It is a landmark in Pakistan's capital markets

Feb 14 - 20, 2005



BMA Capital Management has launched Pakistan's first government bond index and it is called BMA-PGBI. It comprises of all outstanding government bonds with maturity of greater than one year. Whilst the index was formally launched on February 7, the computation commenced from 1st January 2004. The index is weighted by market capitalization and reflects the market performance on total return basis of bonds issued by the government, which are available for investment.

Explaining the need for such an index, Muddassar Malik, Director and Head of Research, said: "The last few years have seen an increasing awareness and need to measure both market and investment performance. Pakistan lacked a performance benchmark for fixed income securities, and in particular, for government bonds. For this reason, BMA capital research was compelled to embrace the challenge. We are proud to launch this benchmark for institutional investors including commercial banks, asset management companies, insurance companies and pension fund managers".

According to Farruk Khan, CEO of BMA, "The BMA-PGBI confirms to international standards set by the European Federation of Financial Analysts' Societies European Bond Commission, which sets the blueprints for the construction of government bond indices for the European countries. In addition, BMA had input from international index specialists and has incorporated local bond market conventions to these standards."

Index Analyst, Aneel Kanwer stated, "There is a huge potential for researchers in this market especially when it's undergoing enormous developmental changes. We see this as a first step in offering a broader menu of performance benchmarks for institutional money managers, including a liquid government bond index based on zero coupon yield curve."

The calculation for index returns adheres to local market trading and settlement conventions, and international best practices. Updates to bond composition of the index are made on the first business day of each month to ensure that the index accurately reflects the market investment opportunities. BMA will provide timely feedback on index constituent changes.



The State Bank of Pakistan issues bonds on behalf of Government of Pakistan. The maturity of various issues has typically ranged from three to ten years. However, from January 2004 the government has also issued bonds with maturities of 15 and 20 years. The issue size varies from one billion to 30 billion rupees.

Bond issues are normally issued at a single auction date, which is two weeks in advance from the auction date. The issues were previously timed at an average difference of 60 days during 2001-02, whereas in FY 2003 the duration of issuance was increased to 90 days. However, in 2004 the issuance is more of demand driven in nature.

In Pakistan, market bond issues were usually not reopened. However, a new practice was adopted during 2004, whereby some jumbo issues were broken down into two tranches, with second tranche being auctioned after 30 days of the first auction. Pakistan government bonds usually have the following characteristics:

Most government securities are fixed semi-annual coupon bearing bullet redemption bonds. Interest on these bonds is paid semi-annually. If coupon payment date falls on a holiday, interest is paid on the next working day and there is no ex-dividend rule. If redemption date falls on a holiday, payment is made on the next business day. The securities are traded on a clean basis usually up to two decimal places. The day count convention is actual. The securities traded during banking hours are settled on the same day, whereas any other trading activity after banking hours is settled on the next day. Bonds trade and settle through Monday to Saturday. There is a three day closed period before any coupon payment and before redemption of the issues.

BMA-PGBI measures the actual change in market value of a portfolio of bonds on a daily basis. The formulae for compute the changes to investment, as if investors bought and sold the market portfolio or index over a period of time. The BMA-PGBI consists of semi-annual pay fixed rate bonds issued domestically in Pakistan and denominated in local currency, with remaining maturity of at least one year. The constituents of the index are semi-annual pay bullet securities with no call or other option future.

The securities in BMA-PGBI are weighted by relative market capitalization. Thus, the return on a bond influences the return on the index in proportion to the bond's market value. Market value of a bond equals the amount outstanding multiplied by the gross price. The gross price is equal to the clean price plus accrued interest.