Basics of Bond
Characteristics of Bond
Indenture , Covenants
Secured | Unsecured
Bond Markets
Categories of Bonds
Bond calculations
Callable , Putable Bonds
Securitisation , structured debt
Letter of Credit / LC / Trade Law / What is LC, Letter of Credit/ How LC work...Asif Mohammad ALFAYED
1.What is Letter of Credit and how many Kinds of Letter of Credit are there?
2 . Critically analys The principles of letter of credit including how Letter of Credit Perform in Bangladesh?
Watch out full video on youtube-
https://youtu.be/Suf9NAMW6Jg
Net Operating Income Approach
It proposes that -
Capital structure does not matter in determining the value of firm
It suggests that the value of firm remains same and is not affected by the change in debt composition of financing
Increase in debt composition results in increased risk perception by investors
Thus, firm appears to be more risky with more debt as capital which results in higher required rate of return by investors
The weighted average cost of capital and market value of firm remains same with increased cost of equity
Assumptions -
There are only two sources of financing – Debt & Equity
Value of equity is calculated by deducting the value of debt from total value of firm
Value of firm is EBIT / Overall cost of capital
WACC remains constant and with an increase in debt, the cost of equity increases
Dividend payout ratio is 1
No taxes & No retained earning
Thank you for Watching
Subscribe to DevTech Finance
The presentation slide is on stock valuation. We have tried to present the various techniques to stock valuation under which different methods are discussed with illustrations. Key concepts:
Zero Growth Model
Balance sheet Technique
Constant Growth Model
Two-stage growth Model
Feel Free to comment.
elationship between banker and customer
,
definition of a banker and customer
,
definition of banking
,
general relationship between banker and customer
,
relationship as debtor and creditor
,
special relationship: banker as trustee
,
pawner and pawnee
,
bailer and bailment relationship
,
mortgager and mortgagee relationship
,
executer
,
attorney
,
guarantor
,
duties of a customer
,
rights and duties of the banker towards the custom
,
rights of a banker
,
garnishee order
A bond is a (written and signed promise) debt investment in which an investor loans money to an entity (typically corporate or governmental) which borrows the funds for a defined period of time at a variable or fixed interest rate (Coupon Rate).
TVPOST è una cassetta postale virtuale personale associata al proprio indirizzo fisico di casa (un domicilio digitale cassaforte dei documenti ricevuti ed inviati), consultabile con tutti i mezzi informatici quali smartphone, tablet e computer, inoltre la consultazione è possibile anche attraverso la televisione, mezzi sui quali sarà possibile ricevere la propria corrispondenza che attualmente viene recapitata dal postino.
Letter of Credit / LC / Trade Law / What is LC, Letter of Credit/ How LC work...Asif Mohammad ALFAYED
1.What is Letter of Credit and how many Kinds of Letter of Credit are there?
2 . Critically analys The principles of letter of credit including how Letter of Credit Perform in Bangladesh?
Watch out full video on youtube-
https://youtu.be/Suf9NAMW6Jg
Net Operating Income Approach
It proposes that -
Capital structure does not matter in determining the value of firm
It suggests that the value of firm remains same and is not affected by the change in debt composition of financing
Increase in debt composition results in increased risk perception by investors
Thus, firm appears to be more risky with more debt as capital which results in higher required rate of return by investors
The weighted average cost of capital and market value of firm remains same with increased cost of equity
Assumptions -
There are only two sources of financing – Debt & Equity
Value of equity is calculated by deducting the value of debt from total value of firm
Value of firm is EBIT / Overall cost of capital
WACC remains constant and with an increase in debt, the cost of equity increases
Dividend payout ratio is 1
No taxes & No retained earning
Thank you for Watching
Subscribe to DevTech Finance
The presentation slide is on stock valuation. We have tried to present the various techniques to stock valuation under which different methods are discussed with illustrations. Key concepts:
Zero Growth Model
Balance sheet Technique
Constant Growth Model
Two-stage growth Model
Feel Free to comment.
elationship between banker and customer
,
definition of a banker and customer
,
definition of banking
,
general relationship between banker and customer
,
relationship as debtor and creditor
,
special relationship: banker as trustee
,
pawner and pawnee
,
bailer and bailment relationship
,
mortgager and mortgagee relationship
,
executer
,
attorney
,
guarantor
,
duties of a customer
,
rights and duties of the banker towards the custom
,
rights of a banker
,
garnishee order
A bond is a (written and signed promise) debt investment in which an investor loans money to an entity (typically corporate or governmental) which borrows the funds for a defined period of time at a variable or fixed interest rate (Coupon Rate).
