Download - Research Report on Bonds of PIA
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RESEARCH REPORT
On BONDS OF PIA
Presented To:
Sir Riaz Hussain Ansari
Presented By:
Group No. 5
Muhammad Irfan MBS-09-23
Asima Shrafat MBS-09-19
Ya
sm
een Sha
rifM
BS-09-24
Department of Business Administration
Bahauddin Zakariya University
Sahiwal Campus
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EXECUTIVE SUMMARY
A bond is a long term contract under which a borrower agrees to make payments of
interest and principal, on specific dates, to the holders of bonds. There are many types of bonds
according to issue and investment. Each type differs according to return and degree of risk.
Governments issue bonds in very large quantity and in different types. We conducts research on
bonds and make literature survey by using different articles and books. First we discus the basic
concepts related to bonds in our report and then add selected literature related to our topic. After
that we discuss corporate bond market and its market in Pakistan as compared to international
market. Then we mention the total local currency bond market and its percentage of GDP in
local currency. The corporate bond market in Pakistan is very short and we give some examples
of companies and organizations that issue bonds. PIA solely has 50% share in total corporate
bond market so we select it for our research. We discuss the different aspects of raising finance
through bonds and stocks and then conclude that bonds are better for PIA. Then we show the
impact long term debts on the MPS of PIA. Regression test is applied to check the relationship
of these two dependent and independent variables. We assume that profitability position of PIA
remains the same and no sudden change in the demand and supply of the shares. Then we
conclude that when long term debts increased MPS decreased and it has strong negative
relationship.
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INTRODUCTION
What is bond?
Abond is a security instrument which acknowledges that the issuer has borrowed money
and must repay it to the bondholder at a specified rate of interest over a predetermined period of
time. These securities are referred to as debt obligations, contrasted withstocks, which represent
ownership in a corporation.
Features of Bond
Face value or par value, The amount on which the issuer pays interest, and which, most
commonly, has to be repaid at the end of the term.
Issue price, The price at which investors buy the bonds when they are first issued, which
will typically be approximately equal to the nominal amount.
Maturity date, The date on which the issuer has to repay the nominal amount. As long as
all payments have been made, the issuer has no more obligations to the bond holders after the
maturity date. The length of time until the maturity date is often referred to as the term or tenor
or maturity of a bond.
Coupon, The interest rate that the issuer pays to the bond holders. Usually this rate is
fixed throughout the life of the bond. The name coupon originates from the fact that in the past,
physical bonds were issued which coupons had attached to them. On coupon dates the bond
holder would give the coupon to a bank in exchange for the interest payment.
Coupon dates, The dates on which the issuer pays the coupon to the bond holders. In the
U.S. and also in the U.K. and Europe, most bonds are semi-annual, which means that they pay a
coupon every six months.
Callability, Some bonds give the issuer the right to repay the bond before the maturity
date on the call dates. These bonds are referred to as callable bonds. Most callable bonds allow
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the issuer to repay the bond at par. With some bonds, the issuer has to pay a premium, the so
called call premium.
Convertible bond, These bonds let a bondholder exchange a bond to a number of shares
of the issuer's common stock at a fix price. Convertible bonds have lower coupon rate than non
convertibles.
Exchangeable bond, These bonds allows for exchange to shares of a corporation other
than the issuer.
Income bonds, Bonds that pays interest only if the interest is earned. These bonds are
more risky than regular bonds.
Types of Bonds
Fixed rate bonds have a coupon that remains constant throughout the life of the bond.
Floating rate notes (FRNs) have a variable coupon that is linked to a reference rate of
interest prevailing in the country.
Zero-coupon bonds pay no regular interest. They are issued at a substantial discount
to par value, so that the interest is effectively rolled up to maturity (and usually taxed as such).
The bondholder receives the full principal amount on the redemption date.
Asset-backed securities are bonds whose interest and principal payments are backed by
underlying cash flows from other assets. Examples of asset-backed securities are mortgage-
backed securities (MBS's), collateralized mortgage obligations (CMOs) and collateralized debt
obligations (CDOs).
Subordinated bonds are those that have a lower priority than other bonds of the issuer in
case of liquidation. In case of bankruptcy, there is a hierarchy of creditors. First the liquidator is
paid, then government taxes, etc.
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Bearer bond is an official certificate issued without a named holder. In other words, the
person who has the paper certificate can claim the value of the bond. Often they are registered by
a number to prevent counterfeiting, but may be traded like cash. Bearer bonds are very risky
because they can be lost or stolen.
Foreign currency bonds Some companies, banks, governments, and other sovereign
entities may decide to issue bonds in foreign currencies as it may appear to be more stable and
predictable than their domestic currency. These bonds are called international bonds.
Issuers of Bonds
Government
When the government wishes to borrow money for more than one year, it sells bonds to the
general public. The bonds issued by government are following two types,
Treasury Bonds
Treasury bonds are just coupon bonds issued by the federal government. It is
reasonable to assume that the federal government will make good on its promised
payments, so these bonds have no default risk. However prices of these bonds aredecline when interest rates rise so they are not free of all risks.
Municipal Bonds
These bonds are also called munis are issued by local or state governments. Like
corporate bonds, munis have default risk. The major advantages of these bonds are that the
interest earned on these bonds is exempt from federal taxes. But the interest rates of these
bonds are lower than the corporate bonds.
Corporations
Corporation issue bonds called corporate bonds. Unlike treasury bonds corporate bonds are
expected to default risk. If the issuing company gets into trouble, it may be unable make the
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promised interest and principal payments. Default risk often is referred to as credit risk, and the
larger the credit or default risk the higher the interest rate the issuer company must pay.
OBJECTIVES AND BENEFITS OF RESEARCH
There will be a number of benefits and objectives of our research study
Objectives of the research
1. To create basic knowledge about the bonds.
2. To show the importance of bonds in financing.
3. To elaborate the risk factors with the bonds.
4. Financial benefits or difficulties of issuing bonds.
5. Bonds or bank loans are more appropriate.
6. To explain the importance of bonds over share capital.
7. Rating of bonds and default risk.
8. Effects of inflations on bonds.
Benefits of research
We will see the benefits in two ways, benefits to the society and benefits of the
organizations.
Benefits to the society
1. It will provide help how to invest in bonds.
2. Information about the different types of bonds existing in market.
Benefits to the organization
1. Help the organizations how to raise finance through bonds
Information about the extent of success to raise of finance through bonds.
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LITERATURE REVIEW
In finance, a bond is a debt security, in which the authorized issuer owes the holders a
debt and, depending on the terms of the bond, is obliged to pay interest and/or to repay theprincipal at a later date, termed maturity. A bond is a formal contract to repay borrowed money
with interest at fixed intervals. Bonds must be repaid at fixed intervals over a period of time.
