fm 2nd assignment

8/3/2019 FM 2nd Assignment

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2ND ASSIGNMENT 3RD SYSMESTERMBA (HRM)

ALLAMA IQBAL OPEN UNIVERSITY,ISLAMABAD

ASSIGNMENT NO.2ON

FINANCIAL MANAGEMENT (562)

Topic:-

Time value of money affects investment decisions infinancial management. Give a comprehensivetheoretical background of the topic and then analyzeits practical application in an organization selected by

you.

Submitted by: ASAD HUSSAIN.

Submitted to: SIR S.M. AMIR HUSSAIN SHAHSB.

Roll No. 5081995455.

ASAD HUSSAIN FINANCIAL MANAGEMENT (562)Page 1
http://www.who.int/management/readfinances/en/FinanceCycle


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EXECUTIVE SUMMARY

This assignment is a research-oriented activity, which represents both

the theoretical and practical implication of the topic. In the first section

of this assignment, I explain the theoretical aspect of the topic and allmajor parts has been explained which are involved in the Time value of

money affects investment decisions in financial management. I give a

comprehensive theoretical background of the topic and then analyze its

practical application in an organization selected by me in financial

management. For empirical study, I select NATIONAL SAVING

ORGANIZATION and compare its ways of Time value of money affects

investment decisions in financial management and I give a comprehensive

theoretical background of the topic and then I analyze its practical application

in an organization selected by National Saving Organization in business

instruments.



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CONTENTS:

TITLE PAGE...

1

ACKNOWLEDGEMENT

2

EXECUTIVE SUMMARY...

3

CONTENTS....

.. 4

INTRODUCTION TO THE TOPIC.

5

APPLICATION OF TIME VALUE CONCEPT .

5

SIMPLE AND COMPOUNDED INTEREST

6

ANNUITY..

7

DISTINCTION BETWEEN AN ORDINARY ANNUITY AND AN

ANNUITY

DUE. 8



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CALCULATING THE VALUE OF AN ANNUITY DUE

9

VISUAL COMPARISON OF CASH FLOW

10

TIME VALUE OF MONEY AFFECTS INVESTMENT DECISION IN

FINANCIAL MANAGEMENT..

12

STOCK VALUATION.

13

PRACTICAL STUDY OF THE ORGANIZATION

15

INTRODUCTION....

15

CASE STUDY AS PER TOPIC..

17

SWOT ANALYSIS .

24

RECOMMENDATION..

26

CONCLUSIONS ..

26

Topic:-



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Time value of money affects investment decisions in financialmanagement. Give a comprehensive theoretical background of thetopic and then analyze its practical application in an organizationselected by you.

Introduction:-

Time Value (TV) of Money:A dollar received today is worth more than a dollar promised at sometime in the future. This relationship exists because of the opportunityto invest todays dollar and receive interest on the investment.

Applications of Time Value Concepts:

a) Used for making decisions about Notes, Leases, Pensions and Other

Postretirement Benefits, Long-Term Assets, Sinking Funds, BusinessCombinations, Disclosures, and Installment Contracts.

b) Also, TV concepts are very important in personal finance andinvestment decisions. For example, TV of Money is used whenpurchasing home or car, planning for retirement, and deciding oninvestments.

To make itself a valuable as possible to stockholders; an enterprisemust choose the best combination of decisions on investment,financing and dividends. In any economy in which individuals, firm and

governments have the time preference, the time value of money is animportant concept. Stockholders will pay more for an investment thatpromises returns over years 1 to 5 than they will pay for an investmentthat promises identical returns for 6 years through 10. The decision topurchase new plant and equipment or to introduce a new product in themarket requires using capital allocating or capital budgetingtechniques. Essentially we mu7st determine whether future benefitsare sufficiently large to justify current outlays. It is important that wedevelop the mathematical tools of the time value of money as the firststep towards making capital allocating decisions.

Principle Amount (P): This is the amount of money that is initiallybeing considered. It might be an amount to be invested or loaned or itmay refer to the initial value or cost of plant or machinery. Thus if thecompany was considering a bank loan of say Rs. 500,000 this would bereferred to as the principal amount borrowed.



