FINANCIAL INSTRUMENTS
1. Certificate of Deposit (CD)
• A Certificate of Deposit (CD) is a time deposit offered by banks with a fixed interest rate
and maturity date. CDs are considered low-risk because they are typically insured by a
government deposit insurance agency (like FDIC in the U.S.). They provide a guaranteed
return, making them appealing to risk-averse investors.
• In Pakistan, CDs are issued by commercial banks and come in various tenures, usually
between 3 months and 5 years. The interest rate depends on the maturity period. These
instruments are popular among retail and institutional investors looking for a safe return on
deposits.
• In the U.S., a 1-year CD might offer a 1.5% interest rate. In Pakistan, CDs may offer higher
rates due to inflation, with rates ranging from 6% to 10%.
2. Treasury Bills (T-Bills)
• Treasury Bills are short-term government securities issued to finance government
expenditures. They are considered one of the safest investments because they are backed
by the government. Investors buy them at a discount and receive the face value upon
maturity.
• In Pakistan, T-Bills are issued by the State Bank of Pakistan (SBP) and have maturities of 3,
6, and 12 months. They are sold to both individuals and institutions. The government uses
them to manage liquidity and finance short-term needs.
• A U.S. T-Bill might be sold at $980 and mature at $1,000 in a year. In Pakistan, T-Bills are
auctioned with yields depending on the current monetary policy, often between 7% and
9%.
3. Repurchase Agreements (Repos)
• A Repurchase Agreement (Repo) is a form of short-term borrowing, typically overnight,
where one party sells securities to another with an agreement to repurchase them at a later
date, usually at a higher price. It's widely used in money markets for liquidity management.
• Repos are common in Pakistan’s interbank market, where financial institutions manage short-
term liquidity. The SBP uses repos to implement monetary policy.
• A bank might sell $1 million in government securities with a promise to repurchase them the
next day for $1.001 million. In Pakistan, a bank may engage in a repo transaction involving
government bonds.
From the desk of Dr. Farhan Ahmed (Course Instructor – EC-304 Money & Banking)
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4. Banker's Acceptances
• A Banker's Acceptance is a short-term debt instrument issued by a company that is
guaranteed by a bank. They are used in international trade to finance the import and
export of goods. These instruments have a maturity period ranging from 30 to 180 days.
• In Pakistan, Banker's Acceptances are used by businesses involved in international trade.
They are less common than other instruments but serve as a reliable tool for financing trade
transactions.
• A U.S. company might issue a 90-day Banker's Acceptance to an exporter, guaranteed by
a U.S. bank. In Pakistan, a company involved in textile exports might use this instrument to
finance raw material imports.
5. Federal Funds
• In the U.S., Federal Funds are overnight loans between banks to maintain reserve
requirements. The interest rate at which these loans are made is called the Federal Funds
Rate, a key tool of monetary policy.
• Pakistan does not have a Federal Funds market similar to the U.S., but interbank lending
rates (the Karachi Interbank Offered Rate or KIBOR) play a similar role in liquidity
management and monetary policy.
• A U.S. bank may borrow $10 million overnight at the Federal Funds Rate. In Pakistan, banks
lend to each other at KIBOR rates for short-term liquidity.
6. Corporate Stocks
• Corporate stocks represent ownership in a company. Investors buy stocks to gain a share in
the company’s profits, typically through dividends and capital appreciation. Stocks are
traded in global markets like the NYSE, NASDAQ, and FTSE.
• The Pakistan Stock Exchange (PSX) is the primary market for corporate stocks. Stocks are
issued by companies across various sectors, including banking, energy, and manufacturing.
• A global company like Apple Inc. trades its shares on NASDAQ, whereas in Pakistan, a
company like Oil and Gas Development Company (OGDC) trades its shares on the PSX.
7. Corporate Bonds
• Corporate Bonds are debt securities issued by companies to raise capital. Investors lend
money to the company and earn interest over time, with the principal returned upon maturity.
Corporate bonds tend to offer higher returns than government bonds but come with higher
risk.
• In Pakistan, corporate bonds (Term Finance Certificates - TFCs) are used by large
corporations to raise funds. The interest rates on TFCs are higher than on government
securities, reflecting the higher risk.
• In the U.S., a company like Tesla might issue bonds with a 5-year maturity and a 3% coupon
rate. In Pakistan, a company like K-Electric may issue TFCs with interest rates ranging from
8% to 12%.
From the desk of Dr. Farhan Ahmed (Course Instructor – EC-304 Money & Banking)
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8. Mortgages
• A mortgage is a loan used to purchase real estate, where the property serves as collateral.
Mortgages are long-term loans and are a common way for individuals to finance home
purchases globally. They are typically offered with fixed or adjustable interest rates.
• In Pakistan, mortgages are offered by banks and housing finance companies. The real
estate sector in Pakistan is growing, and the mortgage market is developing, though access
to financing is more limited compared to developed markets.
• In the U.S., a 30-year fixed-rate mortgage might have an interest rate of 3%. In Pakistan,
housing loans can have interest rates ranging from 7% to 14% depending on the lender
and market conditions.
9. Government Securities
• Government Securities include a range of debt instruments issued by governments to
finance public spending. These instruments, like T-bonds or sovereign bonds, are considered
very safe because they are backed by the government.
• In Pakistan, government securities such as Pakistan Investment Bonds (PIBs) and Sukuk (Islamic
bonds) are issued by the government for long-term borrowing. These are popular among
institutional investors and individuals seeking low-risk investments.
• U.S. Treasury Bonds may offer a yield of 2-3% with maturities ranging from 10 to 30 years.
In Pakistan, PIBs may offer yields of 9-10% depending on market conditions.
From the desk of Dr. Farhan Ahmed (Course Instructor – EC-304 Money & Banking)
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