Money Market Instruments In

Pakistan

Group Number : 2

Tayyaba Karim F06B004Aamna 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

12-months (one-year)

6-months (24-Weeks)

3-months (12-Weeks)

Investment Characteristics Of Treasury Bills

•T-bills are on the guarantee of government, so they have minimum default risk.

Default risk

•T-bills are highly liquid instrument of financial market. Securities can be liquidated when ever the holder wants

Liquidity

•T-bills are trade on the face value of Rs.100 in Pakistan and in denominations of multiples of 100

Minimum denomina

tion

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.

Open Market

Operations(OMO)

Auction

System

State Bank of Pakistan use following two methods to trade T-bills.

Auction System

SBP announces the T-Bill auction

Primary dealers submit the bids

MOF decides the cut off price.

After one or two days of finalizing price, securities are issued.

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 repos3. 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

Importer’s Bank

Acceptance

Manufacturer

Mechanism of Banker’s Acceptance

Letter of

Credit

Time Draft

Accepted

Discounted

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

Dealer In

Pakistan

Gets Shipme

nt Amount

in Dollars

Deposited in a Bank

Situated in US

Amount in

Dollars Transferred to a

Bank 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

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