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Accrued Amount (A): This term is applied generally to a principalamount after some time has elapsed for which interest has beencalculated and added.

Simple and Compounded Interest:

When an amount of money is invested over a number of years, theinterest earned can be dealt with in two ways.

Simple Interest:- This where any interest earned is not added back tothe principal

Amount invested. For example, suppose that Rs. 200,000 is invested at20% simple

Interest per annum. The following table shows the state of theinvestment, year by

Year:-

Year Principa

l

Interest Earned

Amount

Cumulative

Amount

1 200,000 40,000 (20% of

200,000)

240,000

2 200,000 40,000 (20% of

200,000)

280,000

3 200,000 40,000 (20% of

200,000)

320,000

etc

Compound Interest:-The notion of compounded interest is central tounderstanding the mathematics of finance. The term itself merelyimplies that interest paid on load or an investment is added to theprinciple. As a result, interest is earned on interest. Compounding is thearithmetic process of determining the final value of a cash flow or

series of cash flow or series of cash flows when compound interest isapplied



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The difference between the two methods can easily be seen bycomparing the above two tables. Notice that the amount on whichsimple interest is calculated is always the same.Time Line: An important tool used in time value of money analysis andgraphically show the timing of cash flows. In the above example for thesimple interest, the time line can be produced as.

Discounting:- The process of determining the present value of futurecash flows. It is an important concept, which is used in project

appraisals. The opportunity cost rate is the rate available on the nextbest alternative with same equal risk as the current investment.

Annuity.Annuity is a sequence of fixed equal payments or receipts made over

uniform time intervals. Some common examples of annuities include:weekly wages, monthly salaries, insurance premiums, hire purchasepayments. Annuities are used in all areas of business and commerce.Loans are normally repaid with an annuity, investment funds are set upto meet fixed future commitments (for example, asset replacement) bythe payment of an annuity.

Annuities may be paid:-1. At the end of payment intervals (Called and Ordinary Annuity)2. At the beginning of payment intervals (called Annuity Due)

The terms of an annuity may:-1. Begin and end on fixed dates (a Certain Annuity)2. Depend on some event that cannot be fixed (a Contingentannuity)

Year Principal Interest Earned

Amount

Cumulative

Amount

1 200,000 40,000 (20% of

200,000)

240,000

2 240,000 48,000 (20% of

240,000)

288,000

3 288,000 57,600 (20% of

288,000)

345,600

.et

c



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A perpetuity annuity is one that carries on indefinitely. The mostcommon form of annuities are certain and ordinary. That is the annuityis paid at the end of the payment interval and will begin and end onfixed dates. Personal loans and most domestic hire purchase are paid

off in a similar manner but normally without the initial deposit.Annuities that are being invested however are often due, that is paid ofin advance of the intervals. The present value (PV) of an annuity couldbe found as for any cash flow by discounting each return individually,but there is a more economical method. Consider the case of anannuity of Rs. 10,000 that runs for four years at 10% interest. Assumethat the first payment will be made after one year. Using the discountfactor table the PV is:-

Yea Cash Discount Factor Present Value

1 10,000 0.9091 9091

2 10,000 0.8264 8264

3 10,000 0.7513 7513

4 10,000 0.6830 6830

Total 31,698

Sinking Fund:- A sinking fund can be defined as an annuity investedin an order to meet a known commitment at some future date. Sinkingfunds are usually used for the following purposes.

1. Repayment of debts2. To provide funds to purchase a new asset when the existing asset

is fully depreciated.

Example of Dept Repayment Using a Sinking Fund:- Here a debtis incurred over a fixed period of time subject to a given interest rate. Asinking fund must be set up to mature to the outstanding amount ofthe debt.

Perpetuities:- A special case of an annuity is where a contract runsindefinitely and there is no end to the payments. This is calledperpetuity. Steam of equal payments expected to continue forever.Semiannual and other compounding periods semiannual compoundingis the arithmetical process of determining the final value of determiningthe final value of cash flows when interest is added twice a year.



