WEEK 2 – FIS

AGENDA FOR TODAY!

1. Review of 1st Session

2. Assignment Discussion

Topics:
Treasury Bills
1. Process of Auction
2. Issuance
3. Revaluation
4. Selling before maturity
5. Maturity

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 Auction Process

▰ SBP announces the auction target each year, 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

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Primary Dealers List: https://www.sbp.org.pk/dmmd/2021/C11.htm
 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
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Latest Auction Report: https://www.sbp.org.pk/ecodata/auction-tbills.pdf
 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

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Daily Profit Amortization = 8,809 / 90 Days = PKR 97.87
 Selling Before Maturity

▰ Remaining DTM = 50 Days

▰ Market Rate = 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 8
 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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LET’S REVIEW CONCEPTS

Auction Process Issuance Revaluation

How does an When does SBP issue What formula is used
individual can security? for revaluation?
participate?

Selling Before Maturity

Maturity
Who withholds the
What is the process of tax?
calculating
profit/(loss) if selling
10
before maturity?