The money market is a market which is used for buying and selling short term loan able funds in the form of securities and loans. Generally, short term loans are traded in money markets which can be converted into cash rather quickly. Trading in the money markets involves Treasury bills, commercial paper, bankers' acceptances, certificates of deposit, federal funds, short-lived mortgage and Securities
The buyer of a money market instrument is the lender. The seller of the money market instrument is the borrower. Money market instruments have a maturity of one year or less. Most have a maturity of six months or less. The majority of money market instruments are issued at a discount. This means that the lender of the money does not receive interest payments. Rather, a person might lend Rs.96, 000 and receive Rs.100, 000 at maturity. Money market instruments are regarded as quite safe. Of course, there are some instruments, which are considered safer than others. T-Bills are considered safer than commercial paper. Nevertheless, they are all considered low risk.
The money market trades both corporate and government debt securities. T-Bills are the majority of what's traded in the money market. However, Treasury Notes are also traded. Treasury Notes have maturities from one year to ten years. T-Bonds are also traded. However, the only T-Bonds traded have one year or less to maturity. One of the greatest advantages to the Money Market is the great liquidity. It is such a huge market that the spreads are kept relatively low. Also, interest earned from the Money Market is free of state tax. One last feature of the Money Market is the absence of business risk.
CHARACTERISTICS OF MONEY MARKET INSTRUMENTS
Short-term borrowing and lending
Rapid growth in short-term bank debt to developing countries in the 1990s was associated with some significant benefits, such as the financing of growing trade. But this growth was also associated with policy-induced distortions and cyclical influences, leading to riskier accumulation of high levels of short-term borrowing. Short-term debt is also pro cyclical to economic shocks, aggravating rather than smoothing adjustment. Excessive levels of short-term debt relative to liquid international reserves raise the vulnerability of countries to liquidity crises and were a major factor
in the recent crises. Developing countries need to monitor their short-term debt closely, and existing reporting systems for short-term debt may tend to underestimate the size of potentially reversible capital flows
Low credit risk
The risk of loss of principal or loss of a financial reward stemming from a borrower's failure to repay a loan or otherwise meet a contractual obligation. Credit risk arises whenever a borrower is expecting to use future cash flows to pay a current debt. Investors are compensated for assuming credit risk by way of interest payments from the borrower or issuer of a debt obligation.
Credit risk is closely tied to the potential return of an investment, the most notable being that the yields on bonds correlate strongly to their perceived credit risk.
High liquidity
A "high liquidity" investment, is an investment that will permit you the ability to get back your investment dollars in a short amount of time, without the risk of losing any of your principal investment; even if you pull your money back out before the full maturation of an expected investment period.
On the other end of the spectrum a "low liquidity" investment, would be property or Real-estate. You could by $1,000 lot in your home town today, and should you need that money back, you would have to wait until you find a buyer. And even then, you may not get back what you put into it.
Simply put, "high liquidity" refers to the amount of time it takes for you to get back the money you put into it. They tend to be low risk, and consequently have very modest returns.
CHARACTERISTICS OF PAKISTANI MONEY MARKET
The money market in developed and developing countries differ markedly from each other in many senses. Pakistani money market is not an exception for this. Though it is not a developed money market, it is one of the most rapidly growing money market among the developing countries.
Pakistani Money Market has the following major characteristics:-
Seasonality:
The demand for money in Pakistani money market is of a seasonal nature. Pakistan being an agriculture predominant economy, the demand for money is generated from the agricultural operations. During the busy season i.e. between October and April more agricultural activities, takes place leading to a higher demand for money.
Multiplicity of Interest Rates:
In Pakistani money market, we have many levels of interest rates. They differ from bank to bank from period to period and even from borrower to borrower. Again in both organized and unorganized segment the interest rates differ. Thus, there is an existence of many rates of interest in the Pakistani money market.
Absence of Integration:
This is a very important feature of the Pakistani money market. At the same time it is divided among several segments or sections which are loosely connected with each other. There is a lack of coordination among these different components of the money market.
High Volatility in Call Money Market:
The call money market is a market for very short-term money. Here money is demanded at the call rate. The demand for call money comes from the commercial banks. Institutions such as the GIC, LIC, etc suffer huge fluctuations and thus it has remained highly volatile.
Limited Instruments:
It is in fact a defect of the Pakistani money market. In our money market the supply of various instruments such as the Treasury Bills, Commercial Bills, Certificate of Deposits, Commercial Papers, etc. is very limited. In order to meet the varied requirements of borrowers and lenders, It is necessary to develop numerous instruments
DEFECTS OR DRAWBACKS OF PAKISTANI MONEY MARKET
Though the Pakistani money market is considered as a rapidly growing money market among developing countries, it still suffers from many drawbacks or defects. These defects limit the efficiency of our market.