TVPOST è una cassetta postale virtuale personale associata al proprio indirizzo fisico di casa (un domicilio digitale cassaforte dei documenti ricevuti ed inviati), consultabile con tutti i mezzi informatici quali smartphone, tablet e computer, inoltre la consultazione è possibile anche attraverso la televisione, mezzi sui quali sarà possibile ricevere la propria corrispondenza che attualmente viene recapitata dal postino.
Role of Financial Statements
Auditors Report
Management Discussion and Analysis
Balance Sheet
Statement of Profit and Loss
Cash Flow statement
Accounting Polices
How to define Assets , Liabilities , Investments , Revenues , Expenses , Taxes, Cash Flow statements
Time Value of Money
Future Value of Single sum
Present Value of Single sum
Future value of annuity
Present value of annuity
Growing Annuity
Real return of rate
Very Basic of Finance
What is Derivative
Why do we need derivative in the world of finance
Derivative Market at a glance
Types of Derivative
OTC Vs Exchange Traded
Option and Future (F&O)
Derivative Market in India
Regulatory Framework
Present Day
International Trade and Inherent Risks
Definition
Need for Trade Finance
Players and stake holders
Elements of Trade Finance
Traditional
Trending
Trade Financing Agencies
Terminology
Inco Terms
Summary
Most simply, bonds represent debt obligations – and therefore are a form of borrowing. If a company issues a bond, the money they receive in return is a loan, and must be repaid over time. Just like the mortgage on a home or a credit card payment, the repayment of the loan also entails periodic interest to be paid to the lenders. The buyers of bonds, then, are essentially lenders. For example, if you have ever bought a government savings bond, you became a lender to the federal government. Put differently, bonds are IOUs.
Similar to Debt - Basics of Debt and Fixed Income (20)
USDA Loans in California: A Comprehensive Overview.pptxmarketing367770
USDA Loans in California: A Comprehensive Overview
If you're dreaming of owning a home in California's rural or suburban areas, a USDA loan might be the perfect solution. The U.S. Department of Agriculture (USDA) offers these loans to help low-to-moderate-income individuals and families achieve homeownership.
Key Features of USDA Loans:
Zero Down Payment: USDA loans require no down payment, making homeownership more accessible.
Competitive Interest Rates: These loans often come with lower interest rates compared to conventional loans.
Flexible Credit Requirements: USDA loans have more lenient credit score requirements, helping those with less-than-perfect credit.
Guaranteed Loan Program: The USDA guarantees a portion of the loan, reducing risk for lenders and expanding borrowing options.
Eligibility Criteria:
Location: The property must be located in a USDA-designated rural or suburban area. Many areas in California qualify.
Income Limits: Applicants must meet income guidelines, which vary by region and household size.
Primary Residence: The home must be used as the borrower's primary residence.
Application Process:
Find a USDA-Approved Lender: Not all lenders offer USDA loans, so it's essential to choose one approved by the USDA.
Pre-Qualification: Determine your eligibility and the amount you can borrow.
Property Search: Look for properties in eligible rural or suburban areas.
Loan Application: Submit your application, including financial and personal information.
Processing and Approval: The lender and USDA will review your application. If approved, you can proceed to closing.
USDA loans are an excellent option for those looking to buy a home in California's rural and suburban areas. With no down payment and flexible requirements, these loans make homeownership more attainable for many families. Explore your eligibility today and take the first step toward owning your dream home.
Exploring Abhay Bhutada’s Views After Poonawalla Fincorp’s Collaboration With...beulahfernandes8
The financial landscape in India has witnessed a significant development with the recent collaboration between Poonawalla Fincorp and IndusInd Bank.