Bonds and stocks are both securities, but the (capital) stockholders have an equity stake in the
company or owners, whereas bondholders have a creditor stake in the company or lenders.
Bonds usually have a defined term, or maturity, after which the bond is redeemed, whereas
stocks may be outstanding indefinitely except consol bond which is a perpetuity having no
maturity. The interest rate paid by issuer is influenced by a variety of factors, such as current
market interest rates, the length of the term and the creditworthiness of the issuer.
The market price of a bond will vary after it is issued due to change in these factors over
time. This price is expressed as a percentage of nominal value. Bonds are not necessarily issued
at par, but bond prices converge to par if maturity payment to be made in full and on time. This
is referred to as Pull to Par. At other times, prices can be above par which is called trading at a
premium, or below par which is called trading at a discount. The market price of a bond is the
present value of all expected future interest and principal payments of the bond discounted at the
bonds rate of return. The yield and price of a bond are inversely related so that when market
interest rates rise, bond prices fall and vice versa. The market price of a bond may include the
accrued interest since the last coupon date.
Some bond markets include accrued interest in the trading price and others add it on
explicitly after trading. The price including accrued interest is known as the full or dirty
price. The price excluding accrued interest is known as the flat or clean price. Bonds are
bought and traded mostly by institutions like central banks, pension funds, insurance companies
and banks. Most individuals who want to own bonds do so through bond funds. In the U.S.
nearly 10% of all bonds outstanding are held directly by households. Sometimes, bond markets
rise when stock markets fall, the volatility of bonds is lower than that of stocks. Thus bonds are
generally viewed as safer investments than stocks. As bonds do suffer from less day-to-day
volatility than stocks so, its interest payments are often higher than dividend payments.
Bondholders also enjoy a measure of legal protection, under the law of most countries, if a
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company goes bankrupt, its bondholders will often receive some money back, whereas the
companys stock often ends up valueless. However, bonds can also be risky but less than stocks.
(Sheffrin, Steven M. 2003)
Companies can expand their businesses through raising cash in two ways. One is by
going public and diluting their ownership of the company to investors who would all pay a
morsel (share price) and claim ownership called stocks. Another way of raising money is the age
old method of borrowing called bonds. So typically, a bond is nothing but a loan that investors
hand out to companies or the government itself. The loan is paid back to an investorwithin a
scheduled time and at a specific, pre-determined coupon interest rate. If the bonds coupon rate is
divided by its current price, the investors would get the Current Yield which is effectively the
money you would earn if you purchase the bond on that day. Bonds are considered safer to invest
because investors always know how much they are owed exactly, less risky, more stable and
hence they pay less compared to stocks. They are often called as fixed-income securities or debt-
market instruments to reflect on the fact that they are predictable, more stable, pay less but dont
fluctuate wildly. (Ashwin Satyanarayana, Jun 23, 2010)
Investors often view bonds as the less risky then stocks, which is another major
difference between stocks and bonds. Bondholders are creditors for the company and
stockholders own a share in the company. It means if a company falls into financial trouble and
ends up having to file for bankruptcy, it sells off its assets in order to pay back its creditors,
which includes bondholders. In the same scenario, common stockholders arent entitled to any of
the proceeds from the sale of assets after bankruptcy. Preferred shareholders, however, may be
entitled to a portion of the proceeds from the sale of assets after bankruptcy, but usually only
after the company pays its creditors and bondholders. (Sue Lynn Carty)
In case of bonds, investors know the maximum payout it can generate. Stocks, on the
other hand, have infinite earning potential and the investors profits will grow along with the
success of the company issuing the stock. Another big difference between stocks and bonds is
the amount of work required on your part. Once a bond is purchased, the investor can simply
relax and wait for their money to return. By contrast, stocks are active investments and require
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monitoring. Successful stock investors spend a lot of time and energy watching the market for
trends and buying and selling stocks. (Limo wreck)
Common stocks and bonds are traded on exchanges where brokers take orders to sell
from owners and orders to buy from prospective owners. Stock and bond prices can vary
constantly based on what buyers and sellers are willing to agree is a good price.
Different factors ranging from regular profit reports, changing government regulation and rumors
or gossip can affect a stock or bond price. Companies that make money but not what was
expected (projected earnings) can see the stock price go down. A company that posts a loss but is
able to meet all its outstanding debt obligations can see its bond price
go up. (Wesley Tucker, 2010)
Trading in bonds seems to be quite popular among investors as they are generally taken
as a more reliable investment than stocks. There is sum-assured component in bonds which is
absent in stocks. Bonds usually accrue interests like a saving account, which is payable quarterly,
half yearly, or annually. This may make one conclude that bonds are better investment than
stocks. A stock investment market will never promise any interest or for that matter any promise
of positive earning at all. Bonds are often convertible in to equity shares. Like in stocks, there are
many varieties of bonds. Bonds varieties refer to the rates of interest, distance of repayment
terminal time and nature of conversion ratios, while stocks vary according to the size and
probable income potential, which have to be calculated by the investors himself. The main
demerit of bonds as compare to stocks is that a bond can never earn more than its face value,
while a prosperous stock can earn large multiples of its face value. (Ezilon.com, 2006)
Bonds move in the opposite direction of interest rates. When rates rise, bonds fall and
vice versa. If you buy a bond and hold it until it matures, swings in interest rates and the
resulting swings in the bonds price wont matter. But if you sell your bond before it matures, the
price it fetches will be largely related to the interest rate environment. Bonds are more
complicated than stocks. Whereas stocks come in only a handful of varieties and are offered only
by public corporations, bonds are sold by corporations, the federal government, government-
sponsored agencies, cities, states and other public authorities. Bonds also come in nearly endless
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varieties from short-term notes to bonds that take 30 years to mature. The key to understanding
the bond market lies in understanding a financial concept called a yield curve, which is a
graphical representation of the relationship between the interest rate that a bond pays and when
that bond matures. Once you learn to read curves (and calculate the spread between curves), you
can make informed comparisons between bond issues. (Paul Conley)
The bond market (also known as the debt, credit, or fixed income market) is a financial
market where participants buy and sell debt securities, usually in the form of bonds. Nearly all of
the $822 billion average daily trading volume in the U.S. bond market takes place between
broker-dealers and large institutions in a decentralized, over-the-counter (OTC) market.
However, a small number of bonds, primarily corporate, are listed on exchanges.