Some of the important drawbacks of Pakistani Money Market are :-
Multiple rate of interest :
In the Pakistani money market, especially the banks, there exist too many rates of interests. These rates vary for lending, borrowing, government activities, etc. Many rates of interests create confusion among the investors.
Insufficient Funds or Resources :
The Pakistani economy with its seasonal structure faces frequent shortage of financial recourse. Lower income, lower savings, and lack of banking habits among people are some of the reasons for it.
Shortage of Investment Instruments :
In the Pakistani money market, various investment instruments such as Treasury Bills, Commercial Bills, Certificate of Deposits, Commercial Papers, etc. are used. But taking into account the size of the population and market these instruments are inadequate.
Shortage of Commercial Bill:
In Pakistan, as many banks keep large funds for liquidity purpose, the use of the commercial bills is very limited. Similarly since a large number of transactions are preferred in the cash form the scope for commercial bills are limited.
Lack of Organized Banking System:
In Pakistan even though we have a big network of commercial banks, still the banking system suffers from major weaknesses such as the NPA, huge losses, poor efficiency. The absence of the organized banking system is major problem for Pakistani money market.
Less number of Dealers:
There are poor number of dealers in the short-term assets who can act as mediators between the government and the banking system. The less number of dealers leads tc the slow contact between the end lender and end borrowers.
These are some of the major drawbacks of the Pakistani money market; many of these are also the features of our money market.
MONEY MARKET INSTRUMENTS IN PAKISTAN:
Following are the money market instruments offers in Pakistan:
Treasury bills
Commercial papers
Repurchase agreement
Banker’s acceptance
Treasury Bills (T-Bills)
T-bills are a form of a short-term government debt security that matures in one year or less from their issue date. T-bills are traded on the face value of PRs. 100 and in denomination of multiples of 100. FORMULA: discount rate= (par value-purchase price/par value) * (360/#of maturity days). The maturity period for T-bills ranges from a minimum of 3 months to a maximum of 12 months. T-bills differ from other types of investments in that they do not pay interest in the traditional way instead, an investor purchases a T-bill at a discount rate. T-bills are guaranteed by the government therefore, they possess a minimum risk of default. In addition, T-bills are liquid instrument of financial market and can readily be liquidated by its holder. In Pakistan, T-bills are regulated by the State Bank of Pakistan (SBP), by two methods known as Auction System and Open Market Operations respectively. In an Auction system, the SBP announces the T-bill auction. This leads to a bidding process in which dealers submit the bids. The securities are issued after the pricing is finalized following the bidding.
Commercial Papers
In Pakistan, commercial papers were introduced by SBP and SECP in 2003. These are a form of short term, unsecured promissiory notes issued by companies and financial institutions with high credit ratings and a minimum equity of Rs. 100 million. It is a safer investment option for investors and offers a higher yield than deposits. The issuance of commercial paper can be accomplished by way of public offer or scheduled banks. The maturity period of commercial paper securities range from a minimum of 3 months to a maximum of one year from the date of subscription. The minimum size of an issue of a commercial paper cannot be less than RS.10 million. In case of private placement, commercial paper can be denominated in Rs 100,000 or in multiple of thereof. However, in case of a general public offer, commercial paper may be denominated in Rs 5,000 or in multiples of thereof..Discount to face value is determined by the issuer keeping in the view the prevailing T-BILL Rates, KIBOR and issuer credit rating.
Calculation: DRcp= (par value â€" purchase price)/ par value * 360 / days of maturity
Repurchase Agreement
Repurchase agreements are agreements between lender and borrowers. Borrower sells securities to the lender with the stipulation that the securities will be repurchased on the specified date and at a fixed price and interest. Securities are served as collateral for loan. Types of Repo ( in terms of maturities)
Overnight Repos
Term repos
Open repos
Major borrowers and lenders
Major borrowers include government bond dealers of treasuries and federal agency securities, and large banks
While active lenders include state and local governments, non-financial corporations, insurance companies, large banks, and foreign financial institutions
Government securities are the main collaterals for most repos and these government securities ensure lenders to lend their money as a safe investment.
Calculation: interest income= amount of loan * current repo rate * (repo in days/360)
Purpose of repo is to meet deposit reserve requirement. In order to purchase interest bearing securities, companies lend to avoid losing even a single days interest
Bankers Acceptance
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. After acceptance, the draft becomes an unconditional liability of the bank. But the holder of the draft can sell (exchange) it for cash at a discount to a buyer who is willing to wait until the maturity date for the funds in the deposit.
A banker's acceptance starts as a time draft drawn on a bank deposit by a bank's customer to pay money at a future date, typically within six months, analogous to a post-dated check. Next, the bank accepts (guarantees) payment to the holder of the draft, analogous to a post-dated check drawn on a deposit with over-draft protection.
