Grant Thornton Anjum Rahman

Chartered Accountants

Client: Dawood Income Fund

For The Year Ended June 30, 2019

UNDERSTANDING DOCUMENT OF DEBT MARKET

 What is Debt Market

The debt market is a financial market (same as stock Market) where the investors trade in
Bonds and other debts in order to earn profits. There are 2 types of debt securities.
a. Listed debt Securities
b. Unlisted Debt securities
a) Listed Debt Securities
Listed debt securities are debt securities are those securities which are listed in stock exchange.
These securities are traded in stock exchange and their prices are determined on daily basis
depending upon the market trends. Market values of listed debt securities are quoted on stock
exchange and traded therefrom.
b) Unlisted Debt Securities
These are the securities which are not listed in Pakistan stock exchange and whose market
values are not determined at such platform instead these securities are traded in (Over- the-
counter) OTC Market. Over-the counter or off –exchange trading is done directly between
two parties, without the supervision of an exchange .In an OTC trade, the price is not
necessarily publicly disclosed .In OTC market contracts are Bilateral (i-e the contract is only
between two parties ),and each party could have credit risk concerns with respect to the other
party .

 What are bonds and Debentures

Bonds and debts are simple way for government and companies to borrow money from
different investors to raise funds they need for operations or for growth.
Bond is a simple instrument having;
a. Fixed Coupon Rate
b. Fixed Maturity Period ,and
c. Fixed Principal Amount
The bond provides a fixed annual return to the holder at the pre- determined coupon rate
every year until its maturity date at which the principal amount will be returned to the
investors. However, some bonds have the capacity to be traded in open market depending
upon the nature of the bond
 Classification
IFRS 9 Classifies All the Financial Assets into three main categories depending upon their
nature:
a. Amortized Cost
b. Fair Value Through Profit & loss
c. Fair Value through Other comprehensive Income
1. Amortized Cost
If the objective of the entity’s business model is to hold financial assets to collect contractual
cash flows only in terms of solely payments of principal and interest

2. Fair Value through Other comprehensive Income

If the objective of the entity’s business model is to hold financial assets to both collect
contractual cash flows and selling the financial assets into the market.
3. Fair Value through Profit and Loss
All the other Debt securities are classified as FVTPL

Trading of Bonds and Debts into the Open Market

Trading of Bonds/Certificates into open market is a complicated process and requires
technical knowledge of certain factors which may impact the market price of the instrument.
However, the prices of Bonds generally changes due to two main Factors:
a. Interest Rate Risk
b. Credit Risk

a. Interest Rate Risk:

Also known as market risk. It refers to as the propensity bonds have, of the fluctuation in
price due to changes in interest rates.
Interest Rate inversely effect the market price such as if the interest rate has increased during
the year it means that the bond which is currently in your possession is providing a return at a
lesser rate as compared to rest of the market and making it difficult to convince the public to
purchase the bond having less interest rate resulting in the decrease in market Price of such
Bond And Vice Versa.The fluctuations in interest rates on daily Basis depend upon the
following internal and external Factors namely:
1. Inflation
2. Economic Growth

1. Inflation
When the price level rises, each unit of currency can buy fewer goods and services then before
resulting in the reduction in purchasing power.so, the people, with surplus funds, demands
higher interest rates in order to protect the return on their investments against the adverse
impact of higher inflation resulting in an increase in interest rate.
2. Economic Growth
If the economy of the country gains momentum then the demand of money tends to go up
putting upward pressure on interest rates whereas as the economy slows down, the interest
rates are decreased so, that loans become cheaper for public to increase economic activities.
Different expectations regarding these two factors generally lead to the change in prices of
bonds.
b. Credit Risk
If the credit rating of the company whose bond are held by the bond holder is low(generally
below AA- or BBB) and whose performance is also questionable then the market price of the
bond decreases and vice versa.

So, in Order to Decide that in what types of Bond a company or a financial institute has to
invest depends upon investment expectations and Risk profile.