The Securities Industry and Financial Markets Association (SIFMA) classify the broader
bond market into five specific bond markets. These are Corporate, Government & agency,
Municipal, Mortgage backed, asset backed, Funding.
Bond market participants are similar to participants in most financial markets and are
essentially either buyers (debt issuer) of funds or sellers (institution) of funds and often both.
Participants include Institutional investors, Governments Traders and Individuals.
Because of the specificity of individual bond issues, and the lack of liquidity in many
smaller issues, the majority of outstanding bonds are held by institutions like pension funds,
banks and mutual funds.
Amounts outstanding on the global bond market increased 10% in 2009 to a record $91
trillion. Domestic bonds accounted for 70% of the total and international bonds for the
remainder. The US was the largest market with 39% of the total followed by Japan (18%).
Mortgage-backed bonds accounted for around a quarter of outstanding bonds in the US in 2009
or some $9.2 trillion. The sub-prime portion of this market is variously estimated at between
$500bn and $1.4 trillion. Treasury bonds and corporate bonds each accounted for a fifth of US
domestic bonds. In Europe, public sector debt is substantial in Italy (93% of GDP), Belgium
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(63%) and France (63%). Concerns about the ability of some countries to continue to finance
their debt came to the forefront in late 2009.
This was partly a result of large debt taken on by some governments to reverse the
economic downturn and finance bank bailouts. The outstanding value of international bonds is
increased by 13% in 2009 to $27 trillion. The $2.3 trillion issued during the year was down 4%
on the 2008 total, with activity declining in the second half of the year.
For market participants who own a bond, collect the coupon and hold it to maturity, market
volatility is irrelevant; principal and interest are received according to a pre-determined schedule.
But participants who buy and sell bonds before maturity are exposed to many risks, most
importantly changes in interest rates. When interest rates increase, the value of existing bonds
falls, since new issues pay a higher yield. Likewise, when interest rates decrease the value of
existing bonds rise since new issues pay a lower yield. This is the fundamental concept of bond
market volatility, changes in bond prices are inverse to changes in interest rates. Fluctuating
interest rates are part of a country's monetary policy and bond market volatility is a response to
expected monetary policy and economic changes. Bond markets determine the price in terms of
yield that a borrower must pay in able to receive funding. (Eason, Yla, 1983)
Why do bonds & stocks have a low correlation? That Stocks and bonds often but not
always have low correlation. This is due to the effect of interest rates on bonds and to the fact
that bonds have inherently lower risk than stocks. Government bonds contribute to low
stock/bond correlation, because governments are under a different set of rules and pressures than
bond-issuing companies. Correlation measures direction and magnitude of price movement. Low
correlation means that a price increase in stocks goes with price decrease in bonds (and vice
versa) or that prices move in the same direction, but to different extents. Higher interest rates
correspond to higher yield and lower bond price. Stocks don't respond to interest rate changes in
same manner as bonds, so there's little correlation between stock and bond value with respect to
interest rates. Bonds have lower risk than stocks.
In addition, stocks have more volatility, meaning they go up and down more steeply. As
a result, bonds often are seen as a safer investment. Bonds can be issued by governments. This
non-corporate infusion of government bonds affects overall bond behavior and contributes to low
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correlation between stocks and bonds. Past low correlations doesn't necessarily predict the
future. For example, during the 2008-2009 recessions, there was relatively high correlation
between stocks and bonds. (Stan Aberdeen, 2010)
Researched on why companies issue convertible bondsconcluded that there are pros and
cons to the use of convertible bonds as a means of financing by corporations. This method of
delayed equity financing gives several advantages to the corporation. One is a delayed dilution of
common stock and earnings per share (EPS). Another is that the company is able to offer the
bond at a lower coupon rate - less than it would have to pay on a straight bond. Regardless of
how profitable the company is, convertible bondholders receive only a fixed, limited income
until conversion. This is an advantage for the company because more of the operating income is
available for the common stockholders. The company only has to share operating income with
the newly converted shareholders if it does well. Thus, when a company is considering
alternative means of financing, if the existing management group is concerned about losing
voting control of the business, then selling convertible bonds will provide an advantage, maybe
only temporarily, over financing with common stock. Companies with poor credit ratings often
issue convertibles in order to lower the yield necessary to sell their debt securities. The investor
should be aware that some financially weak companies will issue convertibles just to reduce their
costs of financing, with no intention of the issue ever being converted.
As a general rule, the stronger the company, the lower the preferred yield relative to its
bond yield. There are also corporations with weak credit rating that also have great potential for
growth. Such companies will be able to sell convertible debt issues at a near-normal cost, not
because of the quality of the bond but because of the attractiveness of the conversion feature for
this "growth" stock. When money is tight and stock prices are growing, even very credit worthy
companies issuing convertible securities in an effort to reduce their cost of obtaining scarce
capital. There are some disadvantages for issuers, too. One is that financing with convertible
securities runs the risk of diluting not only the EPS of its common stock, but also the control of
the company. If a large part of the issue is purchased by one buyer, typically an investment
banker or insurance company, conversion may shift the voting control of the company away
from its original owners and toward the converters.
This potential is not a significant problem for large companies with millions of
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stockholders, but it is a very real consideration for the small company, or one just going public.
The decision to issue new equity, convertible and fixed-income securities to raise capital funds is
governed by a number of factors. One is the availability of internally generated funds relative to
total financing needs. Such availability, in turn, is a function of a company's profitability and
dividend policy. Used wisely; a policy of selling differentiated securities (including convertible
bonds) to take advantage of market conditions can lower a company's overall cost of capital
below what it would be if it issued only one class of debt and common stock. However, there are
pros and cons to the use of convertible bonds for financing; investors should consider what the
issue means from a corporate standpoint before buying it. (Richard Cloutier, 2008)
10 reasons fixed income still makes sense today. There are many reasons to stick with
fixed income. Bonds provide diversification against stock investment. Bonds have steady
income; most bonds will pay scheduled coupon payments before returning your principal at
maturity. Bonds have largely recovered markets as these have par or face value than those of
stocks even in depression. High quality bonds have stabilized portfolio performance especially
when stock markets have fastest fall. Interest rates are not rise soon. Diversification helps to
manage interest rate and credit risk. We can diversify our investment easily through bonds
because there are long term and short term bonds. A diversified product allows you to target how
much risk you want to take, and target average bond maturities as well. (Rob Williams, 2009)
Choosing the right mix of stocks and bonds can be one of the most basic yet confusing
decisions facing any investor. In general, the role of stocks is to provide long-term growth
potential and the role of bonds is to provide an income stream. The question is how these
qualities fit into your investment strategy. When an investor buys shares of stock; he or she buys
part ownership in a corporation. As such, the value of that corporation's stock will tend to reflect
the earnings experience of the firm up during profitable periods and down during periods of
loss. Even within the world of stocks, there are variations in risk and reward.
