809

Daily Profit Amortization = 8,809 / 90 Days = PKR 97.87
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 Selling Before Maturity
▰ Remaining DTM = 50 Days
▰ Market Yield = 7.4000%

Revised Book Value = 500,000 / (1+(7.2103%/365)^50

Revised Book Value = 495,086

Market Value = 500,000 / (1+7.4000%/365)^50

Market Value = 494,957

Unrealized Gain/(Loss) = Market Value – Book Value

Unrealized Gain/ (Loss) = 494,957 – 495,086 = -128
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 Maturity
▰ At Maturity, Face Value would be 100 and the profit amount would be subjected to tax, depending
on filer and non-filer status.

▰ Primary dealers submit the holders report to SBP one day before maturity.

▰ SBP withholds the tax and transfer the initially invested amount along with profit after tax to bank.

▰ Bank credits it to customer without any commission.

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Auction Process - PIBs
 Auction Process (Fixed)
▰ SBP announces the auction target each year, highlighting
▻ When Issue Period
▻ Auction Date
▻ Settlement Date
▻ Maturing Amount
▻ Target

▰ PIB Fixed Auction occurs once a month, so total 12 auctions in a year.

Auction calendar: https://www.sbp.org.pk/ecodata/Auction-Bond.pdf

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 Auction Process (Floater)

▰ SBP announces the auction target each year, highlighting

▻ When Issue Period
▻ Auction Date
▻ Settlement Date
▻ Maturing Amount
▻ Target

▰ PIB (Floater) Auction occurs twice a month, so total 24 auctions in a year.

▰ Total PIB Auctions = 36 in a year
Auction calendar (Fixed & Floater): https://www.sbp.org.pk/ecodata/Auction-Bond.pdf
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 Auction Process (Fixed &
Floater)
▰ Primary dealers can only participate in the auction through Bloomberg Online
Auction Module
▰ Two types of Bids
▻ Competitive
▻ Non Competitive
▰ Competitive bids: Investor quote their expected rates
▰ Non Competitive bids: Investor gets weighted average yield of the auction.

▰ Face Value is quoted

Primary Dealers List: https://www.sbp.org.pk/dmmd/2021/C11.htm

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 Auction Process (Fixed &
Floater)
1. SBP Announces Auction
2. Primary Dealers participate it in Auction
1. Individuals and non-primary dealers have to participate through Primary
dealers by opening an IPS (Investor Portfolio of Securities) account with
primary dealers.
3. SBP decides the cut-off yield for the auction to shortlist the best deals.
4. Competitive bid holders below the cut-off yield are awarded with their requested
amount.
5. Non-competitive bid holders get it on weighted average yield of all accepted deals
Latest Auction Report (Fixed): https://www.sbp.org.pk/ecodata/Auction-Investment.pdf
Latest Auction Report (Floater): https://www.sbp.org.pk/ecodata/PIB-FRB--.pdf

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 Issuance

▰ Investors are informed by the primary dealers regarding the deals accepted by
SBP.
▰ Primary dealers request bidders to deposit the funds on the settlement date
(First Half Usually).
▰ Bank transfers the securities from their IPS account with SBP to individual or
other FI’s IPS account with bank.
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 PIB Fixed Issuance - Example
▰ ABC applied for 3 Year PIB in non-competitive bids, amounting to PKR 100,000 (Face
Value) with the coupon rate of 7% paid semiannually. How much settlement amount
would bank request from bidder assuming the weighted average yield was 9.000%?
Actual DTM: 1,095 Days.

Coupon Payment Discounting Discounted Cash Flow

 Period (A) (B) (C = A*B) Dirty Price 94.84
Interest Accrued 0
1.00 3.5 3.5 / (1+0.045)^1 3.35 Clean Price 94.84
2.00 3.5 3.5 / (1+0.045)^2 3.21
3.00 3.5 3.5 / (1+0.045)^3 3.07
4.00 3.5 3.5 / (1+0.045)^4 2.93
5.00 3.5 3.5 / (1+0.045)^5 2.81
6.00 103.5 103.5 / (1+0.045)^6 79.48
Total 94.84

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 Selling Before Maturity
▰ Remaining DTM = 2 Years & 9 Months
▰ Market Yield = 10.000%

Revised Book Value

Coupon Payment Discounting Discounted Cash Flow Dirty Price 96.95
(A) (B) (C = A*B) Interest Accrued 1.75
 
0.50 3.50 3.5/(1+0.045)^0.5 3.42 Clean Price 95.20
1.50 3.50 3.5/(1+0.045)^1.5 3.28
2.50 3.50 3.5/(1+0.045)^2.5 3.14
3.50 3.50 3.5/(1+0.045)^3.5 3.00
4.50 3.50 3.5/(1+0.045)^4.5 2.87
5.50 103.50 103.5/(1+0.045)^5.5 81.25
Total 96.95

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 Selling Before Maturity
▰ Remaining DTM = 2 Years & 9 Months
▰ Market Yield = 10.000%

Market Value

Coupon Payment Discounting Discounted Cash Flow Dirty Price 94.67

(A) (B) (C = A*B) Interest Accrued 1.75
  Clean Price 92.92
0.50 3.50 3.5/(1+0.05)^0.5 3.42
1.50 3.50 3.5/(1+0.05)^1.5 3.25
2.50 3.50 3.5/(1+0.05)^2.5 3.10
3.50 3.50 3.5/(1+0.05)^3.5 2.95
4.50 3.50 3.5/(1+0.05)^4.5 2.81
5.50 103.50 103.5/(1+0.05)^5.5 79.14
Total

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 Selling Before Maturity
▰ Book Value = 100,000 / 100 * 95.20 = 95,202.00
▰ Market Value = 100,000 / 100 * 92.92 = 92,920.00

▰ Unrealized Gain / (Loss) = 92,920.00 – 95,202.00 = -2,282.00

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 PIB Floater Issuance -
Example
▰ ABC applied for 3 Year PIB in non-competitive bids, amounting to PKR 100,000 (Face
Value) with the price of 98.2660. How much settlement amount would bank request
from bidder? Actual DTM = 1,095 Days

▰ Book Value = 100,000 / 100 * 98.2660 = 98,266.00

▰ Amortization = Par Value – Book Value

▰ Amortization = 100,000 – 98,266.00 = 1,734

▰ Per Day Amortization = 1,734 / 1,095 = 1.59 Per Day

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 Selling Before Maturity
▰ Remaining DTM = 800 Days (1,095 – 800 = 295 Days)
▰ Market Rate = PKR 99.00

Revised Book Value = 98,266.00 + (1.59 * 295) = 98,733.15

Market Value = 100,000 / 100 * 99 = 99,000.00

Unrealized Gain/(Loss) = 99,000.00 – 98,733.15 = 266.85 Profit

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 Maturity
▰ At Maturity, Face Value would be 100 and the profit amount would be subjected to tax, depending
on filer and non-filer status.

▰ Primary dealers submit the holders report to SBP one day before maturity.

▰ SBP withholds the tax and transfer the initially invested amount along with profit after tax to bank.

▰ Bank credits it to customer without any commission.

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