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A Mortised Load:- Loan repaid in equal payments over its life.Installment prepayments are prevalent is mortgage loans, auto loanand consumer loans and in certain business loans. The distinguishingfeature is that the loan is repaid in equal perio9dic payments thatembody both interest and principal. These payments can be made

monthly, quarterly, semi annually or annually. The debt is said to beamortized if this method is used.

Interest Rates:

1. Nominal RateThe rate which is quoted or stated on loan or investment.

2. Effective Annual RateThe rate, which would produce the same ending (future), values ifannual compounding had been used.

3. Periodic RateThe rate charged by a lender or paid by a borrower each period. Itcan be rate per year, per six month period, per quarter, per monthof per day.

Distinction Between an Ordinary Annuity andAn Annuity DueEach payment of an ordinary annuity belongs to the payment periodpreceding its date, while the payment of an annuity due refers to a

payment period following its date. the meaning of the above statementmay not be immediately obvious until we look at it graphically.

A more simplistic way of expressing the distinction is to say thatpayments made under an ordinary annuity occur at the end of theperiod while payments made under and annuity due occur at thebeginning of the period. A third possibility is to define and annuity duein terms of an ordinary annuity, an annuit6y due is an ordinary annuitythat has its term beginning and ending one period earlier that anordinary annuity. This definition is useful because this si how we willcomputer an annuity due i.e. in relation to an ordinary annuity



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(discussed further in calculating the value of an annuity due below).Most annuities are ordinary annuities. Installment loans and couponbearing bonds are examples of ordinary annuities. Rent payments,which are typically due on the day commencing with the rental period,is an example of annuity due. Note that an ordinary annuity is

sometimes referred to as an immediate annuity, which is unfortunatebecause it implies that the payments are made immediately (i.e. at thebeginning of the period, which would be the case with an annuity due).However, ordinary annuity is the more widely used term.

Calculating the Value of an Annuity Due

An annuity due is calculated in reference to an ordinary annuity.In other words, to calculate either the present value (PV) or futurevalue (FV) of an annuity due, we simply calculate the value of the

comparable ordinary annuity and multiply the result by a factor of(1+i) as shown below:-

Annuity due = Annuity Ordinary x (1=i)

This makes sense because if we go back to our earlier definitionswe see that the difference between the ordinary annuity and theannuity due is one compounding period. Note also that the aboveformula implies that both the PV and the FV of an annuity duewill be greater than their comparable ordinary annuity values.

This is illustrated graphically in the section that follows, VisualComparison of Cash Flows. It can also be clearly seen in thediscount and accumulation schedules constructed in the Excelsection. The following examples illustrate the mechanics of theordinary annuity calculation and subsequent annuity duecalculation.

Present Value of an Annuity: Using the example problem fromthe present value of an annuity page, we calculate the PV of aordinary annuity of Rs. 50 per year over 3 years at 7% as

and the present value of an annuity due under the same termsis calculated as.

. and just as we thought, the PV of the annuity due is greaterthat the PV of the ordinary annuity; by 9.18 in this example.



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Future Value of an Annuity:- Using the example problem fromthe Future Value of annuity page, we calculate the FV of anordinary annuity of Rs. 25 per year over 3 year at 9% as.

and the future value of an annuity due under the same terms iscalculated as

and again the FV of the annuity due is greater than the FV ofthe ordinary annuity; in this example by 7.38.

Visual Comparison of Cash Flows .

The distinction between and ordinary annuity and an annuity duecan be easily grasped by visualizing the timing of the payments.

Present Value of an Annuity:-

Ordinary Annuity. Continuing with the same example from thePV of an annuity page, the following illustration shows howpayments are applied in the case of an ordinary annuity



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Annuity-Due. With an annuity-due the payments are made atthe beginning rather than the end of the period...

The fact that the value of the annuity-due is greater makes sensebecause all the payments are being shifted back (closer to thestart) by one period. This means the PV should be larger underthe annuity due because all the payments are made earlier. Inother words, they are all closer to the "present" so they aresubject to less discounting. Note that there is no need to discountthe first payment under the annuity due at all; since it is made at

the very outset, its PV is its face value.

