RISK AND RETURN ANALYSISRISK: DICTIONARY MEANING OF RISK IS THEPOSSIBILITY OF LOSS OR INJURY, THE DEGREEAND PROBABILITY OF...
BUSINESS R ISK A. MANAGERIAL INEFFICIENCY B. TECHNOLOGICAL       CHANGE    IN   PRODUCTION PROCESS C. AVAILABILITY OF RAW ...
RISK MEASUREMENTIT IS THE EXPRESSION   OF   RISK   INQUANTITATIVE TERMS1. STANDARD    DEVIATION   METHOD-  EXAMPLE2. CHARA...
BOND VALUATIONA BOND IS A CONTRACT THAT REQUIRES THEBORROWER TO PAY the INTEREST INCOME TOTHE LENDER. IT RESEMBLES THE PRO...
IN USA, BONDS ARE SECURED BY TANGIBLEPHYSICAL ASSETS OF THE COMPANY ANDDEBENTURES ARE SECURED ONLY BYCREDITWORTHINESS OF T...
WITH UNSECURED CREDITORS AT THE TIME OF WINDING UP OF COMPANY2. SECURED          OR     MORTGAGED  DEBENTURES  THESE DEBEN...
6.   IRREDEEMABLE DEBENTURES7.   CONVERTIBLE DEBENTURES8.   ZERO INTEREST BONDS/DEBENTURES:     RECENTLY INTRODUCED     CO...
FEATURES:          FIXED RATE OF INTEREST          FIXED MATURITY          INCOME CERTAINTY          LOW RISK OF CAPITAL  ...
PRICE OF BOND IS INVERSLY PROPORTIONAL TOMARKET INTEREST RATE.E.G FOR A 14.5% BOND, IF THE MARKETINTEREST RATE FALLS FROM ...
LIQUIDITY OF THE PARTICULAR BOND DEPENDSON THE CORPORATE WHO ISSUES THE BOND.CALLABILITY RISK:THE UNCERTAINTY CREATED IN T...
CALLED AS ONE PERIOD RATE OF RETURN   IF THE FALL IN THE BOND PRICE IS GREATER THAN   COUPON PAYMENT, HPR WILL BE NEGATIVE...
YIELD TO MATURITY(YTM)   MOST WIDELY TOOL IN BOND INVESTMENT   MANAGEMENT   YTM IS THE SINGLE DISCOUNT FACTOR   THAT MAKES...
3. ALL THE COUPON PAYMENTS SHOULD   BE REINVESTED IMMEDIATELY AT THE   SAME INTEREST RATE AT THE SAME YIELD   TO MATURITY ...
THEOREM 2IF THE BOND YIELD REMAINS THE SAME OVERITS LIFE, THE DISCOUNT OR PREMIUMDEPENDS UPON MATURITY PERIODEXAMPLETHEORE...
THE CHANGE IN PRICE WILL BE LESSER FOR APERCENTAGE CHANGE IN BOND’S YIELD IF ITSCOUPON RATE IS HIGHER.
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Sapm bond

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Sapm bond

  1. 1. RISK AND RETURN ANALYSISRISK: DICTIONARY MEANING OF RISK IS THEPOSSIBILITY OF LOSS OR INJURY, THE DEGREEAND PROBABILITY OF SUCH LOSS. 1. SYSTEMATIC RISKS- UNAVOIDABLE RISKS LIKE POLITICAL UNCERTAINTY, GLOBAL DEPRESSION, WAR, EARTHQUAKE (WHICH AFFECTS THE WHOLE MARKET) 2. UNSYSTEMATIC RISKS- RELATED TO SOME FIRM OR INDUSTRYUNSYSTEMATIC RISK CAN BE CATEGORISEDINTO BUSINESS RISKS AND FINANCIAL RISKS.