The launch of the co-branded credit card, the IndusInd Bank Poonawalla Fincorp eLITE RuPay Platinum Credit Card, marks a major milestone for both entities.
This strategic move aims to redefine and elevate the banking experience for customers.
What website can I sell pi coins securely.DOT TECH
Currently there are no website or exchange that allow buying or selling of pi coins..
But you can still easily sell pi coins, by reselling it to exchanges/crypto whales interested in holding thousands of pi coins before the mainnet launch.
Who is a pi merchant?
A pi merchant is someone who buys pi coins from miners and resell to these crypto whales and holders of pi..
This is because pi network is not doing any pre-sale. The only way exchanges can get pi is by buying from miners and pi merchants stands in between the miners and the exchanges.
How can I sell my pi coins?
Selling pi coins is really easy, but first you need to migrate to mainnet wallet before you can do that. I will leave the telegram contact of my personal pi merchant to trade with.
Tele-gram.
@Pi_vendor_247
Introduction to Indian Financial System ()Avanish Goel
The financial system of a country is an important tool for economic development of the country, as it helps in creation of wealth by linking savings with investments.
It facilitates the flow of funds form the households (savers) to business firms (investors) to aid in wealth creation and development of both the parties
how to sell pi coins in all Africa Countries.DOT TECH
Yes. You can sell your pi network for other cryptocurrencies like Bitcoin, usdt , Ethereum and other currencies And this is done easily with the help from a pi merchant.
What is a pi merchant ?
Since pi is not launched yet in any exchange. The only way you can sell right now is through merchants.
A verified Pi merchant is someone who buys pi network coins from miners and resell them to investors looking forward to hold massive quantities of pi coins before mainnet launch in 2026.
I will leave the telegram contact of my personal pi merchant to trade with.
@Pi_vendor_247
what is the future of Pi Network currency.DOT TECH
The future of the Pi cryptocurrency is uncertain, and its success will depend on several factors. Pi is a relatively new cryptocurrency that aims to be user-friendly and accessible to a wide audience. Here are a few key considerations for its future:
Message: @Pi_vendor_247 on telegram if u want to sell PI COINS.
1. Mainnet Launch: As of my last knowledge update in January 2022, Pi was still in the testnet phase. Its success will depend on a successful transition to a mainnet, where actual transactions can take place.
2. User Adoption: Pi's success will be closely tied to user adoption. The more users who join the network and actively participate, the stronger the ecosystem can become.
3. Utility and Use Cases: For a cryptocurrency to thrive, it must offer utility and practical use cases. The Pi team has talked about various applications, including peer-to-peer transactions, smart contracts, and more. The development and implementation of these features will be essential.
4. Regulatory Environment: The regulatory environment for cryptocurrencies is evolving globally. How Pi navigates and complies with regulations in various jurisdictions will significantly impact its future.
5. Technology Development: The Pi network must continue to develop and improve its technology, security, and scalability to compete with established cryptocurrencies.
6. Community Engagement: The Pi community plays a critical role in its future. Engaged users can help build trust and grow the network.
7. Monetization and Sustainability: The Pi team's monetization strategy, such as fees, partnerships, or other revenue sources, will affect its long-term sustainability.
It's essential to approach Pi or any new cryptocurrency with caution and conduct due diligence. Cryptocurrency investments involve risks, and potential rewards can be uncertain. The success and future of Pi will depend on the collective efforts of its team, community, and the broader cryptocurrency market dynamics. It's advisable to stay updated on Pi's development and follow any updates from the official Pi Network website or announcements from the team.
how to sell pi coins in South Korea profitably.DOT TECH
Yes. You can sell your pi network coins in South Korea or any other country, by finding a verified pi merchant
What is a verified pi merchant?
Since pi network is not launched yet on any exchange, the only way you can sell pi coins is by selling to a verified pi merchant, and this is because pi network is not launched yet on any exchange and no pre-sale or ico offerings Is done on pi.
Since there is no pre-sale, the only way exchanges can get pi is by buying from miners. So a pi merchant facilitates these transactions by acting as a bridge for both transactions.
How can i find a pi vendor/merchant?
Well for those who haven't traded with a pi merchant or who don't already have one. I will leave the telegram id of my personal pi merchant who i trade pi with.