Future Value of an Annuity:

Ordinary annuity.Continuing with the same example from theFuture Value of an Annuity page, the following illustration showshow payments are applied in the case of an ordinary annuity...

http://www.frickcpa.com/tvom/TVOM_FV_Annuity.asphttp://www.frickcpa.com/tvom/TVOM_FV_Annuity.asp


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Annuity-Due. With an annuity-due the payments are made atthe beginning rather than the end of the period.

Note that the FV of the ordinary annuityis 81.95 and the FV ofthe annuity-due is 89.33 (calculated as 81.95 x 1.09).

Time value of money affects investmentdecisions in financial management.

The fact that the value of the annuity-due is greater makes sensebecause all the payments are being shifted back (closer to thestart) by one period. Moving the payments back means there isan additional period available for compounding. Note the underthe annuity due the first payment compounds for 3 periods whileunder the ordinary annuity it compounds for only 2 periods.Likewise for the second and third payments; they all have an



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additional compounding period under the annuity due. Theadditional compounding generates a larger FV. When a companybuys back its own shares it has to offer a price higher than thecurrent stock price, otherwise investors have no incentive to selltheir stock. Buy offering a price higher than the market, the

company is distributing value to its existing shareholders. Notethat dividend is used in a generic sense of value distribution aswell as a cash distribution the most common form of dividend.

You should also note that cash dividends are paid on a regularbasis unless the company explicitly announces an on-timeincrease in dividends. Trhe latter is referred to as a specialdividend.

The main advantage of stock repurchase over dividends is thatthe latter is a one time distribution. An increase in dividend is

promised to the shareholders, such that the company would bepaying the dividend on a regular basis in the future. There are twoimportant implications of expected regular dividend and one timedistribution. One is that if a regular dividend is lowred theninvestors interpret this act as a bad sign and thus the price of thestock tends to fall. Because of this built in expectation, dividend isa burden on the company, as the company feels obidated tosatisfy its shareholders expectation. On the other hand, stockrepurchase is a one time deal and thus shareholders dont expectit to continue in any regular fashion in the future.

The Stock Valuation

Firms obtain their long term sources of equity financing bu issuingcommon and preferred stock. The payments of the firm to theholders of these securities are in the form of dividends. Unlikeinterest payments on debt, which are tax deductible, dividendsmust be paid out of after tax income. The common stockholderare the owners of the firm. They have the right to vote onimportant matters to the firm such as the election of the Board of

Directors. Preferred stock, on the other hand, is a hybrid form offinancing, sharing some features with debt and some withcommon equity. For example preferred dividends like interestpayments on debt are generally fixed. In addition, the claimsagainst the assets of the firm of common stockholders have aresidual claim against the assets and cash flows of the firm. Thatis, the common stockholders have a claim against whatever



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concentrated at the time of the purchase, while cash inflows(benefits) may be spread over many years. The time value ofmoney principle states that dollars today are not eh same asdollars in the future (because we would all prefer possessingdollars today to receiving the same amount of dollars in the

future). Therefore, before we can place the costs and benefits onthe scale, we must make sure that they are comparable. We dothis by taking the present value of each, which restates all of thecash flows into todays dollars. Once all of the cash flows are onthe comparable basis, they may be placed onto the scale to see ifthe benefits exceed the costs.

CASE STUDY

National Savings Organization

The history ofNational Savings Organization dates back to theyear 1873 when the Government Savings Bank Act, 1873 waspromulgated. During the first world war, the British Governmentintroduced several Schemes for collection of funds to meet theexpenditure. It was in this context that the Post Office CashCertificates and, during the second world war, Post Office DefenceSavings Certificates were floated. The need to setup a separateagency was felt and a National Savings Bureau was established in1943- 44 as an attached department of the Ministry of Finance of

the undivided Government of India. The department was headedby National Savings Commissioner with the status of a JointSecretary. At that time the main functions of the SavingsDepartment were to initiate all policy matters and issue directivesfor the execution of policy decisions of the Central Government,and to review the Savings Schemes from time to time. Gradually,Savings Organization were established in almost all the Provincesof the sub-continent with the objective of popularizing the Savings



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Schemes among the masses as well as to supervise, guide andcontrol the working of authorized agents under their jurisdiction.