"Blue chip" stocks are issues of companies that are well established within their
respective industries and have long histories of producing earnings and paying dividends. Small
capitalization, or "small cap," stocks represent shares in companies that are less established.
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Because of this, they have the potential for tremendous growth, which can translate into a large
return for investors. Bonds represent loans made by investors to companies and other entities,
such as branches of government, that have issued the bonds to attract capital without giving up
managing control.. Bondholders do not share in a company's profits. Rather, they receive a fixed
return on their investment. Bonds are issued for specified time periods. When the bond expires
and the principal (original investment) is returned, the bond is said to have matured.Every bond
carries the risk that a promised payment will not be made in full or on time. As uncertainty of
repayment rises, investors demand higher levels of return in exchange for assuming greater risk.
Bonds, similar to common stocks, fluctuate in market value and, if sold prior to maturity, may
produce a gain or a loss in principal value. An important distinction when weighing the rewards
of stocks vs. bonds is that stocks have (theoretically) an unlimited ability for appreciation. That
is, there is no upper limit to how valuable they can become.
On the other hand, a bond buyer generally knows the upper limit to expect on such an
investment, especially if it is held to maturity. It is true that a bond can sell at a premium prior to
maturity, but the potential for appreciation here is nowhere near as great as it is for stocks. Both
options have their risks as well. With stocks, although theoretically there may be no ceiling, there
is a bottom. Stocks can drop in value and become worthless. With bonds, there is interest rate,
inflation and credit risk. (Russell, 2008)
How much of my money should be in stocks vs. bonds? Whole, over long periods of time
which will be more than 15 years? Once you understand how different asset classes perform over
long periods of time, you will have an understanding of what rate of return to expect, and how
much risk, or volatility, you will have to live through to achieve that rate of return. The biggest
factor that will determine your long term rate of return and the level of risk you are exposed to,
will be your allocation to stocks vs. bonds. If your goal is to achieve returns of 9% or more, you
will allocate 100% of your portfolio to stocks.
You must expect that at some point you will experience a single calendar quarter where
your portfolio is down as much as -20%, and perhaps even an entire calendar year where your
portfolio is down as much as -60%. That means for every $10,000 invested, the value would
drop to $4,000. Over the course of many, many years, the down (which occur about 28% of the
time) will be offset by the positive years. If you want to target a long-term rate of return of 8% or
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more, you will allocate 80% of your portfolio to stocks and 20% to cash and bonds. You must
expect that at some point you will experience a single calendar quarter where your portfolio is
down as much as -20%, and perhaps even an entire calendar year where your portfolio is down
as much as -40%. That means for every $10,000 invested, the value would drop to $6,000.
You must rebalance this type of allocation about once a year. If you want to target a long-
term rate of return of 7% or more, you will allocate 60% of your portfolio to stocks and 40% to
cash and bonds. You must expect that at some point you will experience a single calendar quarter
and an entire calendar year where your portfolio is down as much as -20% in value. That means
for every $10,000 invested, the value would drop to $8,000. You must rebalance this type of
allocation about once a year. If you are more concerned with capital preservation than achieving
higher returns, then invest no more than 50% of your portfolio in stocks. Investors who want to
avoid risk need to stick with safe investments. ( Dana Anspach)
Stocks VS Bonds - differences and risks in the world of investments, you'll often hear
about stocks and bonds. They are both feasible forms of investment. They allow you the
opportunity to invest your money with a specific company or corporation with the possibility of
future profits. The easiest way to define a bond is through the concept of a loan. When you invest
in bonds, you are essentially loaning your money to a company, corporation, or government of
your choosing. That institution, in turn, will give you a receipt for your loan, along with a
promise of interest, in the form of a bond. Bonds are bought and sold in the open market.
Fluctuation in their values occurs depending on the interest rate of the general economy.
Basically, the interest rate directly affects the worth of your investment. The logic behind
this system is that the investors deal with a higher rate of interest then the actual bond pays.
Thus, the bond is sold at lower value in order to offset the gap. With bonds, unlike stocks, you,
as the investor, will not directly benefit from the success of the company or the amount of its
profits. Instead, you will receive a fixed rate of return on your bond. Basically, this means that
whether the company is wildly successful, it will not affect your investment. Your bond returnrate will be the same. Your return rate is the percentage of the original offer of the bond. This
percentage is called the coupon rate. Stocks represent shares of a company. These shares give
part of the ownership of the company to you, the share-holder. Your stake in that company is
defined by the amount of shares that you, the investor, own. Stock comes in mid-caps, small
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caps, and large caps. Stocks, unlike bonds, fluctuate in value and are traded in the stock market.
Their worth is based directly on the performance of the company. If the company is doing well,
growing, and attaining profits, then so does the value of the stock. If the company is weakening
or failing, the stock of that company decreases in value.
There are various ways in which stocks are traded. In addition to being traded as shares
of a company, stock can also be traded in the form of options, which is a type of Futures trading.
Both stocks and bonds can become profitable investments. But it is important to remember that
both options also carry a certain amount of risk. Being aware of that risk and taking steps to
minimize it and control it, not the other way around, will help you to make the right choices
when it comes to your financial decisions. The key to wise investing is always good research, a
solid strategy, and guidance you can trust. (Markus Hoettereitk)
A mutual fund is basically a pool of money from investors from around the world in
constructing a portfolio of bonds, real estate, securities and stocks. Below are 6 main reasons
why mutual funds are much better than stocks on long-term investments. Automatic
Reinvestment, with this, you can have capital gains and dividends reinvested into your mutual
fund automatically and easily without having to pay sales load or extra fees. Can Be Diversified,
Most investors buy more than just 1 stock. In order to grow their portfolio, they need to multiply
and diversify their stocks. By diversifying, you reduce the risk without sacrificing your money.
Easier to Manage, when you buy mutual funds, you will not be on your own trying to figure out
how to make money without losing money. Instead you will be provided with a professional fund
manager who knows how to take care of your investments.
