Bond Valuations

8/8/2019 Bond Valuations

1/17

UNDERSTANDING DEBT MARKET

The debt market is the market where fixedincome securities of various types and featuresare issued and traded .

Importance of Debt Market to any economy

Efficient mobilization and allocation of resources.

Financing the development activities of the Government.

Transmitting signals for implementation of the monetary policy.

Facilitating liquidity management in tune with overall shortterm and long term objectives.

1


2/17


Indias Debt Market

The debt market in India comprises broadly two segments, viz.,

Government Securities Market

Corporate Debt Market. This is further classified as Market for

PSU Bonds and Private Sector Bonds.

The trading platforms for government securities are the NegotiatedDealing System and the Wholesale Debt Market (WDM) segment

of National Stock Exchange (NSE) and Bombay Stock Exchange

(BSE).

2


3/17


The

Structure

of the

Indian

Debt

Market

3


4/17

GLOSSARY FOR BOND MARKET

Bond: A Bonds represents a Contract under Which a BorrowerPromises to pay Interest and Principal on Specific dates to theholder of the Bond.

Issuer : The issuer of a bond is a crucial factor to consider, as theissuer's stability is your main assurance of getting paid back. Forexample, the U.S. government is far more secure than anycorporation.

Face Value/Par Value : The face value (also known as the parvalue or principal) is the amount of money a holder will get backonce a bond matures. A newly issued bond usually sells at the parvalue.

4


5/17


Coupon (The Interest Rate): The coupon is the amount thebondholder will receive as interest payments. It's called a"coupon" because sometimes there are physical coupons on thebond that you tear off and redeem for interest.

Coupon Payments: The coupon payments represent the periodicinterest payments from the bond issuer to the bondholder.

Maturity : The maturity date is the date in the future on which

the investor's principal will be repaid. Maturities can range fromas little as one day to as long as 30 years (though terms of 100years have been issued).

Original Maturity & Remaining Maturity

5


6/17


Call Date: For bonds which are callable, i.e., bonds which can be

redeemed by the issuer prior to maturity, the call date represents

the date at which the bond can be called.

Call Price: The amount of money the issuer has to pay to call acallable bond. When a bond first becomes callable, i.e., on the call

date, the call price is often set to equal the face value plus one

year's interest.

Yield: Yield is a figure that shows the return you get on a bond.

The simplest version of yield is calculated using the following

formula: yield = coupon amount/price.

6


7/17


Yield To Maturity: When bond investors refer to yield, they areusually referring to yield to maturity (YTM). YTM is a moreadvanced yield calculation that shows the total return you will

receive if you hold the bond to maturity.

Yield to Call : The rate of return that an investor would earn if hebought a callable bond at its current market price and held ituntil the call date given that the bond was called on the call date.

The Link Between Price And Yield: The relationship of yield toprice can be summarized as follows: when price goes up, yield goesdown and vice versa. Technically, one can say the bond's priceand its yield are inversely related.

7


8/17

CLASSIFICATION OF BONDS

Bonds are known as fixed-income securities because you know the

exact amount of cash you'll get back if you hold the security until

maturity.Used in Bond Market Meaning in General Terms

Bonds Loans (in the form of a security)

Issuer of Bonds Borrower

Bond Holder Lender

Principal AmountAmount at which issuer pays interest and which is repaid on thematurity date

Issue Price Price at which bonds are offered to investorsMaturity Date Length of time (More than one year)

CouponRate of interest paid by the issuer on the par/face value of thebond

Coupon Date The date on which interest is paid to investors

8


9/17


Government Bonds Corporate bondsBills - debt securities maturing in less than one year.Notes - debt securities maturing in one to 10 years.

Bonds - debt securities maturing in more than 10 years.

Classification on the basis of Variability of Coupon

1. Zero Coupon Bonds: Zero Coupon Bonds are issued at a discountto their face value and at the time of maturity, the principal/face

value is repaid to the holders.

2. Treasury Strips: buy coupon paying treasury bonds and usethese cash flows to further create zero coupon bonds.

9


10/17


3. Floating Rate Bonds: In some bonds, fixed coupon rate to be

provided to the holders is not specified. Instead, the coupon

rate keeps fluctuating from time to time, with reference to a

benchmark rate. Such types of bonds are referred to as

Floating Rate Bonds.

Classification on the Basis of Variability of Maturity

1. Callable Bonds

2. Puttable Bonds

3. Convertible Bonds

10


11/17


Classification on the basis of Principal Repayment

1. Amortizing Bonds

2. Bonds with Sinking Fund Provisions

Many people invest in bonds with an objective of earning certain

amount of interest on their deposits and/or to save tax. Bonds are

considered to be a less risky investment option and are generally

preferred by risk-averse investors.

11


12/17

BOND VALUATIONS &

COMPARISON Credit Rating of Bonds

In India, the main credit bureaus are CRISIL, ICRA and CreditRegistration Office (CRO). CRISIL Standard & Poor's are major

shareholder, CARE 61% owned by 3 major Indian banks

(IDBI,SBI, Canara), ICRA Moodys is a major shareholder, Duff

& Phelps (India) Subsidiary, Fitch (India) Subsidiary.

Benefits of Investing in a Government Security

Future of Bond Market In India

When to Invest In Bonds

12


13/17

CURRENT SCENARIO OF BOND

MARKET

13


14/17


MARKET

14


15/17


MARKET

15


16/17


MARKET

16


17/17


MARKET

17

Bond Valuations

Documents

Transcript of Bond Valuations