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Module: Money and Banking
Topic: Money Supply.
Week 5
Mr.M Aamir waheed
Department of Business Administration
Lecturer Objectives
This lecturer aims:
 To Understand the concept of Money Supply
 To Understand the concept of M1 Money
Supply
 To Understand the concept of M2 Money
Supply
 To Understand the concept of M3 Money
Supply
Ch 1 -2
Lecturer Objectives (Cont’d)
 To Understand the concept of M4 Money
Supply
 To Understand the Different Money Market
Instruments
 To Understand the Different Capital Market
Instruments
Ch 1 -3
Money Supply
The total amount of money in circulation or
in existence in a country.
OR
In macroeconomics, the money supply is the
total value of money available in an
economy at a point of time.
Ch 1 -4
The total stock of money in circulation
among the public at a particular point of time
is called money supply.
The measures of money supply are mainly
classified into four categories
 M1 Money Supply
 M2 Money Supply
 M3 Money Supply
 M4 Money Supply
Ch 1 -5
M1 Money Supply
M1 money supply - a narrow definition of the
money supply that includes currency and checking
accounts in banks, and to a lesser degree,
traveler’s checks.
Ch 1 -6
M1 money supply includes:
 Coins and currency in circulation - the coins
and bills that circulate in an economy that are
not held by state bank of Pakistan or Central
Bank.
 Checkable (demand) deposits - checkable
deposit in banks that is available by making a
cash withdrawal or writing a check.
Ch 1 -7
M2 Money Supply
M2 money supply - a definition of the money
supply that includes everything in M1, but also
adds savings deposits, money market funds, and
certificates of deposit.
Ch 1 -8
M2 money supply includes:
 All M1 types
 Savings deposits - bank account where you
cannot withdraw money by writing a check, but
can withdraw the money at a bank - or can
transfer it easily to a checking account.
 Money market fund - the deposits of many
investors are pooled together and invested in a
safe way like short-term government bonds.
Ch 1 -9
 Certificates of Deposit (CD’s) and other time
deposits - account that the depositor has
committed to leaving in the bank for a certain
period of time, in exchange for a higher rate of
interest.
Ch 1 -10
The Relationship between M1 and M2 Money Supply
● M1 and M2 money have several definitions, ranging from narrow
to broad.
● M1 = coins and currency in circulation + checkable (demand)
deposits + traveler’s checks.
● M2 = M1 + savings deposits + money market funds + certificates
of deposit + other time deposits.
M3 Money Supply
M3 is a measure of the money supply that
includes M2 as well as large time deposits,
institutional money market funds, short-
term repurchase agreements (repo), and
larger liquid assets.
Ch 1 -12
The M3 measurement includes assets that
are less liquid than other components of
the money supply and are referred to as
"near money," which are more closely
related to the finances of larger financial
institutions and corporations than to those of
small businesses and individuals.
M3 = M2 + large time deposits + MMMF-
institutional + repurchasing agreements +
Eurodollars
Ch 1 -13
M4 Money Supply
M4 is a measure of the money supply that
includes M3 as well as all treasury bills and
commercial securities.
M4 = M3 + T-bills + commercial papers
(securities)
Ch 1 -14
Types of Financial Instruments
Money Market Instruments
 Market Treasury Bills
 Certificates of Deposit
 Commercial Paper
 KIBOR (Karachi Interbank Offered Rate)
Ch 1 -15
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.
Ch 1 -16
 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.
 Issuer Govt. of Pakistan
Ch 1 -17
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
Ch 1 -18
 Liquidity= 3 months or less are liquid if
marketable
 Default risk= First Rs100,000 (Rs250,000)
is insured
 Taxation= Interest income is fully taxable
Ch 1 -19
Commercial Paper
 Commercial paper is an unsecured, short-
term debt instrument issued by a
corporation, typically for the financing
of accounts receivable, inventories and
meeting short-term liabilities.
 Commercial Paper Issued by Large
creditworthy corporations and financial
institutions
Ch 1 -20
 Maturity Maximum 270 days, usually 1 to 2
months
 Liquidity 3 months or less are liquid if
marketable
Ch 1 -21
KIBOR
 Karachi Inter Bank Offered Rates (KIBOR)
is the average interest rate at which banks
want to lend money to other banks.
Ch 1 -22
Capital Market Instruments
 Equities
1. Common stock / Ordinary shares
2. Preferred Stock
 Fixed Income
I. Corporate bonds/TFCs
II. Pakistan Investment Bond
Ch 1 -23
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
Ch 1 -24
Preferred Stock
 Fixed dividends: limited gains, non-voting
Priority over common
 Preferred & common dividends are not tax
deductible to the issuing firm. Corporate
tax exclusion on 70% dividends earned
Ch 1 -25
Corporate bonds
A corporate bond is a bond issued by
a corporation in order to raise financing for
a variety of reasons such as to ongoing
operations, M&A, or to expand business.
The term is usually applied to longer-
term debt instruments
Ch 1 -26
Term finance certificate/TFCs
 A Term Finance Certificate (TFC) is a
corporate debt instrument issued by
companies in Pakistan to generate short
and medium-term funds.
Ch 1 -27
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
Ch 1 -28
Overview of financial
Institutions in Pakistan
 State bank (SBP)
 Private banks
 Foreign banks
 Development financial institutions (e.g., House Building
Finance Corporation, Karachi )
 Specialized banks (ZTBL)
 Investment banks ( Atlas Investment Bank Limited)
 Micro finance banks
 Islamic banks
Ch 1 -29
Any Question?
