3. WHAT IS A BOND?
• A bond is a debt security, similar to an I.O.U.
When you purchase a bond, you are lending
money to a government, municipality,
corporation, federal agency or other entity
known as the issuer.
• Bonds issued by corporations or the US
government are usually taxable.
• Bonds issued by state governments or
municipalities are usually exempt from tax.
6. REDEMPTION
FEATURES
• Bond with a redemption provision usually have
higher return to compensate for the risk that the
bonds might be called early.
CALL Option: provisions that allow or require the
issuer to repay the investors’ principal at a
specified date before maturity.
PUT Option: option of requiring the issuer to
repurchase the bonds, at a specified time, prior to
maturity.
8. Credit Ratings
Credit Risk
Moody's
Standard and
Poor's
Prime
Aaa
AAA
AAA
Excellent
Aa
AA
AA
Upper Medium
A
A
A
Lower Medium
Baa
BBB
BBB
Speculative
Ba
BB
BB
Very Speculative
B, Caa
B, CCC, CC
B, CCC, CC, C
Default
Ca, C
D
DDD, DD, D
Fitch
10. PRICE
• The amount you pay
for the bond
–Newly issued bonds
–Traded bonds
11. YIELD
1) Yield is a return
2) Two types of yields:
Current yield:
Yield to maturity:
12. • From the time a bond is originally issued until
the day it matures, its price in the marketplace
will fluctuate according to changes in market
conditions or credit quality. The constant
fluctuation in price is true of individual
bonds-and true of the entire bond marketwith
every change in the level
of interest rates typically having an
immediate, and predictable, effect on the
prices of bonds.
13. YIELD (Linking price and
yield)
• Most important thing to
remember!!
* When prevailing
interest rates rise
* When prevailing
prices fall
16. INTEREST RATEINFLATION
• Inflation – Erodes a
bonds value.
• Reasons of rise in
interest rates.
• Effect of rising
interest rate on
bond market.
17. CONT…
• Interest rates rise due to:
– The Federal Reserve trying to slow economic
growth
– through market forces acting in anticipation of
interest rate moves
**Since rising interest rates push bond prices down,
the bond market tends to react negatively to
reports about strong economic growth.
20. WHAT IS DERIVATIVE
MARKET?
• Financial derivatives are financial
instruments whose prices are derived from
the prices of other financial instruments
which are also know as underlying. It
relates to equities, loans, bonds, interest
rates and currencies.
23. • In finance, an option is a contract which gives the owner
the right, but not the obligation, to buy or sell an
underlying asset or instrument at a specified strike price on
or before a specified date. The seller incurs a corresponding
obligation to fulfill the transaction, that is to sell or buy, if
the long holder elects to "exercise" the option prior to
expiration. The buyer pays a premium to the seller for this
right. An option which conveys the right to buy something
at a specific price is called a call; an option which conveys
the right to sell something at a specific price is called a put.
Both are commonly traded, though in basic finance for
clarity the call option is more frequently discussed, as it
moves in the same direction as the underlying asset, rather
than opposite, as does the put.
25. SERVICES RENDERED
•
•
•
Provide hedging facilities to buyers and
sellers to protect them against unpredictable
price fluctuations over time.
Introduce an element of stability market
prices.
Indicate expected future prices.
26. SWAPS
• It is an agreement between
two parties to exchange
sequences of cash flows for
a set period of time.
• The Market Began in 1981
& has been Growing ever
since.
• Swaps market is regulated
by SDMA.
27. ADVANTAGES OF SWAP
AGREEMENT
• Highly Flexible & can be
customized to the parties.
• Cost of transacting in the
market is fairly low.
• Private transaction between
2 parties.
28. DISADVANTAGES OF SWAP
AGREEMENT
• Requires finding a Counterparty willing to accept the
terms.
• An Illiquid Market (require
consent of counter-party to
terminate).
• Unregulated: lots of
potential Credit Risks.
29. IMPORTANCE
• To minimize risk.
• To protect the interest of individual and
institutional investors.
• Offers high liquidity and flexibility.
• Does not create new risk and minimizes
existing ones.
• Lowers transaction cost.
• Provides information on market movement.
• Provides wide choice of hedging.
• Convenient, low cost and simple to operate.