Tele gram: @Pi_vendor_247
#pi #sell #nigeria #pinetwork #picoins #sellpi #Nigerian #tradepi #pinetworkcoins #sellmypi
The secret way to sell pi coins effortlessly.DOT TECH
Well as we all know pi isn't launched yet. But you can still sell your pi coins effortlessly because some whales in China are interested in holding massive pi coins. And they are willing to pay good money for it. If you are interested in selling I will leave a contact for you. Just telegram this number below. I sold about 3000 pi coins to him and he paid me immediately.
Telegram: @Pi_vendor_247
Financial Assets: Debit vs Equity Securities.pptxWrito-Finance
financial assets represent claim for future benefit or cash. Financial assets are formed by establishing contracts between participants. These financial assets are used for collection of huge amounts of money for business purposes.
Two major Types: Debt Securities and Equity Securities.
Debt Securities are Also known as fixed-income securities or instruments. The type of assets is formed by establishing contracts between investor and issuer of the asset.
• The first type of Debit securities is BONDS. Bonds are issued by corporations and government (both local and national government).
• The second important type of Debit security is NOTES. Apart from similarities associated with notes and bonds, notes have shorter term maturity.
• The 3rd important type of Debit security is TRESURY BILLS. These securities have short-term ranging from three months, six months, and one year. Issuer of such securities are governments.
• Above discussed debit securities are mostly issued by governments and corporations. CERTIFICATE OF DEPOSITS CDs are issued by Banks and Financial Institutions. Risk factor associated with CDs gets reduced when issued by reputable institutions or Banks.
Following are the risk attached with debt securities: Credit risk, interest rate risk and currency risk
There are no fixed maturity dates in such securities, and asset’s value is determined by company’s performance. There are two major types of equity securities: common stock and preferred stock.
Common Stock: These are simple equity securities and bear no complexities which the preferred stock bears. Holders of such securities or instrument have the voting rights when it comes to select the company’s board of director or the business decisions to be made.
Preferred Stock: Preferred stocks are sometime referred to as hybrid securities, because it contains elements of both debit security and equity security. Preferred stock confers ownership rights to security holder that is why it is equity instrument
<a href="https://www.writofinance.com/equity-securities-features-types-risk/" >Equity securities </a> as a whole is used for capital funding for companies. Companies have multiple expenses to cover. Potential growth of company is required in competitive market. So, these securities are used for capital generation, and then uses it for company’s growth.
Concluding remarks
Both are employed in business. Businesses are often established through debit securities, then what is the need for equity securities. Companies have to cover multiple expenses and expansion of business. They can also use equity instruments for repayment of debits. So, there are multiple uses for securities. As an investor, you need tools for analysis. Investment decisions are made by carefully analyzing the market. For better analysis of the stock market, investors often employ financial analysis of companies.
how to sell pi coins effectively (from 50 - 100k pi)DOT TECH
Anywhere in the world, including Africa, America, and Europe, you can sell Pi Network Coins online and receive cash through online payment options.
Pi has not yet been launched on any exchange because we are currently using the confined Mainnet. The planned launch date for Pi is June 28, 2026.
Reselling to investors who want to hold until the mainnet launch in 2026 is currently the sole way to sell.
Consequently, right now. All you need to do is select the right pi network provider.
Who is a pi merchant?
An individual who buys coins from miners on the pi network and resells them to investors hoping to hang onto them until the mainnet is launched is known as a pi merchant.
debuts.
I'll provide you the Telegram username
@Pi_vendor_247
how to sell pi coins effectively (from 50 - 100k pi)
Debt - Basics of Debt and Fixed Income
1.
2. Debt
Borrowers:
Interest is the cost of having access to Funds for his needs – individual or Company or Government.
Lender’s Perspective:
Interest is compensation for Opportunity cost and risk
Invested spent
Interest is based on:
Tenure – Longer the Loan – Higher risk – Opportunity Cost
Risk the borrower – Credit Worthiness – Riskier the borrower Interest will be more
Inflation – higher , interest will be more
How do you raise debt:
Loan through Banks and Financial Institutions
Financial Markets or Debt Markets
Company or Government issued Securities called Debt
Securities or Bonds
Can issue more than one issue of Debt Securities
3. Debt
Bond:
A bond is a contract between the issue and the owners
of the bonds (bond holders), that obligates the issuer
to make specified payments over a specific period.