The agents, who were appointed by the local authorities. Theywere paid commission @ 2 1/2 on the investment secured bythem. These authorized agents were in those days the only

agency for securing investment in terms of Savings Certificatesfrom the general public. In nutshell the central agency viz.National Savings Bureau, Simla, was mainly concerned with thepolicy and planning matters of the Savings Schemes whereas theresponsibility of execution of various Savings Schemes vestedwith Provincial authorities .

At the time of Independence there was no time for any sort ofinnovations in the field of administration. Thus an organizationwith the name of 'Pakistan savings Central Bureau' was createdand the Savings work was entrusted to it by the Government of

Pakistan, but this Bureau had its own peculiarities. The PakistanSavings Central Bureau had no independent entity and was notgiven the same status as enjoyed by Savings Bureau, Simla. Thehead of the Pakistan Savings Central Bureau was then calledCentral National Savings Officer, a Junior Officer of the Ministry ofFinance with the status of an Under Secretary to the Governmentof Pakistan. He was assisted by a Superintendent having someauxiliary staff. In 1953, the Pakistan Savings Control Bureau wasre-named as Central Directorate of National Savings and it carriedout the functions on the lines of National Savings Bureau Simla

but as a part and parcel of the Finance Division, CentralDirectorate of National Savings was only responsible for publicity,and the operative agents were the Provincial Governments as wellas Pakistan post Offices. However, the entire expenditure in thisregard was borne by the Central Government. Such anarrangement created a large number of administrative difficultiesand stunted the growth of savings. In view of these difficulties theCentral Directorate of National Savings was given the statusof an Attached Department in September, 1960, and was maderesponsible for all policy matters and execution of various

National Savings Schemes.

Subsequently, it was also declared a Technical Department by theGovernment. The Director General, National Savings (BPS-20) nowenjoys full

powers of a Head of the Department.



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Till December, 1971, the National Savings Organizationfunctioned as a Publicity organization and its activities weremerely promotional in nature. But in early 1972, the scope of itsactivities was enlarged as the Central Directorate started sellingII-Rupee Prize Bonds, and subsequently engaged in the operations

of other savings schemes. This resulted in considerable expansionof the National Savings Organization.

At present, this Organization has a total sanctioned strength of3377 employees in various grades and its main component unitsare as under:

a. Central Directorate of National Savings, Islamabad.

b. Directorate of Inspection and Accounts, Islamabad.

c. Training Institute of National Savings, Islamabadalongwith a sub-Training Institute at Karachi.

d. 12 Regional Directorates (located at Peshawar,Abbottabad, Rawalpindi, Gujranwala, Lahore,Faisalabad, Multan, Bahawalpur, Sukkur, Hyderabad,Karachi, Quetta)

e. 367 National Savings Centres spread throughout thecountry.

Director General

Mr. Zafar M. Shaikh

Director General National Savings Organization

Address

23-N, Savings House, G-6 Markaz, Civic Centre, Islamabad.

Case study as per topic:-

The following products of National Savings Organization directlyinvolves that how the time value of money effects investmentdecision in financial management.

Defence Savings Certificates



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Mode of Deposit.

These certificates can be purchased by depositing cash at theissuing office or by presenting a cheque. The certificates shallimmediately be issued on receipt of cash. However, in case of

deposit through cheque the certificates shall be issued from thedate of realization of the cheque after receipt of the clearanceadvice.

What Is The Investment Limit.

The minimum investment limit is Rs.500/-, however, there is nomaximum limit of investment in this scheme.

What About Redemption.

These certificates are encashable at par any time after one monthfrom the date of purchase. However, no profit is payable ifencashment is made before completion of one year.

What is the return.

In this scheme the profit is paid on maturity or encashment forcompleted years. Every Rs.100,000/- will become Rs.108,000/-,Rs.118,000/-, Rs.129,000/-, Rs.142,000/-, Rs.158,000/-,Rs.177,000/-, Rs.201,000/-, Rs.230,000/-, Rs.265,000/- andRs.315,000/- on completion of 1, 2, 3, 4, 5, 6, 7, 8, 9 and 10 years,respectively. These rates are effective from 24th June, 2008. Theaverage compound rate of return on maturity presently works to12.15% p.a. For any other time period rates table is also availableon website.