Ch 1 -30
Many Thanks
Ch 1 -31

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MB by week 6 Aamir waheed.ppt money and banking course

  • 1. Module: Money and Banking Topic: Money Supply. Week 5 Mr.M Aamir waheed Department of Business Administration
  • 2. Lecturer Objectives This lecturer aims:  To Understand the concept of Money Supply  To Understand the concept of M1 Money Supply  To Understand the concept of M2 Money Supply  To Understand the concept of M3 Money Supply Ch 1 -2
  • 3. Lecturer Objectives (Cont’d)  To Understand the concept of M4 Money Supply  To Understand the Different Money Market Instruments  To Understand the Different Capital Market Instruments Ch 1 -3
  • 4. Money Supply The total amount of money in circulation or in existence in a country. OR In macroeconomics, the money supply is the total value of money available in an economy at a point of time. Ch 1 -4
  • 5. The total stock of money in circulation among the public at a particular point of time is called money supply. The measures of money supply are mainly classified into four categories  M1 Money Supply  M2 Money Supply  M3 Money Supply  M4 Money Supply Ch 1 -5
  • 6. M1 Money Supply M1 money supply - a narrow definition of the money supply that includes currency and checking accounts in banks, and to a lesser degree, traveler’s checks. Ch 1 -6
  • 7. M1 money supply includes:  Coins and currency in circulation - the coins and bills that circulate in an economy that are not held by state bank of Pakistan or Central Bank.  Checkable (demand) deposits - checkable deposit in banks that is available by making a cash withdrawal or writing a check. Ch 1 -7
  • 8. M2 Money Supply M2 money supply - a definition of the money supply that includes everything in M1, but also adds savings deposits, money market funds, and certificates of deposit. Ch 1 -8
  • 9. M2 money supply includes:  All M1 types  Savings deposits - bank account where you cannot withdraw money by writing a check, but can withdraw the money at a bank - or can transfer it easily to a checking account.  Money market fund - the deposits of many investors are pooled together and invested in a safe way like short-term government bonds. Ch 1 -9
  • 10.  Certificates of Deposit (CD’s) and other time deposits - account that the depositor has committed to leaving in the bank for a certain period of time, in exchange for a higher rate of interest. Ch 1 -10
  • 11. The Relationship between M1 and M2 Money Supply ● M1 and M2 money have several definitions, ranging from narrow to broad. ● M1 = coins and currency in circulation + checkable (demand) deposits + traveler’s checks. ● M2 = M1 + savings deposits + money market funds + certificates of deposit + other time deposits.
  • 12. M3 Money Supply M3 is a measure of the money supply that includes M2 as well as large time deposits, institutional money market funds, short- term repurchase agreements (repo), and larger liquid assets. Ch 1 -12
  • 13. The M3 measurement includes assets that are less liquid than other components of the money supply and are referred to as "near money," which are more closely related to the finances of larger financial institutions and corporations than to those of small businesses and individuals. M3 = M2 + large time deposits + MMMF- institutional + repurchasing agreements + Eurodollars Ch 1 -13
  • 14. M4 Money Supply M4 is a measure of the money supply that includes M3 as well as all treasury bills and commercial securities. M4 = M3 + T-bills + commercial papers (securities) Ch 1 -14
  • 15. Types of Financial Instruments Money Market Instruments  Market Treasury Bills  Certificates of Deposit  Commercial Paper  KIBOR (Karachi Interbank Offered Rate) Ch 1 -15
  • 16. 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. Ch 1 -16
  • 17.  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.  Issuer Govt. of Pakistan Ch 1 -17
  • 18. 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 Ch 1 -18
  • 19.  Liquidity= 3 months or less are liquid if marketable  Default risk= First Rs100,000 (Rs250,000) is insured  Taxation= Interest income is fully taxable Ch 1 -19
  • 20. Commercial Paper  Commercial paper is an unsecured, short- term debt instrument issued by a corporation, typically for the financing of accounts receivable, inventories and meeting short-term liabilities.  Commercial Paper Issued by Large creditworthy corporations and financial institutions Ch 1 -20
  • 21.  Maturity Maximum 270 days, usually 1 to 2 months  Liquidity 3 months or less are liquid if marketable Ch 1 -21
  • 22. KIBOR  Karachi Inter Bank Offered Rates (KIBOR) is the average interest rate at which banks want to lend money to other banks. Ch 1 -22
  • 23. Capital Market Instruments  Equities 1. Common stock / Ordinary shares 2. Preferred Stock  Fixed Income I. Corporate bonds/TFCs II. Pakistan Investment Bond Ch 1 -23
  • 24. 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 Ch 1 -24
  • 25. Preferred Stock  Fixed dividends: limited gains, non-voting Priority over common  Preferred & common dividends are not tax deductible to the issuing firm. Corporate tax exclusion on 70% dividends earned Ch 1 -25
  • 26. Corporate bonds A corporate bond is a bond issued by a corporation in order to raise financing for a variety of reasons such as to ongoing operations, M&A, or to expand business. The term is usually applied to longer- term debt instruments Ch 1 -26
  • 27. Term finance certificate/TFCs  A Term Finance Certificate (TFC) is a corporate debt instrument issued by companies in Pakistan to generate short and medium-term funds. Ch 1 -27
  • 28. 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 Ch 1 -28
  • 29. Overview of financial Institutions in Pakistan  State bank (SBP)  Private banks  Foreign banks  Development financial institutions (e.g., House Building Finance Corporation, Karachi )  Specialized banks (ZTBL)  Investment banks ( Atlas Investment Bank Limited)  Micro finance banks  Islamic banks Ch 1 -29