Treasury & fund Management Fund Management in Money Market

Call / Clean Transaction Call Transaction Call transactions consist of non-secured lending/borrowing of PKR funds. It takes place between two commercial banks. These transactions are not backed by any security and therefore called unsecuritized transactions. Clean Transaction A Clean transaction is identical to a Call transaction except that it is between two NBFIs.

Example of Call / Clean Bank A borrows Rs.100 million for 92 (Rate x Number of days x Face Value) 365 = (0.14 x 92 x 100,000,000) 365 Interest cost = Rs. 3,528,

Repurchase Agreements (Repo / Reverse Repo) A Repos involves a sale transaction (of Government security, TFCs and listed shares) with the standing commitment the same upon maturity. For the party selling the security (borrower of funds) the transaction is referred to as a repo whereas for the party purchasing it (lender of funds), the transaction is referred to as a reverse repo.

Example: Repo & Reverse Repo Bank A wants to borrow Rs. 100 million from Bank B for a period of one month. Bank A has securities so it can enter into a repo in order to raise these funds. Bank B offers to lend Rs % (per annum). Bank A now has the option of borrowing these funds against T- Bills.

Example: Repo & Reverse Repo  T-Bills Particulars Issue DateMarch 11 th 2009 Current DateMay 10 th 2009 Tenor12 Months Maturity DateMarch 12 th 2010 Days to Maturity306 Reveal Rate13.20% Repo Rate12.00% Tenure of Deal1 Month (30 days)

Solution First price (P1)= Face Value 1+ {(MTM Rate/365) x DTM} = (.1320/365 x 306) =

Solution Second Price (P2 or Repo price) = P1 x Repo rate x term of repo) + P1 365 = x (0.12 x 30) =

Solution 1 st Cheque Amount = P1 x Deal Amount 100 = x 100,000, = Rs. 90,036,300/- 2 nd Cheque Amount = P2 x Deal Amount 100 = x 100,000, = Rs.90,924,300

Bonds – Fixed Income Securities “ Fixed income securities, promises to pay a stream of semiannual or annual payments for a given number of years and then repay the loan amount at the maturity date.”

Bond Valuation  K d = The bond market rate of interest. Discount to use to calculate the present value of bond.  N = The number of years before the bond matures.  INT = Rupee amount of interest paid annually or semiannually.  M or FV = the or maturity value of the bond.

Bonds – Zero Coupon  It pays no coupon payment.  It is issued at discount and that determines its yield. Bond Value = maturity value (1 + YTM) ⁿ E.g. Compute the value of a 1 year, 100 face value zero coupon bond with a yield to maturity of 8%.

Bond Formula Bond Value = V B = INT + INT + … + INT + M (1+K d ) 1 (1+K d ) 2 (1+K d ) N (1+K d ) N

Bond Valuation  N = 3  K d = 10%  INT = 100  M or FV = 1000  Find out Bond value.  Semi annual coupon.

Current Yield  It is the yield based on bond’s annual coupon payment.  It does not reflect the total return on bond.  It does not reflect the capital gain or loss on bond.

Current Yield  Current Yield = Annual Coupon Payment Current Price of Bond Example: A semi annual bond with a FV = 100, market price Rs.98 and coupon rate of 9.50%. Compute current yield.

Yield to Maturity  The rate of return earned on a bond if it is held till maturity.  It is the total rate of return on a bond.  YTM equals the expected rate of return only if: 1. The probability of default is ZERO. 2. The bond cannot be called.

YTM approx. = Annual Cpn + (FV – PV ) / N (FV + PV ) / 2 E.g. N = 10, annual coupon 10%, FV = Rs.100, PV = Rs.105. Find out YTM.