The party that holds the banker's acceptance may wait the acceptance until it matures, and thereby allow the bank to make the promised payment, or it may sell the acceptance at a discount today to any party willing to wait for the face value payment of the deposit on the maturity date. The rates at which they trade, calculated from the discount prices relative to their face values, are called banker's acceptance rates. [1].
Banker's acceptances make a transaction between two parties who do not know each other more safe because they allow the parties to substitute the bank's credit worthiness for that who owes the payment. They are used widely in international trade for payments that are due for a future shipment of goods and services. For example, an importer may draft a banker's acceptance when it does not have a close relationship with and cannot obtain credit from an exporter. Once the importer and bank have completed an acceptance agreement, whereby the bank accepts liabilities of the importer and the importer deposits funds at the bank (enough for the future payment plus fees), the importer can issue a time draft to the exporter for a future payment with the bank's guarantee.
Term Deposit Receipts
Similar to guaranteed investment certificate, an interest-paying investment under which the investor commits funds for a specified term at a specified rate of interest, usually 30, 60, 90 days and up to one year. These deposits give profit on daily basis and we can withdraw our money at any time. On the other hand term deposit receipt starts from one year to three years on fixed deposits.
The Term Deposit Receipt is not transferable. Exim Bank may, however, at its discretion permit the addition of not more than two names to the Term Deposit Receipt issued to a sole depositor, under certain circumstances and subject to such terms and conditions as it may deem fit. Exim Bank will not recognize or accept any lien on or an assignment of the deposit and/or interest thereon unless expressly agreed by it.
The Term Deposit Receipt will be despatched by Exim Bank to the address of the sole/first-named depositor or to its/his/her authorised agent within three weeks of receipt of the Application by Exim Bank. .
In the event of loss, theft, destruction, mutilation or defacement of the Term Deposit Receipt, a duplicate Deposit Receipt may be issued by Exim Bank subject to compliance with its terms and conditions including furnishing of such indemnity duly signed by the depositor(s) as may be deemed fit by Exim Bank. All expenses in this connection will be borne by the depositor(s).
WHY INVEST IN TDR
Advantages:
The advantages of investing in TDRs are highlighted as follows:
Short-term lending is a positive point of term deposit receipts. Short term lending helps an investor to invest money for a short time. .i.e. from one month to three years. So, this is very helpful for investor to earn an interest in short period of time. Short term investments also prove helpful to an individual who does not want to bind his money for a long period of time. It also attracts an investor to earn a return on his marginal or excessive income.
Low credit risk is a characteristic of money market instruments. That is why term deposit receipts also fall in category of low credit risk. This low credit risk is because of exim bank. This bank gives surety to investor that there money is safely invested and risk of loss is minimum. As term deposit receipts are of low credit risk, there return become low., by a common theory that when there high risk, there will be high profit and when there is low risk, there will be low profit. So to earn high interest we have to invest large amount of money. But this does not make the moral of investor down as he has a big advantage of low risk.
High liquidity attracts the investors to invest in term deposit receipts. Because of high liquidity investor knows that, if he needs money immediately, like he gets better opportunity to invest in, he can easily withdraw his money from term deposit receipts. Even withdrawing money before maturity, he will also receive interest which has earned in days of lending after a little bit amount of fine.
High volume of lending in term deposit receipts affects the interest rate. Higher the amount of investment, higher will be the return. In case if you are lending a large amount, banks will give you a high rate and in case you are still not satisfied, this rate is negotiable and you can even increase the rate. This flexibility attracts the investors to lend large amount of money to get high return on a low risk investment.
Day to day return is always creates a big room for investors to chose term deposit receipts. In this day to day return, money increases on day to day basis according to the percentage decided by the bank. This day to day increase is feasible on all of their policies, like 1 month, 3 months, 6 months, 1year, 2year, and 3year. To avail this facility we have to select this package while investing.
Fixed deposit gives high rate of return as compare to day to day returns. It is our will that we have to fix our money or we do day to day return. As we fix our money, we cannot withdraw our money before maturity and we also get high return on it.
Due to all the above advantages, we can identify that term deposit receipts are very easy way to earn returns. These term deposit receipts are very comfortable with investors, and this attracts many different types of investors to invest in term deposit receipts. So as our project has done investments in different sectors, which are high risk stocks, medium risks mutual funds, term deposit receipts are low risk. Because of low risk we will receive less return on these term deposit receipts. Because of this reason, we have invested 5 % of the total amount of money which is 1billion. This helped in surety of profits, but also helped us in covering every sector in Pakistan from where we can invest money.
TDR Returns
Credit Ratings (Long Term/Short Term)
Ratings Agency
11.75
AA+/A-1+
JCR-VIS
11.75
AA/A1+
PACRA
11
AA-/A1+
PACRA
10.5
AAA/A-1+
JCR-VIS
10.25
AA+/A1+
PACRA
7.99
AA/A1+
PACRA
6.4076
AA+/A1+
PACRA
