Term Finance Certificates (TFC's):
A debt instrument issued by various financial and non-financial entities in Pakistan, usually with a fixed term to maturity. The rating of the issuing entity is monitored and published in Pakistan by JCR-VIS and PACRA, which have come to be the leading rating agencies in the country. Most TFCs have yields linked to the Karachi 6 month interbank offered rate (KIBOR), the rate at which top tier banks are willing to lend money to each other. Some TFC's are linked to other rates such as the base rate published by the State Bank of Pakistan from time to time.
A feature of some TFC's is that they are sometimes issued with a "Cap" and/or "Floor", which essentially means that their yield cannot go higher than the "cap" rate or lower than the "floor" rate. Since TFC's with caps and/or floors are hybrid instruments, their price behavior is a mix between that of a pure floating rate TFC (floater), and that of a corporate bond. TFC price behavior tends to emulate that of a bond as KIBOR (or whatever rate it is linked to) approaches and exceeds (or goes lower than) the cap or floor rate. What this means is that these instruments are potentially riskier that pure floaters, in that there can be price erosion if the rate rises too far and conversely, there can also be capital gains if the rate goes lower.
Certificates of Investment (COI's):
Nomenclature used to describe un-collateralized lending to non-banking financial companies in Pakistan. The risk here is similar to that of TFC's and lenders are guided by ratings assigned to borrowers by JCR-VIS and PACRA.
Continuous Funding System (CFS):
Term coined to define the relatively new system of leveraged equity financing currently in use at the Karachi Stock Exchange, and planned for the other stock exchanges in the country. In this system, lenders lend money to the exchange to fund leveraged buyers in return for shares of certain large cap companies as collateral. The risk here is minimal, since the whole CFS system is conducted under the auspices of the stock exchanges, which have never defaulted since their inception.