FIXED INCOME MARKET
The fixed income market comprises of two main categories; namely “Money Market” and “Bonds Market”.
A Money Market is characterized by very short-term debt securities that mature in less than one year. Securities have very high standard denominations (usually PKR 100mn and above) as well as a high credit quality as compared to other typical fixed income markets. The main instruments of the Money Market are:
- Bank Deposits – characterized by ease of withdrawal and low rate of return. Bank accounts are either current (no profit) or remunerative (savings/term deposits)
- Treasury Bills – short term government issued securities with maturities of less than a year. As they are backed by the government, T-bills contain negligible credit/default risk.
- Commercial Paper – unsecured short-term debt issued by a large corporation typically for financing their accounts receivables and inventories.
- Certificate of Investment (COI) – issued by authorized non-banking financial institution with maturities of less than a year.
A bond is a long-term contractual note issued by a corporation, usually of more than three years. Bonds can be traded in the primary and secondary markets. The issuer is obliged to pay periodic interest payments as well as principal amount at maturity.
In Pakistan, bonds can broadly be categorized into:
- Pakistan Investment Bonds (PIBs): Long Term government issued bonds with long term maturities. As they are backed by the government, they contain negligible credit/default risk.
- Government Ijara Sukuks: Islamic Long-Term Government issued Bonds with long term maturities. As they are backed by the government, they contain negligible credit/default risk.
Corporate Bonds (Term Finance Certificates)
- Long-term debt issued by a large corporation typically for financing their long-term capital needs.
Stocks (Shares) are listed equity securities, that represent ownership stake in a company, are bought and sold on the stock market (stock exchange). Investors can purchase and sell these shares and gain a proportional ownership in the company. Ownership in the company represents share in the profits and assets of the company. This means that there are no fixed returns. However, the return depends on the performance of the company. Returns on equity securities comprise of two aspects:
- Capital Gains when selling the stock – Difference between the sale price and purchase price
- Dividend Income – Periodically paid by companies to shareholders