Liquidity, what this basically means is that you can exchange them for cash quickly and
easily without any hassles. Only 1 Investment Portfolio, This is much better than stocks whereby
you need to come up with several different portfolios just to qualify as a long-term stockholder
and investor. Transparency, Most mutual fund holdings are publicly available. This ensures thatyou as an investor are getting what you are paying for. Apart from buying, you can sell them
too. Here are the reasons why. Meeting Your Goals, As with every investor, your objectives
could be being debt free, enjoying a blessed and fruitful retirement, travelling around the world,
providing for your family and kids in every way possible etc. But along the way towards your
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goals, changes are inevitable. For example if your children intends to further their studies
especially overseas, you certainly need to adjust your portfolio to reduce the risk of losing money
and increase the possibility of earning more. In this case, you can sell some of your investments
to buy fixed income types. Change of Fund Manager or Broker, When a fund manager or broker
resigns and another takes over, you should consider selling even if you are being told that the
replacement will do an equally excellent job. The truth is the new fund manager or broker may
have a different mindset and philosophy of doing things and managing clients. These are all the
main reasons why you should choose mutual funds. However as with most investments, you
require capital. The amount usually ranges from a couple of hundred to thousands of dollars. But
overall, you do not to spend a lot to get started. (Amuro Wesley 2010)
Money is an essential element of life. We work and earn money to get the comforts oflife, to educate our children and to increase our standards of living and so on. It is our human
nature that forces us to try hard and earn money quickly. Two popular financial instruments that
most of us have heard about are stocks and the bonds. Both of these instruments are quite
popular with the masses. The basic idea of these instruments is to provide you an opportunity to
invest in your money in a specific company and become its investor, so as to maximize your
future profits. Both of these instruments are a good alternate of investing the money, but both
have different roles to play in the share market.
Investors are aware about the fact that the share market is quite risky, but if it takes your
favor, then it can shower the huge profits on you. The financial experts suggest that favoring
bonds over stocks is not the wise decision. Rather, investors should have multiple assets and they
need to consider how one type of instrument relates to another in terms of returns and risks.
When you buy a bond, you are actually lending your money to the issuing party. Now this party
will have to give you interest in the future. The value of the bonds depends up on the market
interest rate of the particular scenario. Bonds are available for selling and purchasing in the open
share market. The worth of the money invested in the bonds actually comes from the interest rate
that the investors earn on the bonds. If you have a bond that fetches you 4 % interest rate and the
market's general interest rate is going on 3 % then you can sell this bond in the share market at a
higher face value than actually you purchased it for. Unlike stocks, bonds come with limited risk
and promise you to get the fixed interest whether the issuing party is doing good business or
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facing loses. Again, bonds are different from the stocks since bonds have a pre defined time
frame. They have a fixed maturity date and after which, it expires.
When a bond expires, the principal amount is also returned to the investor. The risk that
is involved with the bonds is that the issuing institution may not return the principal amount. To
avoid such situations, an investor should invest in institutions that have a sound reputation.
Stocks reflect the stability of a company and an investor, with the view to avoid risk, must invest
in the stocks of the company that is reputed and stable. Stocks are available in three categories,
i.e. small caps, mid caps and the large caps. These categories decide your stake in the company.
Unlike bonds, stocks fluctuate in the value and its worth is completely dependent up on how the
company is performing. The profit on stocks is again dependent up on the performance of the
company. With the rising performance of the company, its stock price increases and henceinvestor gains profits. One can also sell stock with this increased value. (Shivi Jain 2010)
Buying a corporate bond does not give you ownership interest in the corporation, it just
means that you are lending money to the corporation that issued the bond and in exchange for
your purchase you should expect your money back plus interest that will be earned during the
time that you own the bond. Check to see how well the business has been doing financially
within the last few years and look at the proposals for the upcoming quarter. Also see what
departments the business wants to expand in and the estimated market value proposal. The
compensation for buying a corporate bond is well worth the investment and risk at the end of the
bond's maturity. One of the risks is the Credit Spread Risk, which only compensates the
investors when the bonds value and interest rate depreciates; it means fewer taxes will be paid
out by investor. The level of interest in a bond market changes as the market value of the
business fluctuates, this adjustment only affects the interest on the bond itself, not the amount
you paid for the bond.
You can always purchase bonds from a bond broker and pay a fee and commission, or
through an online trading company, which may have fewer fees involved. Then there is short
term as well as long term bonds. Short term bonds mature after one to three years and long term
bonds have increased risk of company takeover, merger, or bankruptcy etc. The market value of
business affects the liquidity risk which leaves with the initial investor with difficulty in selling
the bond. The anticipation of inflation should be accounted for because it may decrease the price
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immediately after the purchase. Corporate bonds normally have higher earning yield than the
government bonds because corporations are looking to enlarge their business. If you are looking
for the tax break so never purchase corporate bonds because some government bonds are tax
exempt. (Angela Nelson)
Investing in stocks and bonds is indeed and art or skill which you should develop for
getting decent returns on your investment. Stock and bond investment made systematically are
known to give fabulous returns to investors. The money earned through the route of appreciation
in stock prices and dividends will help you to beat the rising inflation rate and save money for
the future. Though investing in stocks is more risky than investing in bonds which always give
fixed returns. Investing in stocks with little money should be our strategy when you first enter
the stock market because you have no experience and should not to take a risk. Investing in
stocks for beginners requires preparation of a good investment portfolio comprising of stocks of
companies belonging to varied sectors of the economy. The investment in stocks is the receipt of
divided from profitable companies.
New investors should avoid considering high risk stocks to invest in as they may not
understand when stocks prices start tanking to new lows. Investing in bonds is believed to be a
much safer investment option than stock trading and investing because these are supposed to
give fixed percentage returns to the investors. This rate of return will not be changing even
though the company does not make profits. Bonds are issued through a lot of advertisements
which contain all the details regarding the business, turnover and sales and profits of the
company. First of all before any investment decision, you need to study the financial aspects of
company thoroughly. Choose government run companies for which government give guarantee.
(Charlie S, 2010)
Bond portfolios usually take a back seat to stock portfolios when it comes to popularity.
While they play an important role in overall asset allocation, they just don't seem to get the same
attention as their much jazzier stock-based cousins. Properly constructed bond portfolios can
provide income, total return, diversify other asset classes and be as risky or safe as the designer
desires. The fixed-income world is even more diverse and exotic than any stock market ever
was. The bonds can also be used in an account as collateral for loans including, margin loans to
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purchase other bonds, stocks and some funds. Bonds are quite versatile and are excellent
liquid vehicles for meeting investing goals and objectives. Bond income can be either taxable at
the federal rate or exempt from federal tax. Beyond that, there are many variations of taxability
at the state and local levels up to and including intangible tax.