Important Characteristics of Bond
Par value – Principal Value - Face Value
Coupon Rate
Maturity Rate
4. Debt
Coupon Rate & Coupon Payments:
Coupon Rate: It is the promised interest rate on bond ex: 5% coupon rate
Coupon Payment: Coupon payments are linked to the bonds per value
and bonds coupon rate. Ex: Bonds Coupon rates is 5% and Pay Value is
Rs.100; then Coupon Payment is Rs.5
Most Debt instrument issued by Governments makes coupon payments
as Semi – Annual basis
Rs.2.50 is given – 2 times
In general Debt securities are used with fixed coupon rate and paid
fixed coupon payments; they are referred as fixed – income securities.
5. Maturity:
Debt Securities – 1 year Referred as bills
1 year – 10 years Referred as Notes
10 year Bonds
Term bond is used irrespective of its Maturity.
Maturity Date:
The life of the Bond ends on its maturity date and the
issuer is not responsible for any further payments after
that date
6. Bond Indenture:
Bond is governed by a legal contract between the bond issuer
and the bond holders, which describes the key terms of the debt
obligation. This legal contract is referred as the bond indenture
Covenants:
It describes actions the issuer must perform or is prohibited from
performing.
Ex:
Common covenant requires the issuer to pay interest on timely
basis
To provide Quarterly Financial Statement to bond holder
No additional borrowing or No sale of Assets etc.,
A bond issuer failing to make the promised payments is referred
to as a default.
7. Secured Debt securities:
When Security is backed by asset or issuer pledges assets as
collateral to bond holders. In the event of default, bond
holders are legally entitled to take the possession of the
assets.
Reduces the risk
So lower coupon
Unsecured Debt Securities:
Not backed by collateral
Higher Risk of default
Higher coupon then secured
8. Subordinate Debt:
A bond which has a lower priority (specified in
contract) in the event of default. It is unsecured debt
with a lower priority. Bond holders will receive
payment only after higher priority debt claims are
paid.
Priority or Seniority Ranking of Debt Securities :
Secured Debts >> Senior unsecured Debt >> Senior
subordinate debt >> Subordinate Debt >> Junior
subordinate Debt.
9. Bonds issued by corporate –-> Corporate Bond
Bonds issued by Government - G Secs or
GILTS(India)
Bonds issued by US Government - Treasury
Securities or T- bills
10. Bond Markets
Primary Market :
Issue of new securities to investors. Investors buy directly from bond
issuer.
Secondary Markets :
Investor later may sell their bonds to other investor in the secondary
market at a market price
Check link : http://primedatabase.com/debtsecurities.asp
“ Price of the bond in Secondary market is reflecting of Credit quality,
interest rate, market conditions
Bond holder (primary purchase or secondary) is entitled to set promised
coupon payments as principal
11. Categories
Categories :
Bonds are often categorized by their coupon rates :
Fixed – Rate bonds or straight bond
Floating – rate bonds
Zero – Coupon bonds
12. Fixed Rate Bond or Straight Bond :
It pays a fixed periodic coupon payment over its life
and returns the principal on the maturity date
Coupon rate does not change over the life of the bond
Par value does not change.
13.
14.
15. Floating rate bonds :
Sometimes referred as variable – rate bonds.
Coupon rate on Floating Rate Bond changes overtime
Coupon rate is linked to a reference rate
Reference rate is a interest rate paid by a highly credit worthy
borrower
LIBOR – London interbank offered rate is widely used
MIBOR – Mumbai interbank offered rate is widely used in India
Floating rate is calculated by making on adjustment to the
reference rate to reflect the riskiness (creditworthiness) of issuer.
Floating Rate= Reference percentage (which reflects Credit
Worthiness and Bond features)
Percentage over Reference rate is called spread and is constant
Any change in Credit worthiness does not reflect at later stage
Percentage is referred in bps or bonus points 1%= 100bps
So it is stated as LIBOR +100 bps (spread is 1%)
16.