Tax & Zakat Status.

At present, the profit earned is exempt from withholding tax, ifthe total investment in the scheme by the investor(s) does notexceed Rs.150,000/-. However, withholding tax @ 10% isdeductible at source on the profit(s) earned if the total investmentexceeds Rs.150,000/- by the investor(s). The Zakat is collected atsource as per rules.



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Special Savings Certificates (Registered)

Keeping in view the periodic needs of depositors, this three years'maturity scheme was introduced in February, 1990. Thesecertificates are available in the denomination of Rs.500, Rs.1000,

Rs.5,000, Rs.10,000, Rs.50,000, Rs.100,000, Rs.500,000 andRs.1,000,000/=. Profit is paid on the completion of each period ofsix months.

Who Can Invest .

These certificates can be purchased by a single adult, a minor,two adults in their joint names with the options of payable to theholders jointly (Joint-A ) or payable to either (Joint-B). An adult canalso purchase these certificates on behalf of a single minor, two

minors jointly or himself/herself and a minor jointly. In addition tothe above individual investors, the following institutions can alsoinvest in the scheme:

Registered Charities (Non-profit bodies).

Public Sector Enterprises excluding Banks.

Private Educational & Health Institutions.

Employees Old Age Benefit Institutions (EOBIs).

Private Corporate Sector registered with the SECP excludingBanks.

Non-Bank Financial Institutions (NBFIs) excluding InsuranceCompanies.

How To Purchase.

These certificates can be purchased from any National Savings

Centre (NSC), Pakistan Post Office (PPO), Scheduled Bankbranches and the offices of State Bank of Pakistan (SBP) by fillingin a prescribed form called SC-1, which is available at all theabove offices of issue free of cost. A copy of the National IdentityCard or in case of a foreign national, a copy of the Passport isrequired to be attached with the application form. To download



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application form in editable Adobe Acrobat format, please clickhere.

Mode of Deposit.

These certificates can be purchased by depositing cash at theissuing office or by presenting a cheque. The certificates shallimmediately be issued on receipt of cash. However, in case ofdeposit through cheque the certificates shall be issued from thedate of realization of the cheque after receipt of the clearanceadvice.


The minimum investment limit is Rs.500/-, however, there is no

maximum limit of investment in the scheme.

What About Redemption.

These certificates are encashable at par any time after one monthfrom the date of purchase. However, no profit is payable if theencashment is made before completion of six months.

What Will I Get As Profit.

At prevailing rates, the profit is paid @11.6% p.a. for 1st five

profits and @ 12.0% p.a. for the last profit. However, if the profitis not withdrawn on due date it will automatically standreinvested and would be calculated for further profit oncompletion of the next 06 months' period.

Tax & Zakat Status.

At present, the profit earned is exempt from withholding tax, ifthe total investment in the scheme by the investor(s) does notexceed Rs.150,000/-. However, withholding tax @ 10% is

deductible at source on the profit(s) earned if the total investmentexceeds Rs.150,000/- by the investor(s). Zakat is collected atsource as per rules.

Regular Income Certificates



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Keeping in view the monthly requirements of the general public,this five years' maturity scheme was launched on 2nd February,1993. These certificates are available in the denomination ofRs.50,000, Rs.100,000, Rs.500,000, Rs.1,000,000, Rs.5,000,000 &Rs.10,000,000/=. Profit is paid on monthly basis reckoned from

the date of issue of certificates.

Who Can Invest .These certificates can be purchased by a single adult, a minor ortwo adults in their joint names with the options of payable to theholders jointly (Joint-A ) or payable to either (Joint-B). An adult canalso purchase these certificates on behalf of a single minor, twominors jointly or himself/herself and a minor jointly. In addition toabove individual investors, the following institutions are alsoallowed to invest in the scheme:

Registered Charities (Non-profit bodies).Public Sector Enterprises excluding Banks.Private Educational & Health Institutions.Employees Old Age Benefit Institutions (EOBIs).Private Corporate Sector registered with the SECP excludingBanks.Non-Bank Financial Institutions (NBFIs) excluding InsuranceCompanies.