  2. 2. BUSINESS R ISK A. MANAGERIAL INEFFICIENCY B. TECHNOLOGICAL CHANGE IN PRODUCTION PROCESS C. AVAILABILITY OF RAW MATERIALS D. CHANGE IN CONSUMER PREFERENCE E.LABOUR PROBLEMSFINANCIAL RISK A. DEBT EQUITY MIX
  3. 3. RISK MEASUREMENTIT IS THE EXPRESSION OF RISK INQUANTITATIVE TERMS1. STANDARD DEVIATION METHOD- EXAMPLE2. CHARACTERISTIC REGRESSION LINE- EXAMPLE3. CORRELATION METHOD-EXAMPLE
  4. 4. BOND VALUATIONA BOND IS A CONTRACT THAT REQUIRES THEBORROWER TO PAY the INTEREST INCOME TOTHE LENDER. IT RESEMBLES THE PROMISSORYNOTE AND ISSUED BY GOVERNMENT ANDCOROPORATE.THE PAR VALUE OF THE BOND INDICATES THEFACE VALUE OF BOND I.E THE VALUE STATEDON THE BOND PAPER.GENERALLY THE FACE VALUE OF THE BOND ISIN RS 1000,2000,5000 ETC.MOST OF THE BONDS MAKE FIXED INTERESTPAYMENT TILL MATURITY PERIOD.THE SPECIFIC RATE OF INTEEREST IS KNOWN ASCOUPON RATE.
  5. 5. IN USA, BONDS ARE SECURED BY TANGIBLEPHYSICAL ASSETS OF THE COMPANY ANDDEBENTURES ARE SECURED ONLY BYCREDITWORTHINESS OF THE COMPANY.BUT IN INDIA AND UK NO SUCH DISCUSSION ISMADE AND THEY ARE USEDINTERCHANGEABLY. TYPES OF DEBENTURES AND BONDS 1. SIMPLE, NAKED OR UNSECURED DEBENTURES THESE DEBENTURES ARE NOT GIVEN ANY SECURITY ON ASSETS. THEY HAVE TO NO PRIORITY AS COMPARED TO OTHER CREDITORS. THEY ARE TREATED ALONG
  6. 6. WITH UNSECURED CREDITORS AT THE TIME OF WINDING UP OF COMPANY2. SECURED OR MORTGAGED DEBENTURES THESE DEBENTURTES ARE GIVEN SECURITY ON ASSETS OF THE COMPANY3. BEARER DEBENTURES: THESE DEBENTURES ARE EASILY TRANSFERABLE. THEY ARE JUST LIKE NEGOTIABLE INSTRUMENTS.4. REGISTERED DEBENTURES: REQUIREMENT OF FOLLOW UP OF PROCEDURE FOR TRANSFER5. REDEEMABLE DEBENTURES
  7. 7. 6. IRREDEEMABLE DEBENTURES7. CONVERTIBLE DEBENTURES8. ZERO INTEREST BONDS/DEBENTURES: RECENTLY INTRODUCED CONVERTIBLE DEBENTURE WHICH YIELDS NO INTEREST. THE INVESTOR IN A ZERO INTEREST BOND IS COMPENSATED FOR THE LOSS OF INTEREST THROUGH CONVERSION OF SUCH BOND INTO EQUITY SHARES.9. DEEP DISCOUNT BONDS: THESE BONDS DOESN’T CARRY ANY INTEREST BUT IT IS SOLD BY THE ISSUER COMPANY AT A DEEP DISCOUNT FROM ITS EVENTUAL MATURITY VALUE.
  8. 8. FEATURES: FIXED RATE OF INTEREST FIXED MATURITY INCOME CERTAINTY LOW RISK OF CAPITAL CLAIMS ON INCOME CONTROL CALL OPTION( WHEN MARKET RATE IS LOWER THAN INTEREST ON DEBENTURE) BOND RISKSINTEREST RATE RISK:VARIABILITY IN THE RETURN FROM THE DEBTINSTRUMENTS TO INVESTORS IS CAUSED BYTHE CHANGES IN THE MARKET INTEREST RATE.
