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DIFFERENT CHOICES AVAILABLE
FOR INVESTORS IN PAKISTAN
(Finance Perspective)
BUITEMS
Submitted By: Submitted To:
Muhammad Z...
Corporate Finance Group Assignment
Drafted by: Zafar Aziz CMS ID: 20402
What is Financial Markets?
A system comprised of i...
Corporate Finance Group Assignment
Drafted by: Zafar Aziz CMS ID: 20402
b) Secondary Market
 Securities previously issued...
Corporate Finance Group Assignment
Drafted by: Zafar Aziz CMS ID: 20402
Market Treasury Bills
One of the most popular mone...
Corporate Finance Group Assignment
Drafted by: Zafar Aziz CMS ID: 20402
 Liquidity 3 months or less are liquid if marketa...
Corporate Finance Group Assignment
Drafted by: Zafar Aziz CMS ID: 20402
 Coupon payments are paid at fixed rate of face v...
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financial instruments available in Pakistan for investment

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financial instruments available in Pakistan for investment

  1. 1. DIFFERENT CHOICES AVAILABLE FOR INVESTORS IN PAKISTAN (Finance Perspective) BUITEMS Submitted By: Submitted To: Muhammad Zeshan Ali Sir Rizwan Durrani Zafar Aziz Furrak Javeed
  2. 2. Corporate Finance Group Assignment Drafted by: Zafar Aziz CMS ID: 20402 What is Financial Markets? A system comprised of individuals and institutions, instruments, and procedures that bring together borrowers and savers. Flow of Funds in Financial Markets 1. Direct Transfer  business sells its stock directly to investors 2. Indirect Transfer through financial intermediary  bank or mutual fund obtains funds from savers and uses the money to lend or purchase securities Classification of Financial Markets Financial markets are classified on the following bases: 1. Classification by nature of claim.  Debt market; Equity market 2. Classification by maturity of claim.  Money market; Capital market 3. Classification by seasoning of claim.  Primary market; Secondary market 4. Classification by organizational structure  Auction market; Over-the-counter market; Intermediated market 1) Classification by maturity of claim a) Money Markets  instruments traded mature in one year or less b) Capital Markets  includes instruments with maturities greater than one year 2) Classification by seasoning of claim a) Primary Market  New security issues sold to initial buyers  Typically involves an investment bank who underwrites the offering
  3. 3. Corporate Finance Group Assignment Drafted by: Zafar Aziz CMS ID: 20402 b) Secondary Market  Securities previously issued are bought and sold  Examples include the KSE  Involves both brokers and dealers 3) Classification by organizational structure a) Exchanges  Trades conducted in central locations - Auction (e.g., Karachi Stock Exchange, LSE)  Stock Exchange: Providing an organized market place for bringing together, buyers and sellers of corporate debt and equity securities. b) Over-the-Counter Markets  Dealers at different locations buy and sell  Best example is the market for Treasury Securities  Provides for trading in securities not listed on the organized exchanges  Electronic network provides communications link  National Clearing Company: Provides clearing and settlement services by acting as a central and geographically neutral clearinghouse for all the three Exchanges for book entry securities.  Central Depository Company: Operates a book entry system to record and transfer securities in electronic/demat form. What is a Financial Instrument A financial instrument is  any contract that gives rise to both a financial asset of one entity and a financial liability or equity instrument of another entity A financial asset is  cash; or  a contractual right to receive cash or another financial asset from another entity; or  a contractual right to exchange financial instruments with another entity under conditions that are potentially favourable; or  an equity instrument of another entity Types of Financial Instruments Money Market Instruments  Market Treasury Bills  Certificates of Deposit  Commercial Paper  KIBOR (Karachi Interbank Offer Rate)