How To Purchase.

These certificates can be purchased from any National SavingsCentre (NSCs) or from Pakistan Post Office (PPO) by filling in aprescribed form called SC-1, which is available at all the aboveoffices of issue free of cost. A copy of the National Identity Card orin case of a foreign national, a copy of the Passport may beattached with the application form (SC-I). To download applicationform in editable Adobe Acrobat format, please click here.

Mode of Deposit.These certificates can be purchased by depositing cash at the

issuing office or by presenting a cheque. The certificates shallimmediately be issued on receipt of cash. However, in case ofdeposit through cheque the certificates shall be issued from thedate of realization of the cheque after receipt of the clearanceadvice.




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The minimum investment limit is Rs.50,000/-, however, there isno maximum limit of investment in this scheme.

What About Redemption.These certificates are encashable any time subject to deduction of

service charges at the following rates:

if encashed before completion of one year from the date of issue.@ 2.00% of the face valueif encashed after one year but before completion of 02 years fromthe date of issue. @ 1.50% of the face valueif encashed after two years but before completion of 03 yearsfrom the date of issue. @ 1.00% of the face valueif encashed after three years but before completion of 04 yearsfrom the date of issue. @ 0.50% of the face value

Note: A receipt of the service charges so deducted, duly signed bythe officer incharge and the cashier, shall be issued to theinvestor.

What is the return.At the prevailing rates monthly profit of Rs.1000/- is paid oninvestment of each Rs.100,000/-. This way the profit rate works to12.0% p.a. However, the facility of automatic reinvestment ofprofit to earn further profit is not available in this scheme.

Tax & Zakat Status.

The profit earned on these certificates is subject of deduction of10% withholding tax at source. However, the investment made inthis scheme is exempt from collection of Zakat.

Bahbood Savings CertificatesKeeping in view the hardships faced by the widows and seniorcitizens and to guard them against the declining rate of return onNational Savings Schemes, this ten years' maturity scheme was

launched by the Government on 1st July, 2003. Initially thescheme was meant for widows only, however, the Govt. laterdecided to extended the facility for senior citizens aged 60 yearsand above with effect from 1st January, 2004. These certificatesare available in the denominations of Rs.5,000/-, Rs.10,000/-,Rs.50,000/-, Rs.100,000/-, Rs.500,000 and Rs.1,000,000/-. Profit



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is paid on monthly basis reckoned from the date of purchase ofthe certificates.

Who Can Invest .Only widows and senior citizens aged 60 years and above are

eligible to invest, singly or jointly.

How To Purchase. These certificates can only be purchased from the NationalSavings Centre (NSCs) by filling in a prescribed form called SC-1,which is available at the offices of issue free of cost. A copy of theNational Identity Card and necessary evidence regardingeligibility is required to be attached with the application form. Todownload application form in editable Adobe Acrobat format,please click here.

Mode of Deposit. The certificates can be purchased by depositing cash at theissuing office or by presenting a cheque. The certificates shallimmediately be issued on receipt of cash. However, in case ofdeposit through cheque the certificates shall have the effect fromthe date of realization of the cheque after receipt of the clearanceadvice.


The minimum investment limit in this scheme is Rs.5,000/-,whereas, the maximum limit is Rs.3,000,000/-. Investment inallowed in multiple of Rs.1,000/-.

What About Redemption.The certificates can be encashed any time after issuance subjectto deduction of service charges at the following rates:If encashed before completion of one year from the date ofpurchase. @ 1.00% of the face valueIf encashed after one year but before completion of 02 years from

the date of purchase. @ 0.75% of the face valueIf encashed after two years but before completion of 03 yearsfrom the date of purchase. @ 0.50% of the face valueIf encashed after three years but before completion of 04 yearsfrom the date of purchase. @ 0.25% of the face valueIf encashed after completion of 04 years No service charges



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Note: A receipt of the service charges so deducted, duly signed bythe officer incharge and the cashier, shall be issued to theinvestor.

