Fixed Income Securities - Instruments, Pricing, Yield and Risk in Pakistan's Debt Market
Domain 1 - Fixed Income Securities. The FISC section on fixed income checks that you can name the debt instruments issued and traded in Pakistan, price them, measure yield and risk, and apply the SBP/SECP and Shariah rules governing issuance and settlement. Expect both numeric items and "which statement is correct" items.
The instrument map
- Government. Market Treasury Bills (3, 6, 12 months) are zero-coupon, sold at a discount through SBP auctions; Pakistan Investment Bonds (PIBs, typically 3–30 years) pay semi-annual fixed coupons; GoP Ijara Sukuk are asset-backed and PSX-listed.
- Corporate. Term Finance Certificates are secured, redeemable and often priced as KIBOR + spread with periodic resets; commercial paper covers short-term needs; sukuk use ijara, musharakah or mudaraba structures.
- Retail. National Savings Schemes are examined as competing instruments.
Pricing and risk rules
Price is the present value of contractual cash flows at the required yield, discounted at the coupon frequency. Settlement uses the dirty price: clean price plus accrued interest. For zero-coupon T-bills, price = face ÷ (1 + y × days/365). Modified duration = D ÷ (1 + y/m), and ΔP ≈ −D_mod × Δy × P. A floater's duration runs only to its next KIBOR reset.
Worked example
A 3-year PIB, 8% semi-annual coupon, face 100, yield 10%. Semi-annual yield 5%, 6 periods, coupon 4. PV coupons = 4 × [1 − 1.05⁻⁶]/0.05 = 20.30. PV principal = 100/1.05⁶ = 74.62. Price = 94.92 - a discount, because the yield exceeds the coupon. Modified duration ≈ 2.7, so a 100 bp yield rise costs roughly 2.6% of price.
Traps
- Mixing discount yield, bond-equivalent yield and current yield on T-bills, or annualising on 360 days instead of Pakistan's 365.
- Quoting the clean price and forgetting accrued interest at settlement.
- Believing a low coupon makes a bond low-risk - it usually raises duration.
- Assuming ijara sukuk carry a guaranteed return; they convey ownership risk in the underlying asset.
- Treating KIBOR-linked TFCs as fixed-rate and overstating their price sensitivity.