  9. 9. PRICE OF BOND IS INVERSLY PROPORTIONAL TOMARKET INTEREST RATE.E.G FOR A 14.5% BOND, IF THE MARKETINTEREST RATE FALLS FROM 14 % TO 13%,BOND VALUE WILL BE HIGHER.DEFAULT RISK: THE FAILURE TO PAY THE AGREED VALUE OF THE DEBT INSTRUMENTS BY THE ISSUER IN FULL OR ON TIME.MARKETABILITY RISK:VARIABILITY IN RETURN CAUSED BY DIFFICULTYIN SELLING THE BONDS QUICKLY WITHOUTMAKING ANY SUBSTANTIAL PRICECONCESSIONS. THE MARKETABILITY OR
  10. 10. LIQUIDITY OF THE PARTICULAR BOND DEPENDSON THE CORPORATE WHO ISSUES THE BOND.CALLABILITY RISK:THE UNCERTAINTY CREATED IN THE INVESTORSRETURN BY THE ISSUERS ABILITY TO CALL THEBOND. IF CALL OPTION IS THERE. BOND RETURNHOLDING PERIOD RETURN:AN INVETSOR BUYS A BOND AND SELLS ITAFTER HOLDING FOR A PERIOD. THE RATE OFRETURN IN THAT HOLDING PERIOD IS:HPR= PRICE GAIN/LOSS DURING HOLDINGPERIOD+COUPON INT RATE IF ANY(PAYMENT)/PRICE ATTHE BEGINNING OF THE HOLDING PERIOD
  11. 11. CALLED AS ONE PERIOD RATE OF RETURN IF THE FALL IN THE BOND PRICE IS GREATER THAN COUPON PAYMENT, HPR WILL BE NEGATIVE.EXAMPLECURRENT YIELD:IT IS THE COUPON PAYMENT AS A PERCENTAGEOF CURRENT MARKET PRICECURRENT YIELD=ANNUAL COUPONPAYMENT/CURRENT MARKET PRICEBY THIS MEASURE INVESTORS CAN FIND OUTTHE RATE OF CASH FLOW WHICH THEY AREGETTING BECAUSE OF INCREASE/DECREASE INMARKET PRICE. DIFFERENT FROM COUPON RATE COUPON RATE IS BASED ON FACE VALUE CY IS BASED ON MARKET PRICE
  12. 12. YIELD TO MATURITY(YTM) MOST WIDELY TOOL IN BOND INVESTMENT MANAGEMENT YTM IS THE SINGLE DISCOUNT FACTOR THAT MAKES PRESENT VALUE OF FUTURE CASH FLOWS FROM A BOND IS EQUAL TO THE CURRENT PRICE OF THE BOND BASICALLY YTM IS THE RATE OF RETURN WHICH AN INVESTOR CAN EXPECT TO EARN IF THE BOND IS HELD TILL MATURITY. BASED ON PRESENT VALUE CONCEPTEXAMPLESASSUMPTIONS: 1. THERE SHOULD NOT BE ANY DEFAULT COUPON AND PRINCIPAL AMOUNT SHOULD BE PAID AS PER SCHEDULE 2. THE INVESTOR HAS TO HOLD THE BOND TILL MATURITY
  13. 13. 3. ALL THE COUPON PAYMENTS SHOULD BE REINVESTED IMMEDIATELY AT THE SAME INTEREST RATE AT THE SAME YIELD TO MATURITY OF THE BOND BOND VALUE THEORMS VALUE OF BONS DEPENDS UPON THREE FACTORS NAMELY: 1. COUPON RATE 2. YEARS TO MATURITY 3. EXPECTED YIELD TO MATURITYON THE BASIS OF THIS CERTAIN THEORMSHAVE BEEN PROPOUNDED:THEOREM 1IF THE MARKET PRICE OR SELLING PRICE OF THEBOND INCREASES, THE YIELD WOULD DECLINEAND VICE VERSAEXAMPLE
  14. 14. THEOREM 2IF THE BOND YIELD REMAINS THE SAME OVERITS LIFE, THE DISCOUNT OR PREMIUMDEPENDS UPON MATURITY PERIODEXAMPLETHEOREM 3BOND PRICE IS INVERSLY PROPORTIONAL TOYIELD. THIS RELATION IS NOT LINEAR ALSO.A RAISE IN THE BOND’S PRICE FOR A DECLINEIN BOND’S YIELD IS GREATER THAN THE FALL INTHE BOND’S PRICE FOR A RAISE IN YIELDEXAMPLETHEOREM 4
  15. 15. THE CHANGE IN PRICE WILL BE LESSER FOR APERCENTAGE CHANGE IN BOND’S YIELD IF ITSCOUPON RATE IS HIGHER.

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