A bond portfolio's total return is the total change in the value including income and
capital appreciation or depreciation over a specified time interval. Market value fluctuations, and
ultimately risk characteristics, are affected by interest rates. As an asset class, bonds help
diversify the overall portfolio because of the low correlation to other asset classes. The lonely
bond portfolio always shines brightest when equity markets slump. While the correlations vary
widely over different time periods, overall, bonds are not highly correlated with other asset
classes besides in general. Even in the simplest form of a diversified portfolio - one with three
asset classes, stocks, bonds and cash - bonds can reduce volatility due to cross-correlation with
the stock portfolio. (Michael Schmidt)
Bond valuation is a process or strategy that is used to identify the fair market value of a
given bond issue. This process involves allowing for the present value of the interest payments
connected with the bond, as well as the total value of the issue at the point of maturity.
Identifying the bond valuation makes it possible for an investor to determine if the overall return
from the investment is worth the time and money required to acquire the bond and hold it all the
way to maturity. The process of bond valuation takes into consideration the cash flow connected
with the bond issue under consideration. Typically, the cash flow is realized from the interest
payments that are made on the bond at regularly scheduled intervals. This in turn is related to the
par value of the bond, or the face value that the bond holds at the time it reaches maturity. By
approaching the overall worth of the investment from both these angles, it is easier for an
investor to evaluate the issue and decide if it is worth his or her time, or if another investment
option should be selected. Engaging in bond valuation can be somewhat more complicated if
the rate of interest connected with the investment opportunity is variable rather than fixed. In this
scenario, the task is to project movements in the marketplace and how those movements will
impact the prevailing interest rate. (Wise Geek)
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The most obvious difference between stocks and bonds are that stocks enable the
investor to own a part of the company, while the bonds are nothing but loans that the investors
provide to the company. Stockholders would benefit or lose as per the fate of the company, but
investors in bonds will get a fixed rate of return; this would be a percentage that would be the
original offering price on the bond, known as the coupon rate. Moreover, bonds have a maturity
date after which the principal amount is returned. These maturity dates could go as long as thirty
years for maturity. There are credit ratings to determine how the companies stand in respect of
paying back the principal amounts of the bonds.
Companies with higher credit ratings are safer investments, but then they would give a
lower coupon rate. Buying and selling of bonds is done on the open market. The value of the
bonds would fluctuate depending on the level of the interest rates in the general economy. Bondsare generally traded in the over-the-counter market set up by banks and security firms. The stock
exchange is also used for trading, which enable stockbrokers to sell bonds. This could clear the
air about whether to invest in stocks or in bonds. A careful investigation must be done by the
investor as to the risks and the potentials involved. Stocks can increase faster, but then they can
also decrease as fast.
Hence, if you are looking for a short term investment, then the bonds will give you better
security and return. If the investment is being planned for more than ten years, then the stock
market is much better in returns.
Companies would increase in their worth over such significant periods of time and short-
term fluctuations would be taken care of. Most portfolios still figure bonds prominently in them.
This shows that they are considered to be safe investments and as a buffer to the stock market
fluctuation. Wise investors would blend bonds and stocks from various industries together to
achieve maximum profits, and also for security of investments. (Adanheist, 2007)
As you search for stocks and bonds related information or other information about fixed
rate with capital or municipal bond rates, take your time to view the below article. It will provide
you with a really refreshing insight into the stocks and bonds information that you need. After
going through it you will also be better informed about information in some way related to stocks
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and bonds, such as coupon bonds or even treasury bonds prices. If stock prices are up, bond
prices witness a downturn and if stock prices are down, bond prices are generally on an upsurge.
A lot of bonds are fairly low risk, as generally it's expected that you'd at least receive your
money back in a crisis, but the lower the risk, generally the lower the return on the bond. Since
they first emerged 100 years ago, surety companies in the United States have evolved
considerably, nowadays delivering reliable, efficient and high-quality services.
Consequently, surety bonds have diversified considerably in the last few years, addressing a
wide range of risk situations. Bond is simply an investor owned utility (IOU) in which an
investor agrees to loan money to a government agency or to a company for a predetermined
interest rate. The interest rate paid on bonds depends on several factors such as financial strategy
of the government in power or the strength of the corporation; current market interest rates, andthe length of the term. As these factors fluctuate over time, the market value of a bond may also
vary after it is issued. Bonds are undoubtedly a valuable form of investment. It is always
advisable to invest in stock bonds, as they are comparatively risk-free in nature in comparison to
other bonds. It was intriguing to find that many people, oblivious of their background, found this
article related to stocks and bonds and other future market, interest rate chart, and even bond
quotes free helpful and information rich. (Deepak kulkarni, 2009)
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RESEARCHMETHODOLOGY
Corporate bond market
When companies need financing they have four basic options: retained earnings, bank
borrowing, corporate bonds, and equity. A well functioning corporate bond market is an
important component of financial sector development of an emerging economy. Several studies
have found that financial market development is correlated with economic development.
Corporate bond markets are important for several reasons including: as a source of long term
financing, providing competition to the banking sector, and enhancing financial sector stability.
Corporate bond market in Pakistan
The corporate bond market in Pakistan is still at an early stage of development with total
public corporate debt issues accounting for just over one percent of GDP. The corporate bond
market exists in Pakistan in the form of Term Finance Certificates. TFCs are based on legislation
enacted in 1984, which authorized the issuance of redeemable capital securities. As a debt
instrument, the TFC is slightly different from the traditional corporate bond because it was
specifically designed to comply with Sharia Law. The key difference is that the TFC substitutes
the words "expected profit rate" for "interest rate." The TFC issuers include both non-financial
and financial institutions as well as private and public firms. The coupon rate on the TFCs
display a wide variety with different fixed coupons as well as floating coupons linked to various
interest rates including the discount rate, Pakistan Investment Bond (PIB) rates, and the Karachi
inter-bank Offer Rate (KIBOR).
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Examples of few companies which issue TFCs in Pakistan
There are only few companies which issues TFCs in Pakistan for raising finance, some of
them are as follows.
Packages Limited
The corporate bond market in Pakistan, in the form of TFCs, has experienced robust
growth since the first TFC issue of Packages Limited for Rs. 232 million in February of 1995.
The total amount of outstanding TFCs as of March 2006 is estimated at Rs. 57.99 billion (US$
dollars 0.97 billion or 1.12 percent of GDP).
WAPDA
In 1988, Water and Power Development Authority (WAPDA), a government owned
statuary company, issued a five year bond. Over the period 1988 to 1994, WAPDA issued Rs.
22.5 billion of bonds to the public. The market experience of WAPDA bonds was disappointing
due to two factors. First, WAPDA had to delay repayments of its maturing bonds due to
insufficient funds. Second, the secondary market for the WAPDA bonds did not meet market
expectations due to the under capitalization of the market maker resulting in low liquidity of the
bonds.
