Bond is a debt security in which the authorized issuer
owes the holder a debt and is obliged to repay the
principal and interest at a later date, termed maturity.
It is issued by public authorites,credit intuition,
companies and supranational institutions in the
A bond is a promissory note and financial debt.
Instrument issued by corporates and governments to
collect funds from public or investors by offering fixed
interest or there form of returns with specific maturity
term to the investors. In India the term bond is
associated generally with loan able instrument issued
by public undertaking.
FEATURES OF BOND
• Nominal, principal or face amount
• Issue price
• Maturity date
(1) short term
(2) medium term
(3) long term
• Coupon dates
• Indentures and covenants
(1) call ability
(2) put ability
(3) call dates and put dates
(4) convertible bonds
• Convertible bonds
• Exchangeable bonds
TYPES OF BONDS
• Fixed rate bonds
• Floating rate bond
• High yield bond
• Zero coupon bond
• Inflation linked bonds
• Assets-backed securities
• Subordinated bonds
• Perpetual bonds
• Bearer bond
• Registered bonds
• Book entry bonds
• Municipal bond
Yield to cost
Bond management strategies
Buy and hold
Sector and asset
Passive strategy Buy and hold strategy : A buy and hold strategy
essentially means purchasing and holding a security to
maturity or redemption and then reinvesting cash
proceeds in similar securities.
Any capital change resulting from interest rate change is
neutralized or ignored.
Primarily used by income maximizing investors who are
interested in the largest coupon income over a desired
Bond ladder strategy: building a bond ladder means
buying bonds scheduled to come due at several different
dates in the future, rather than all in the same year.
This process is known as laddering because each group on
bonds represents a rung on the investments maturity
Beneficial in both situation when interest rate rise or fall.
Effective tool for someone who needs large mounts of money
available on certain future dates, for example, to pay for a
if interest rates plunge, invester would be better off owning
only long term bonds
Ladders also not make sense for investors with smalll
amounts of money.
Semi active strategies
1. Immunization because of changes in the shape of the
term structure and changes in the level of interest rates,
investor faces interest rate risk. The elimination of
these risk is called bond immunization.
Immunization is the investment of asset in such a
manner that the existing business is immunized to a
general change in the rate of interest provided that the
average duration of assets is equal to average duration of
Two types of interest risk
a) Price risk : the price risk occurs due to decrease in price
or value of bond as a result of increasing in interest rate
in the market.
b) Coupon reinvestment risk: CRR arises because the
yield to maturity computation implicitly assumes that all
coupon flows will be reinvested at the promised yield to
2. Duration: duration is a concept , which means the
weighted average measure of time period of bond’s life.
This is valuable in understanding how bond’s price
change in response to interest rate change.
I. High coupon rate result in shorter duration and less
volatility in price
II. The bond has no coupon rate, the duration is equal
to maturity period.
III. Higher , YTM leads to shorter duration , YTM and
duration have inverse relationship.
IV. The duration of a coupon bond increases at
decreasing rate with maturity.
Advantages: Necessary for a study of the effect of
changes in interest rates on bond prices and yields.
3 Dedication: dedication is concerned with financing a
stream of liabilities over time.
The purpose of dedication is to fund a sequence of
liability payments as they come due with no interest rate
It involve four steps:
I. Liability payment stream is determined
II. Bond universe is selected according to quality
III. Investor objectives and constraints are identified
IV. Optimal portfolio is chosen
Sector and asset substitution among bonds say from
central government securities to higher yielding semi
government bonds or from government to corporate bonds.
Maturity adjustments by shortening the maturities when
interest rates are expected to rise and lengthening the
maturities when interest rates are expected to fall.
Quality diversification into various grade of risk, through
expected or actual ratings of bonds by rating agencies.
Coupon adjustments or yield substitutions: bonds of
lower coupons are preferred when speculative capital gains
or losses are aimed at.
EVALUATION OF BONDS
1. Goodwill of the cooperation
2. Past earning of the profit
3. Purpose of collection money
Valuation of bonds The value of a bond is simply the present value of the security future
Market price and expected yield are the major determinants of bond.
Current year = coupon rate (current year is the coupon payment as a
% of current market price.
CY = CR/P
CURRENT YIELD – Current yeild held investor to measure threir
annual cash flows on a bond every year. if the bond is purchased at
the face value the current yeild and coupon rate will the same. So
with the help of current yeild the investors can find out the rate of
cash flow from their investment evry year.
HOLDING PERIOD RETURN - A Bond is held for no.
of years. So, it become necessary to calculate the rate
of return of that period.
Yeild to maturity - (ytm) is the rate of return and
investors expects to earn if the bond is held till
It is the single discount factor that makes present value
of future cash flow from a bond equal to the current
price of the bond. YTM is the discounted cash flow of
the returns from the bond which represents interest
payment And premium or discount in the price.
YMT is a measure of yield not a measure of returns
from a coupon bond.
The investors holds the bond till maturity
The intering coupon received a re-invested and the
computed at the YTM rate or at the same interest rat as the
same ytm of the bond
There is no default in payment of coupon or maturity of