Financial Instruments in

Money Market & Capital

Market
Lecture # 05

Govt. Securities
T-bills
zero coupon
Default risk is very low and liquidity is high
3 , 6 , 12 Months (Pakistan)
Issued in denomination of PKR 5000
Auction is held on fortnightly basis
How to buy T-Bills?
IPS (Investor Portfolio Security) Account with PDs

Foreigners can also invest IPS Account

along with SCRA

Discount Bills Return

Calculation

I = (F-P)/P * (365/n)
Suppose you buy a 26 week T-bill
for $9500 whose face value is
$10,000. What is the discount
yield ?

 You decide to purchase a 91-day Tbill for $ 9850. When it matures, the
bill will be worth $ 10,000. What is
the bills annualized yield?
Now suppose that you decide to sell the
Treasury bill 31 days before it matures.
By selling before it matures, you will
receive $ 9948. What is bills annualized
yield?

I = (F-P)/P * (365/n)

Govt. Securities
T-notes
coupon
2, 5, 10 years

PIBs
Issued in multiple of PKR 100,000
3 , 5 , 10 & 20 years
Fixed & semi-annual
Auction quarterly
Redeemable at maturity

Coupon Striping
In Feb 1985, coupon-striping program
was started called as STRIPS
Treasury does NOT issue zero coupon
T-notes or T-bonds
Treats Coupons and principal as
separate securities

What is auction of
Securities
Auction is a process of calling of bids
with an objective of arriving at the
market price.
A sale by auction is a public sale where
different intending buyers try to outbid
each other.
The goods / securities are ultimately sold
to the highest bidder.

Types of Bids
Competitive bids
bid by yield

lowest yields (highest price) are successful

quantity limited to 35% of offering for a single buyer

only primary dealers submit competitive bids

Non Competitive bids

bid by quantity
agree to pay average yield of successful
competitive bids or Stop Yield in case of Dutch
auction
anyone may submit a noncompetitive bid

Securities Auction (22, 2)

Bidder

Bid Yield

8.100

Bid Amount
(Billion Rs)
4

8.200

8.300

8.500

8.400

8.400

8.500

Auction
Stop yield
highest yield of accepted competitive bid
Cut-off yield

Bid to cover Ratio

Bid Received/Amount Awarded
High Bid to cover ratio show strength in auction

Tail
stop yield - av. of successful yield bids
Short tail strength, long tail weakness

Commercial Paper
Short-term debt instrument issued by
corporations.
Issued on a discount basis in maturities
ranging from one to 270 days.
Securities in this maturity range are exempt
from SEC registration requirements.
In Pakistan CPs shall be issued for maturities
between 30 days and one year
Minimum current ratio of 1: 1 and
debt/equity ratio of 60: 40.

Negotiable Certificates of Deposits

(CDs)
Issued by banks to raise short-term
money
Negotiable CDs are issued as
securities (versus CDs which are a
form of deposit at retail banks).
Typical maturity one to twelve
months.

Types of Negotiable CDs

Domestic CD: issued by PK bank in the PKR
for local markets.
Foreign or Yankee CD: issued by a foreign
bank in the Pakistan, denominated in PKR
Eurodollar CD: issued by a large PK or foreign
bank in the Euro market & denominated in
PKR
Floating-Rate CD: securities issued with a 3 to
5 year maturity have coupons that change (or
float) based on a spread over a benchmarked
reference rate.

Bankers Acceptances
A banker's acceptance, or BA, is a
promised future payment, or time draft,
which is accepted and guaranteed by a
bank and drawn on a deposit at the bank.
The banker's acceptance specifies the
amount of money, the date, and the person
to which the payment is due.
Banker's acceptances make a transaction
between two parties who do not know each
other more safe

Repurchase Agreements
RP is the sale of securities together
with an agreement for the seller to buy
back the securities at a later date.
The repurchase price should be greater
than the original sale price, the
difference
effectively
representing
interest, sometimes called the repo rate.
Types: overnight, term, and open repo

Uses of Repo
It helps banks to invest surplus cash
It helps borrower to raise funds at
better rates.
Central Bank uses Repo and Reverse
repo as instruments for liquidity
adjustment in the system