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Bonds

(1) Primary and secondary markets are defined, with the secondary market being where previously issued financial claims are traded. (2) Various types of financial instruments are described briefly, including shares, bonds (such as WAPDA and Euro bonds), bills of exchange, bankers' acceptances, repurchase agreements, mortgages, and Mudarabah certificates. (3) Mutual funds are introduced as collective investment schemes that pool money from investors to invest in securities, providing small investors access to diversified portfolios. Open-ended and closed-ended funds are described.

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37 views6 pages

Bonds

(1) Primary and secondary markets are defined, with the secondary market being where previously issued financial claims are traded. (2) Various types of financial instruments are described briefly, including shares, bonds (such as WAPDA and Euro bonds), bills of exchange, bankers' acceptances, repurchase agreements, mortgages, and Mudarabah certificates. (3) Mutual funds are introduced as collective investment schemes that pool money from investors to invest in securities, providing small investors access to diversified portfolios. Open-ended and closed-ended funds are described.

Uploaded by

Danish Shakeel
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© © All Rights Reserved
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(1) Primary Market, is one in which new financial claims are issued,

(2) Secondary Market, is one in which previously issued financial claims are traded;
this is a conceptual definition but there are many cases in which it becomes blurred in
practice. Broadly speaking financial instruments can be classified as under:-

Shares

common stock or ordinary shares are issued by public limited companies for securing
fund from the public against the issue of shares. Prices of the shares are determined by
the rule of demand and supply, shares of the companies. With good performance and
higher pay-out are in demand and their market prices are higher.

Bonds

Different types of bonds are issued by the Government of Pakistan. Most common are
the prize bonds of different denominations. They are issued by State Bank of Pakistan
to general public. Periodical balloting is held for the distribution of cash prizes they
carry

WAPDA Bonds

They are of two types: registered & Bearer Bonds. Return on these bonds is 19 per
cent per annum and is payable every sixth month, the period for maturity is 10 years.
These bonds are acceptable as security in lieu of bid bonds, earnest money, bank
guarantee, performance bond by WAPDA etc. The bonds are available in the
denominations of 10,000/-, 50,000/100,000/- and 500,000/- each. Recently the
government has issued sixth subscription of WAPDA Bonds.

Euro Bonds

These bonds are floated in European Market in order to generate funds in


international currencies. They are issued in US dollars, Swiss franc, Japanese yen &
German mark (DM), 56 per cent of the total floatation are in US dollars. Euro Bonds
issue would require a company to have a credit rating from one of the rating agencies
and a market, a capitalisation of US$ 1 billion. Dewan Salman Fabric is the first
Pakistani company to go for such an issue.

Bill of Exchan
ge and (Other Commercial Papers):
Discounting of bill of exchange and
Discounting of bill of exchange and
commercial papers provide liquidity to
commercial papers provide liquidity to
the financial system and to the
the financial system and to the
individuals and business concerns.
individuals and business concerns.
Short term investment for savers
Short term investment for savers
(Purchase of papers/Discounting) and
(Purchase of papers/Discounting) and
source of funds for the corporations
source of funds for the corporations
(issuing/Drawing bill of exchange). For
(issuing/Drawing bill of exchange). For
financial institutions commercial papers
financial institutions commercial papers
are a source of raising funds. Interest is
are a source of raising funds. Interest is
higher than short-term securities
higher than short-term securities

Bankers’ Acce
It is a draft issued by a
It is a draft issued by a
firm/company drawn on a ban
k

firm/company drawn on a ban


ptances
k
and accepted by the bank. It
and accepted by the bank. It
helps in growth and promotion o
f
helps in growth and promotion of
international
trade.
These
instruments
establish
credit
between parties, who at times
do not know each other.

