2. FIXED INCOME SECURITIES
• Fixed income security is a financial obligation of an entity that promises to pay a
specified sum of money at specified future dates.
• Governments viz. central, state and municipal bodies, corporate bodies, financial
institutions can issue
• Fixed income instruments: Debt securities and preferred stock
• Debt securities include bonds, mortgage backed securities, asset backed
securities, and bank loans
• Preferred stock represents ownership and gets contractually fixed dividend
payment
3. FEATURES OF BONDS
• 1) Maturity: Number of years the debt is outstanding. Maturity date is always
identified when describing a bond. For e.g. 7.17GS2015
• Longest maturity is 30 years
• 2) Par Value: The amount that the issuer agrees to pay the bond holder. It is also
called as principal value, face value, redemption value, or maturity value.
• When a bond trades below its par, it is said to be trading at discount and if it is above
face value, it is said to be trading at premium
• 3) Coupon Rate: Interest rate the bond issuer agrees to pay
• Paid semi annually (generally)
4. FEATURES OF BONDS
• a) Zero Coupon Bonds: No coupon paid during the life of the bond.
• Interest is realized by purchasing the bond below par value and redeeming at maturity. Free from reinvestment risk.
• b) Step up notes: Securities that have a coupon rate that increases over time. For e.g. for a five year bond 5%
interest for first two years and 6% for remaining period.
• Single step up and multiple step up
• c) Deferred coupon bonds: Payments are deferred for specified number of years i.e. no interest paid in the deferred
period.
• d) Floating rate securities: Coupons set with regard to a reference rate. For e.g. Libor/Mibor+ some basis points
• If interest is paid semi annually and if coupon reset date is today, based on the coupon formula coupon rate is set for
next coupon payment six months from now.
• Caps and Floors: Maximum and minimum coupon rates. If it is 9-3%, coupon rate cannot move beyond and below
the caps and floors in spite reference rate moves.
5. INDIAN DEBT MARKETS
• There are three main segments in the debt markets in India, viz.
• Government Securities:The market for Government Securities comprises the Centre,
State and State-sponsored securities. In the recent past, local bodies such as
municipalities have also begun to tap the debt markets for funds.
• Public Sector Units (PSU) bonds: The PSU bonds are generally treated as surrogates
of sovereign paper, sometimes due to explicit guarantee and often due to the
comfort of public ownership.
• Corporate securities: Corporate bond markets comprise of commercial paper and
bonds
7. ISSUING G SEC IN INDIA
• Yield Based Auction: A yield based auction is generally conducted when a new
Government security is issued. Investors bid in yield terms up to two decimal
places (for example, 8.19 per cent, 8.20 per cent, etc.).
Details of bids received in the increasing order of bid yields
Bid No. Bid Yield
Amount of bid
(Rs. crore)
Cummulative amount
(Rs.Cr)
Price* with
coupon as 8.22%
1 8.19% 300 300 100.19
2 8.20% 200 500 100.14
3 8.20% 250 750 100.13
4 8.21% 150 900 100.09
5 8.22% 100 1000 100
6 8.22% 100 1100 100
7 8.23% 150 1250 99.93
8 8.24% 100 1350 99.87
8. PRICE BASED AUCTION:
A PRICE BASED
AUCTION IS
CONDUCTED WHEN
GOVERNMENT OF
RE-ISSUES SECURITIES
ISSUED EARLIER.
Details of bids received in the decreasing order of bid price
Bid no. Price of bid
Amount of bid
(Rs. Cr)
Implicit
yield
Cumulative
amount
1 100.31 300 8.1912% 300
2 100.26 200 8.1987% 500
3 100.25 250 8.2002% 750
4 100.21 150 8.2062% 900
5 100.20 100 8.2077% 1000
6 100.20 100 8.2077% 1100
7 100.16 150 8.2136% 1250
8 100.15 100 8.2151% 1350
9. VALUATION OF DEBT SECURITIES
• General Principles of Valuation:
• The fundamental principle of financial asset valuation is that its value is equal to the
present value of its expected cash flows
• The valuation of a financial asset involves the following three steps:
• Step 1: Estimate the expected cash flows.
• Step 2: Determine the appropriate interest rate or interest rates that should be used
to discount the cash flows.
• Step 3: Calculate the present value of the expected cash flows found in step 1 using
the interest rate or interest rates determined in step 2.
10. Bond Valuation
Period No. of Payments Cash Flow PV of Cash flow
Coupon Bond
Case -1
Settlement date 01-01-2010
Maturity date 01-01-2012
Face Value of the Bond 100 1 1 8 7.27
8% coupon bond 8% 2 2 108 89.26
Discount rate 10%
Coupon payments per year 1 96.53
Case -2 Period No. of Payments Cash Flow PV of Cash flow
Settlement date 01-01-2010 1 1 8 7.27
Maturity date 01-01-2020 2 2 8 6.61
Face Value of the Bond 100 3 3 8 6.01
8% coupon bond 8% 4 4 8 5.46
Discount rate 10% 5 5 8 4.97
Coupon payments per year 1 6 6 8 4.52
7 7 8 4.11
8 8 8 3.73
9 9 8 3.39
10 10 108 41.64
87.71