PIA (Pakistan International Airlines)
The largest TFC ever issued was by PIA for Rs. 15.4 billion, issued in February of 2003,
it was the 50 percent of the total number of TFCs outstanding in Pakistan. Then secondly PIA
issue sukuk bonds in 2009 6.8 billion in 2009.
NetworkLease
Smallest issue was for Rs. 100 million issued by Network Lease in October of 2000.
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Internationalcomparison
Pakistan is far behind in this segment as compared to contemporary markets in emerging group
of countries as evident from the following data.
Size ofLocalCurrency Bond Market as a % of GDP
22.16
9.17
24.77
39.1 40.18
4.4
12.96 38.85
58.26
54.14
31.29
0.9
0
10
20
30
40
50
60
70
80
90
100
China Hong Kong Korea Malaysia Singapore Pakistan
Government Corporate
Country Government Corporate
China 22.16 12.96
Hong Kong 9.17 38.85
Korea 24.77 58.26
Malaysia 39.1 54.14
Singapore 40.18 31.29
Pakistan 4.4 0.90
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Total Size ofLocalCurrency Bond Market
633.03
85.09
637.86
121.7983.43
6.5280
100
200
300
400
500
600
700
China Hong Kong Korea Malaysia Singapore Pakistan
Total Size (Billion USD)
% share
Country Total Size (Billion USD) Government Corporate
China 633.03 63.6 36.4
Hong Kong 85.09 19.1 80.9
Korea 637.86 29.8 70.2
Malaysia 121.79 41.9 58.1
Singapore 83.43 56.2 43.8
Pakistan 6.528 82.87 17.13
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Problem Statements
As literature review shows the different aspects of bonds and research conducted on this
topic. We also describe the aspect of corporate bond market in Pakistan as compared to other
countries which has very low contribution in financial market. So by studying these concepts we
decide to work on Pakistan International airlines for our project because PIA was the largest
issuer of bonds in Pakistan and it solely issue two types of bonds. So by considering all these
aspects we chose the topic for our research is
Either bonds or stock are better to raise finance for PIA.
What is the impact of long term debts on the market price per share of PIA?
For that purpose we collect all the primary data from the website of PIA for our research
and calculations. We study all the financial reports carefully and collect secondary data about
the issuance of Term certificates and bonds by PIA through business recorder and from different
journals and websites on internet.
We chose these two variables which are the long term debts and MPS in which long term
debts are dependent variable and MPS is independent variable. Long term debts have a strong
effect on profitability of the firm and then profitability affects MPS. MPS is inversely related to
the long term debts. The data for calculation and application of test is available in the financial
statements of PIA. We have done a co-relational study in order to check out strength of
relationship between dependent variable and independent variable.
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Either Bonds or Stocks
When we see the financial performance of the PIA it was not good from past few years
because it faced losses continuously. Corporation has no more finance for its operations and it
can raise finance from different sources. Now we see that which type of is better for PIA.
1. Taking on debt by issuing bonds is usually cheaper than either a bank overdraft or the
cost of raising equity through a share issue. A major advantage is that the return on debt
(interest) is tax-deductible, whereas the return on equity (dividends) is paid out of a
companys profits, which are taxed before dividend payments can be made to
Stockholders and PIA are not earning profit.
2. Debt issuance can also be advantageous from a governance point of view. Creditors haveno influence on the board or company policyunlike stockholders, who often have the
right to vote on policies and the appointment of directors. Financing through debt can
thus be very useful for companies that do not want to relinquish control to others.
Because PIA is totally under the control of federal Govt. and it follow its own rules and
policies which are better for the country.
3. Bonds offer a more secure return for investorsdividends are paid out purely at the
discretion of the company, whereas interest on debt must be paid according to the set
terms of the bond. And PIA earns no profits so it has only potential to raise finance from
bonds because investors can easily invest in bonds.
4. The risks for bondholders rise as more debt is issued. But in case of PIA Govt. of
Pakistan give guarantee of the bonds and the risk of investor reduced.
5. Another problem is more likely to face cash flow difficulties as it has to meet the coupon
payments and PIA faces continuous losses. In some cases the cost of servicing the debt
may rise beyond the ability to pay, due to low profitability or any other external or
internal factors. But when we see PIA Govt. of Pakistan pays coupon payments and
purchases shares of PIA in return.
6. If the company is publicly listed on a stock exchange, the risk to stockholders increases
when debt is issued. This is due to the increased claims of the creditors, or bondholders,
on the companys capital and earnings, which must be used to service the debt before
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anything else. The market value of shares of PIA is very low because of its increased
losses and debts due to Govt. owned corporation it can make its stable with efficient use
of debts of its growth.
7. Another option is to issue convertible bonds. These bonds can be converted in stocks and
has 1or 2 percent low coupon payment. But if do this the large voting power goes to the
private stockholders and voting right shifts to them. Govt. is not willing to do so because
it wants to remain PIA under its own control.
8. The bonds issued by PIA are callable and at a notice of particular time can be call back.
This option is not used for shares. When corporation have enough finance it can call the
bonds back.
9. When we see the option of issuance of stock it has no much potential because the market
value of stock of PIA is very low due to losses. So no much more finance can be raised
due to very low market price of shares.
10.Investors are not willing to purchase the shares of PIA because of its continuous losses
and also uncertainty of future.
11.Government has no much finance to purchase the share of PIA in much large quantity
because corporation needs very large finance to overcome its present situation.
Conclusion
We now conclude that bonds are more suitable for PIA to raise finance instead of stocks due to
above reasons.
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KEY FINANCIAL DATA OF PIA
Rs. In Billions
Years 2009 2008 2007 2006 2005 2004
Profit (Loss) after tax (5.82) (36.14) (13.40) (12.76) (4.41) 2.31
Equities (49.05) (47.52) (11.90) (.788) 60.14 58.89
Long term debts 105.42 96.63 74.28 62.65 38.10 42.52
Debt Equity Ratio NA NA NA NA 4.15 3.52
EPS (2.72) (17.79) (6.61) (6.80) (2.55) 1.76
MPS 2.61 3.51 6.30 7.05 12.30 13.70
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Long Term Debts and MPS of PIA.
Long Term Debts and MPS in 2004
Discussion
Long term debts have a large portion of FTCs which had issued during the year 2003
fully paid 151400 TFCs having the denominations of Rs. 100,000 each. These TFCs having
semi annually payments in arrears and the corporation have a call option for early redemption
after 24 and 48 months from the date of issuance with the 60 days notice period.
The above TFCs have been obtained as a financial package of Rs. 20 billion approved by
GoP and are secured against the guarantees issued by GoP. The amount of mark up is provided
by the GoP as its equity contributions.
