Treasury and Fund

Management
Course ID:
69358
Visiting Faculty: Muhammad Faraz
Khan

The Term Asset Class

An asset class is a group of securities that have similar financial

characteristics.
The primary asset classes are: Equities, Fixed Income, Money

Market and Real Estate etc.

The goal of asset allocation is to create a balanced mix of assets

that have the potential to improve returns, while meeting:

Tolerance for risk (market volatility)
Goals and investment objectives

Classification of Fixed Income

Instruments
Type of Issuer
Govt., Govt. related Sectors, Corporate Sector and
Structured Finance Sector (Financial Institutions)
Credit Quality
Investment Grade Rating, based on Issuers Credit
Worthiness
Maturity
Termination

date on which
becomes due and repaid

the

principal

amount
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Classification of Fixed Income

Instruments
Currency Denomination
Face Value/Base Currency of Financial Instrument
Type of Coupon
Fixed/Floating Rate of Interest to be paid
Interbank Offered Rate
Set of rates that reflect the rate at which unsecured funds be
borrowed
Geography
Domestic or Intl Markets, Developed or Emerging Bond Markets
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Issuer Specific Credit Rating Factors

Past Payment History
Quality of Management
Overall debt Level of the Firm
Operating Cash Flows, ability to Service Debt
Other Sources of Liquidity (cash, salable

assets)
Competitive
Environment

Position

and

Regulatory

Primary and Secondary Bond Markets

Primary bond market, Issuer first sell bonds to

investors to raise capital

E.g Sale of new Government Bonds by Central

Bank

Secondary Market, Investor trade existing

bonds
E.g

Trade of existing Government Bonds

between Buyers & Sellers

Mechanism for Issuing Bond Primary

Markets
Public Offerings
Underwritting

Function of buying bond from Issuer

Activity usually done by Investment Banks/FIs (Underwritter)

Best Effort Offering

Bank/FIs serves only as a Broker to sell bonds
Shelf Registration
Issuers are allowed to offer and sell securities to the public without
a separate prospectus for each act of offering.
Single prospectus for multiple, undefined future offerings
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Mechanism for Issuing Bond Primary

Markets
Auctions

Issue announces terms of the Issue and interested

parties submit bids for it.

Advantage Eliminate Underwritting Fees by Direct

Offering to Investors

Shelf Registration - Example

Company can file a shelf registration statement to SECP with a

prospectus for 100,000,000 shares, PKR 1,000,000,000 face

value of bonds, PKR 500,000,000 face value of convertible bonds
These different asset classes or series of securities are offered in

a single document.
The company may offer to sell all of them, none of them, or any

part of asset class.

It

can sell 30,000,000 shares at one time and another

50,000,000 a year later
(Residual 20,000,000 unissued shares covered by the shelf prospectus).

Mechanism for Trading Bond

Secondary Markets
Securities are sold by and transferred from

oneinvestor or speculator to another

Objective is to provide Liquidity, Easy

Entry/Exit at price closer to Fair Value

Buying and Selling of Bonds done through

network of Brokers and Dealers

Bond Settlement Convention T+0 or T+1
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Commercial Paper
Short Term, Unsecured Debt Instrument
Use to borrow money at rates lower than Interbank

Rate
Maximum maturity <= 1 Year
Issued at Discount to its Face Value
Makes Single Payment equals to Face Value at

Maturity
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CoDs and Bankers Acceptances

Certificate of Deposits
Issued by Banks and sold to Customer
A Promise by a bank to pay certain amount of

(Interest + Principal)
Issued in specific denominations and specified
period of Time
Penalty on Early Maturity

Negotiable CDs

Allow trading in the Secondary Market

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CoDs and Bankers Acceptances

Bankers Acceptances
Backed by Bank Guarantee that a loan will be repaid
Usually part of Commercial Transactions such as

International Trade
Issued in form of LC (Term as Letter of Credit)
Use to hedge Single Party Credit Risk
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Thank You!

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