do not know each other


1)Repurchase
Re
purchase
Agreement (Repos)
 In such cases a company places such cases a
company places
surplus funds with a Bank, usually
surplus funds with a Bank, usually
overnight but may be for very short rt
term i.e.; maturity of less than two
weeks.
In such cases if a company
surplus funds, it purchases treasuryy
bills from a bank, the selling bank
agrees to buy them back on agred
time at a higher rate. (This is called at a higher
repurchase agreementlly
Mortgages are loans
long term) to household or
business to purchase building g
or land, with the underlying
assets (house, plant or piece of
land)
serving
as
security/
collateral.
collateral
Muddrabah Certificates
MudaTabah certificate is, however, one of the instruments which has already been
introduced in Pakistan under the special law called 'The Mudcirabah companies and
Mudcirabah (Flotation and Control) Under this law, management companies, banks and
financial institutions can register themselves as Muddrabah companies and float a
Mudcirabah for a specific or general purpose. The objects of any Mudcirahah will be
restricted only to such business as are permitted under Islamic Shari'ah. In order to
ensure that Mudcirabahs are not used in any activity that is repugnant to the tenets of
Islam, the prospectus of each Muddrabah will need a prior clearance from a Religious
Board. Furthermore, after the Mudcirabah goes into operation, the law imposes
additional responsibility on the auditors to certify that all business conducted,
investments made and expenditure incurred are in accordance with the objects, terms
and conditions of the Muddrabah.

Mutual Funds & Types


A mutual fund is a collective investment scheme, which specializes in investing a pool of money collected from
many investors for the purpose of investing in securities such as stocks, bonds, money market instruments
and similar assets. A fund's portfolio is structured and maintained to match the investment objectives stated in
its prospectus.
One of the main advantages of funds is that they give small investors access to professionally managed,
diversified portfolios of equities, bonds and other securities, which would be quite difficult (if not impossible) to
create with a small amount of capital. The income earned through these investments and the capital
appreciations realized are shared by its unit holders in proportion to the number of units owned by them.
Open-ended fund units are issued and can typically be purchased or redeemed as needed at the fund's
current net asset value (NAV) per share whereas closed-end funds are listed on the stock exchanges and can
be freely traded.
Open-ended Funds
These funds are in a continuous process of issuing shares/ units on demand and redeeming shares/ units on
demand. The shares/ units do not trade on a market. The number of shares/ units outstanding varies each
time the net asset valuation calculation is carried out, which is daily for most open-ended funds.

Closed-end Funds
Closed-end funds issue a specific number of shares. Their capitalization is fixed. The shares are not
redeemable, but are readily transferable and traded on either a stock exchange or the over-the-counter
market. The price of a closed-end fund share fluctuates based on investor supply and demand. Closed-end
funds are not required to redeem shares and have managed portfolios.

Pakistan Market Treasury Bills (MTBs) and long term Pakistan Investment Bonds
(PIBs)

Characteristics of MTBs and PIBs

Market Treasury Bills (MTBs) are short-term instruments of Government borrowing

having the following features:

 Zero Coupon bonds sold at a discount to their face values

 Issued in three tenors of 3-month, 6-month and 12-months maturity

Purchased by individuals, institutions and corporate bodies including banks


irrespective of their residential status.
 Can be traded freely in the country’s secondary market. The settlement is

normally through a book entry system through Subsidiary General Ledger

Accounts (SGLA) maintained by banks with State Bank of Pakistan (SBP).

Physical delivery could be affected if required.

 Profit is taxable at 20%

Pakistan Investment Bonds


After the suspension of auctions of the long term Federal Investment Bonds

(FIBs) in June 1998, there was no long term marketable government security that

could meet the investment needs of institutional investors. Therefore, in order to

develop the longer end of the Government debt market for creating a benchmark

yield curve and to boost the corporate debt market, the Government decided to

launch Pakistan Investment Bonds in December 2000.


 Issued in five tenors of 3, 5, 10, 15 and 20-years maturity.

 Script less security managed through SGLA

 Purchased by individuals, institutions and corporate bodies including banks

irrespective of their residential status.

 Coupon and target amount announced by SBP in consultation with Ministry of

Finance

 Payment of Profit on semiannual basis. Profit is taxable @10%.

Auction Mechanism

SBP is acting as an agent on behalf of the government for raising short term and long

term funds from the market. The MTBs and PIBs are sold by SBP to eleven approved

Primary Dealers through multiple price sealed bids auction.

 The Auction for MTBs is held under a fixed schedule on fortnightly basis.

 The Auction for PIB is held on quarterly basis. Since September 2003, the sale

of PIBs is done under Jumbo issuance mechanism under which the previous

issues are reopened in order to enhance the liquidity in the secondary market.

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