When we make analysis of MPS we see that corporation earns profit in 2003 and the
operations of 2004 are also good and quarterly reports shows profits and corporation was in good
position. So the demand of shares was existent in the market and closing market price per share
is Rs. 13.7 (Rs. 10 par value). The was also high due to the low supply of shares in the market
because corporation issued share to GoP as against its equity contribution for the purpose of
interest against TFCs.
42.52
13.7
0
5
10
15
20
25
30
35
40
45
Long term debts (In billion) MPS
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Long Term Debts and MPS in 2005
Discussion
Because of the profitability in 2004 corporation paid out some current portion of long
term debts in which the portion of TFCs are Rs. 756.97 millions are paid out due to that long
term debts are decreased. This was good decision for the corporation to pay out its debts but it
can be done only when the operations of corporation was done in profitable manner.
There is a profitable business by corporation in 2004 but in 2005 fuel prices and many
other operating costs are increased and corporation faces loss. Through the quarterly reports of
company it was shown that it is very difficult for the corporation to earn profit in that year so
share price was decline slightly but still it was above the par value.
38.1
12.3
0
5
10
15
20
2530
35
40
45
Long term debts (In billion) MPS
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Long Term Debts and MPS in 2006
Discussion
In this year corporation faced continuous losses and raise finance to meet its short term
need for finance requirements and to finance its operating cash requirements. When we see MPS
it shows very much decline. MPS decreases only due to the continuous losses of the corporation.
It also increase its long term debts due to which it have to pay higher finance cost which has also
negative effect on EPS.
Long Term Debts and MPS in 2007
62.65
7.05
0
10
20
30
40
50
60
70
Long term debts (In billion) MPS
74.28
6.3
0
10
20
30
40
50
60
70
80
Long term debts (In billion) MPS
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Discussion
When we see 2007 there was a same trend as in 2006 debts increased due to the continuous
losses and MPS also decreased.
Long Term Debts and MPS in 2008
Discussion
Financial situation was remained same in 2008 and corporation faced continuous losses
and raise finance for its operating requirements through long term debts. MPS also declines due
to the same factors. Due to continuous losses corporation charged losses to the accumulated
losses account and then finally this account charged to the capital reserves account. Due to these
accumulated losses total equity of the corporation shows in negative form. So company has no
reserves to meat its operating requirements in long run.
96.63
3.51
0
20
40
60
80
100
120
Long term debts (In billion) MPS
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Long Term Debts and MPS in 2009
Discussion
The profitability trend of corporation was remained the same that corporation face losses
also in 2009. Now the corporation needs large finance to meet operating cash flows,
infrastructure development and to cut borrowing cost of loans.
So corporation issued GoP guaranteed FTCs for aggregating Rs. 12,800 million whichhave face value Rs.15,140 million and carry 6 months KIBOR and 85 basis points. From which
some TFCs are issued for replacing the existing TFCs. This restructuring was performed in the
coordination with the Ministry of Finance, as duly approved by the ministry in a financial
restructuring plan. These TFCs are secured by the guarantee of GoP and Standard Chartered
Bank appointed as trustee under the trust deed. The corporation has an option of early purchase
with a 30 days notice period at a nil premium. These TFCs have been issued as a part of 26,500
million approved by GoP.
During the year corporation also has issued GoP guaranteed, privately placed sukuk
certificates amounting to Rs. 6,800 million to refinance the short term loans amounting to
Rs.6730 million. The certificates carry 6 months KIBOR plus 175 points per annum. Meezan
bank has been appointed as the trustee under the trust deed.
105.42
2.61
0
20
40
60
80
100
120
Long term debts (In billion) MPS
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Effect oflong term debts on MPS of PIA
Assumptionswe assume that the profitability position of PIA remains the same that is faces losses and nochange in demand and supply of shares.
Years Long term debts (X)
Billion Rs.
MPS (Y)
2004 42.52 13.70
2005 38.10 12.30
2006 62.65 7.05
2007 74.28 6.30
2008 96.63 3.51
2009 105.42 2.61
SOLUTION
Years Long term
debts
(X)
MPS
(Y)
XY X2
2004 42.52 13.10 557.012 1807.9504
2005 38.10 12.30 468.63 1451.6100
2006 62.65 7.05 441.683 3925.0225
2007 74.28 6.30 467.964 5517.51842008 96.63 3.51 339.171 9337.3569
2009 105.42 2.61 275.146 11113.3764
Total: 419.60 44.87 2549.606 33152.8346
Y = a + b X
a = Y b X
b = nXY (X)(Y)__n X2 (X) 2
b = (6)(2549.606) (419.60)(44.87)_(6)(33152.8346) (419.60) 2
b = 15297.636 18827.452_
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198917.0076176064.16
b = 3529.816_22852.8476
b = 0.15446a = 7.4783 (0.15446) (69.9333)a = 18.2802Y = 18.2802 + ( 0.15446) XY = 18.2802 0.15446 X
Testing Regression Estimates
Long Term
Debts
(X)
MPS
(Y)
^
Y
^
(Y Y)
(YY) (Y)
42.52 13.10 11.7126 17.9293 38.7096 187.6938.10 12.30 12.3953 24.1769 23.2488 151.29
62.65 7.05 8.6033 1.2656 0.1834 49.7025
74.28 6.30 6.8069 0.4508 1.3884 39.69
96.63 3.51 3.3547 17.0041 15.7474 12.3201
105.42 2.61 1.9970 30.0444 23.7003 6.8121
419.60 44.87 = 90.8711 = 102.9780 = 447.5047
R = Explained Variation_
Total Variation^
R = (Y Y)
(YY)
R = 90.8711102.9780
R = 0.882
Comments:
The value of R is 0.882, which means that more than 88 percent of the variation in
MPS is explained by change in Long Term Debts. Thus, the equation would appear to fit the data
quite well.
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Graphical Representation
Conclusion
After discussing aspects we see that the operations of PIA are not up to mark. Its faces
continuous losses and these losses are charged to equity which is in a negative form and
corporation uses short term and long term debts to finance even its daily operations. So
management should use long term debts for the growth of the corporation and Govt. should take
steps to make it a profitable institution.
0
20
40
60
80
100
120
2004 2005 2006 2007 2008 2009
Years
Rupees
Long term debts MPS
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32. Mehtab Haidar, The Govt. decided to issue sukuk for PIA
www.thenews.com
33. Shahnawaz Akhter, PIA to raise Rs to billion through Sukuk Bonds
www.businessrecorder.com
34. Mushtaq Ghuman, ECC May allow PIA to flot Rs 16 billion Sukuk
www.brecorder.com