Note: It is to clarify that in the cases of conversions made on 02-

02-2009 by the existing holders of BSCs to earn higher rate ofprofit, the service charges deduction on such conversion shall berefunded on a written request lodged by them for this purpose.Such refunds shall however, be made through crossedgovernment cheques issued by the National Savings Treasury orthe cheques issued on current accounts opened by out stationcenters at the NBP. A proper acknowledgement receipt shall alsobe obtained from the concerned investor for the cheque soissued. In addition they shall also be entitled to the difference ofprofit due under the amended rules and that be paid to them on

the date.

What is the return..At the prevailing rates monthly profit of Rs.1180/- is paid oninvestment of each Rs.100,000/-. This way the profit rate works to14.16% p.a. Automatic reinvestment of profit facility to earnfurther profit is not admissible in this scheme at the scheme'srate; however, further profit is paid on undrawn profit at the rateapplicable on Savings Account.

Tax & Zakat Status.The withholding tax is not collected on the profit earned on thesecertificates. The investment made in this scheme is also exemptfrom Zakat.Note: In exercise of the powers conferred by rule 12 of theBahbood Saving Certificates Rules, 2003, the Federal Governmentis pleased to direct that monthly profit on Bahbood SavingsCertificates notified on 29th November,2008 by the FederalGovernment shall be applicable to all existing investment witheffect from 1st February,2009.

SWOT ANALYSIS

The SWOT analysis is done by the organization for theenvironmental scanning. The strength and weaknesses andopportunities and threats are analyzed by organization from the



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external environment. National Savings Organization SWOTanalysis is given below:STRENGTH

It has always been considered as the pillar of the country'seconomic scenario asset.

Its image, work force, network and working according to thefinancial policies of Govt. of Pakistan are also the strength ofthe National Savings Organization.

The branch, I visited has most experienced and freshemployees which is good combination of experienced headsand exuberance of youth

Saving Organization has strong reputation and confidence ofthe general public

National Savings Organization culture was very friendly andinteresting. Employees has created a very cooperativeenvironment among each other. They have created loyaltytoward the organization by deviating their future efforts andenergies. The employees take the organizational problempersonals and try their best for the prosperity of theorganization.

Fortunately National Saving Organization has got from timeto time best top management.

The organization has huge branch network even in the small

towns and cities all over the country.

WEAKNESSES

National Savings Organization has small staff with a shallowskills base in many areas.

I keenly observe this that as compared to other financialinstitutions, their capabilities are not upto the requirementand staff trainings should be arranged.

Lack of competitive strength

Delays were observed because the prescribed proceduresare not followed.

OPPORTUNITIES

National Savings Organization has very bright prospects forthe future. They plan to region their lost glory not only in



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terms of profitability but also include latest technology andcompetent work force.

National Savings Organization has advantage of generatingmore deposits and attracting valuable customers due to itsbetter image in the business community. This better image

can help further in explanation of its activities. Due to non existence of competitor National Savings has lot

of opportunities to boost its business.

Volumes, production, economies

Threats. This is the major threat for any business organization in

Pakistan because the political officials influence in financing National saving organization sick projects are increasing day

by day due to economic downfall. IT developments

New technologies, services, ideas

Recommendations

National Savings Organization should undergo extension oftheir products.

At present not a big / strong competitor exist for NationalSavings, but in future there should be a threat for itsproducts so it should combine quality with ingenuity.

Reputation of the organization has to be kept robust. Today we live in a fast moving world where novelty and

newness count a lot. So fresh efforts, newness of approachmust remain the cardinal principle of a well maintainedstrategy and the campaign must be relentless.

Conclusion



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National Savings is a well renowned organization and it hasmaintained its position well by understanding the clientpsychology, by ensuring quality, by introducing ingenuity inproducts, by enlarging its product base, by keepingeconomic factors in view and by intense and jazzy

advertisement. National Savings has very strong guaranteeof Government of Pakistan at its back and people buy itsproducts on behalf of Govt. of Pakistan

fm 2nd assignment

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