  4. 4. Corporate Finance Group Assignment Drafted by: Zafar Aziz CMS ID: 20402 Market Treasury Bills One of the most popular money market instruments is Treasury bills, • Which are short-term securities that mature in less than a year. • An investor may purchase Treasury bills for less than the face value of the security and makes a profit at the end of the period when the government pays the Treasury bill holder the full face value amount. • Treasury bills are affordable and completely risk-free, backed by the assurance of the government. Given the lack of risk associated with this type of money market instrument, the returns are generally very low, compared to higher risk securities. Certificates of Deposit (CD) CDs generally have a slightly higher return than Treasury bills due to the higher risk an investor is exposed to and also have a higher rate of return compared to putting the money in a savings account.  Issued by Depository Institutions  Denomination Any, Rs100,000 or more are marketable  Maturity Varies, typically 14 day minimum
  5. 5. Corporate Finance Group Assignment Drafted by: Zafar Aziz CMS ID: 20402  Liquidity 3 months or less are liquid if marketable  Default risk First Rs100,000 (Rs250,000) is insured  Interest type Add on  Taxation Interest income is fully taxable Commercial Paper Commercial paper, as a security, is considered a safe investment as the financial health of the issuing corporation can be anticipated over the relatively short time frame of nine months.  Commercial Paper Issued by Large creditworthy corporations and financial institutions  Maturity Maximum 270 days, usually 1 to 2 months  Liquidity 3 months or less are liquid if marketable  Default risk Unsecured, Rated, Mostly high quality  Interest type Discount  Taxation Interest income is fully taxable Capital Market Instruments (a) Equities I. Common stock/Ordinary shares  Residual claim • Cash flows to common stock lowest priority in case of bankruptcy. First Debt holders then preferred, then common.  Limited Liability- Can only lose initial investment II. Preferred stock  Fixed dividends: limited gains, non-voting Priority over common  Tax treatment: Preferred & common dividends are not tax deductible to the issuing firm. Corporate tax exclusion on 70% dividends earned (b) Fixed Income I. Corporate bonds/TFCs  Pakistan Investment Bond:  Issued by Government of Pakistan  Issued in multiples of PKR 100,000  Available in tenors of 3,5,10 and 20 years
  6. 6. Corporate Finance Group Assignment Drafted by: Zafar Aziz CMS ID: 20402  Coupon payments are paid at fixed rate of face value on semi- annual basis. Debt-Market Instruments Different type of certificates available to invest in Pakistan are as follows. I. Defense Saving Certificate: The Government of Pakistan introduced Defense Savings Certificate scheme in the year 1966. This is 10 years' maturity scheme with built in feature of automatic reinvestment after the maturity. These certificates are available in the denominations of Rs.500, Rs.1000, Rs.5,000, Rs.10,000, Rs.50,000, Rs.100,000, Rs.500,000 and Rs.1,000,000.  These certificates can be purchased by a single adult, a minor, two adults in their joint names  The minimum investment limit is Rs.500/-, however, there is no maximum investment limit in this scheme.  In this scheme the profit is paid on maturity or encashment for completed years  The average compound rate of return on maturity presently works to 12.26% p.a.  These certificates are cashable at par any time after the date of purchase. However, no profit is payable if encashment is made before completion of one year. II. SPECIAL SAVINGS CERTIFICATES: This three years' maturity scheme was introduced in February, 1990. These certificates are available in the denomination of Rs.500, Rs.1000, Rs.5,000, Rs.10,000, Rs.50,000, Rs.100,000, Rs.500,000 and Rs.1,000,000. Profit is paid on the completion of each period of six months.  These certificates are cashable at par any time after the date of purchase. However, no profit is payable if the encashment is made before completion of six months.  At prevailing rates, the profit is paid @ 11.40% p.a. for 1st five profits and @ 12.00% p.a. for the last profit. However, if the profit is not withdrawn on due date it will automatically stand reinvested and would be calculated for further profit on completion of the next 06 months' period. III. REGULAR INCOME CERTIFICATES: This five years' maturity scheme was launched on 2nd February, 1993.  These certificates are available in the denomination of Rs.50,000, Rs.100,000, Rs.500,000, Rs.1,000,000, Rs.5,000,000 & Rs.10,000,000  Profit is paid on monthly basis  The minimum investment limit is Rs.50,000/-, however, there is no maximum investment limit in this scheme.  At the prevailing rates monthly profit of Rs.990/- (excluding withholding tax) is paid on investment of each Rs.100,000. This way the profit rate works to 11.88% p.a.

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