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
term remaining from the date when trading
takes place to the date of maturity, is of a
short-term nature.” 
Characteristics Of Money Market
Instruments

• Short-term borrowing and lending

• Low credit risk

• High liquidity
• High volume of lending and borrowing
INSTRUMENTS IN PAKISTAN!

• Treasury Bills
• Commercial Papers

• Repurchase Agreements
• Banker’s acceptance
• Eurodollar Deposits

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

• 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

3-months
(12-Weeks)
6-months (24-
Weeks)

12-months
(one-year)
 Investment Characteristics Of
Treasury Bills

Default T-bills are on the guarantee of

●

government, so they have

risk minimum default risk.

Liquidit T-bills are highly liquid instrument of

●

financial market. Securities can be

y liquidated when ever the holder wants

T-bills are trade on the face value of

Minimum
●

Rs.100 in Pakistan and in

denomination denominations of 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;
treats 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 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 American-style auction-based
system.
 The role of primary market restrict to
fortnightly auctions.
 Primary dealers were appointed.
State Bank of Pakistan use following two methods to
trade T-bills.

Auctio
n
System
Open
Market
Operations(
OMO)
 Auction System
After the submission
Primary
SBP dealers
MOFannounces
decides the
After the submission
deadline,
Primary
SBP
MOF bids willthe
dealers
announces
decides
the
cut off
T-Bill
submit
deadline,
open price.
auction
the
bids bids
will
the off
cut T-Bill
submit
open price.
auction
the bids

Af
ter
on
e
or
tw
o
da
ys
of
fin
ali
zi
ng
pri
ce,
se
cu
riti
es
ar
e
iss
ue
d.
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 circulation of money in the market.
COMMERCIAL
PAPER
 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 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 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 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, non-financial 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
 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

Importer’ Acceptan Manufact

Importer
s Bank ce urer
 Mechanism of Banker’s
Acceptance

Letter of Time Discount

Accepted
Credit Draft ed
 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
 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

Amount in
Dollars
Gets Deposited Transferre
Dealer In Shipment in a Bank d to a
Pakistan Amount in Situated Bank
Dollars in US Situated
In
Pakistan
 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
• 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.
QUESTION & ANSWER
SESSION