17. Zero Coupon Bonds:
They don’t offer periodic interest payments.
Only cash flow offered by a Zero coupon bond is a single payment
equal to the bonds par value that is paid on the bonds maturity date.
Bonds are issued at a discount to the bonds par value.
The difference between issue price and par value received at maturity is
the return.
Usually Government Securities are issued as Zero coupon securities.
Ex: Book: IDBI issued deep discount bonds at maturity par value is 2 L,
maturity period of 25 years and issued at 5300/-
Use FV=PV(1+r)n
(1+r) 23 = 200000/5300 = (37.73).0434
(1+r) 23= 1.1706= r=.1706 or 17%
18. Bonds with Embedded provisions
B0nds can have provisions which give the issuer or the
bond holder the right but not the obligation to take
certain actions .
Callable Bonds
Putable Bonds
Convertible Bonds
19. Bonds with Embedded provisions
Callable Bonds
Provides the issuer with the right to buy back (retire or call)
the bond from the bond holders prior to maturity at are
specified price referred to as a call price .
Call Price= par value + Call premium
Call provision is the right of the issuer
Issuer is of advantage over bond holder
To compensate the risk of bond retired early , callable
bonds have higher coupon than coupon of comparable
bond with our call option .
This risk is called call risk
20. Bonds with Embedded provisions
Callable Bonds
Issuer calls for the provision when interest rate are coming down , and he has
option to raise capital at lower coupon .
Ex : Let’s look again at that nice, safe Aaa-rated corporate bond that pays 4% a
year. Imagine that Federal Reserve Bank begins cutting interest rates. Suddenly,
the going rate for a 15-year, Aaa-rated bond falls to 2%. The issuer of your bond
looks at the market and decides it’s in its best interest to pay off those old
bonds and borrow again at 2%.
You the investor will get back the original principal of the bond -- $1,000. But
you won’t be able to reinvest that principal and match the return you were
getting. Now you’ll have to either buy a lower-rated bond to get a 4% return or
buy another Aaa-rated bond and accept at 2% return.
21. Bonds with Embedded provisions
Putable Bonds
A putable bond provides the bondholders with the right to sell (put back )
their bonds to the issuer prior to the maturity date a at pre-specified price
referred to as the put price .
Put provision is the right of the bond holder
Coupon rate of putable bond is generally lower than coupon of comparable
bond .
It will help the bond holders from down side price protection in case of interest
rates increase.
When a bind holder exercises the put provision , the pre specified put price at
which binds are sold back t o the issuer is typically the binds par value .
22. Bonds with Embedded provisions
Convertible Bonds
It has characteristics of both debt and equity
It gives the bond holder to right tot convert the bind in to a pre
specified number of common shares of the issuing company at some
point prior to bonds maturity date .
Conversion value is the value of the bond if it converted to stock .
Conversion ratio is the number of shares that the bond holder would
receive from converting the bond to stock .
Conversion value is equal to the conversion ratio times the share price .
Coupon is lower than comparable bonds as additional feature of
conversion is given .
23. Bonds with Embedded provisions
Let’s look at an example. Acme Company
issues a 5-year convertible bond with a
$1,000 par value and a coupon of 5%. The
“conversion ratio” – or the number of
shares that the investor receives if he or
she exercises the conversion – option is
25. The effective conversion price is
therefore $40 per share, or $1000 divided
by 25. The investor holds on to the
convertible bond for three years and
receives $50 in income each year. At that
point, the stock has risen well above the
conversion price and is trading at $60.
The investor converts the bond and
receives 25 shares of stock at $60 per
share, a total value of $1,500. In this way,
the convertible bond offered both
income and a chance to participate in the
upside of the underlying stock.
On the other hand, let’s say that Acme’s
stock weakens during the life of the
security – rather than rising to $60, it
falls to $25. In this case, the investor
wouldn’t convert – since the stock prices
is less than the conversion price – and
would hold on to the security until
maturity as though it were a straight
corporate bond. In this example, the
investor receives $250 in income over the
five year period, and then receives his or
her $1000 back upon the bond’s
maturity.
24. Bonds with Embedded Provisions
Inflation – Linked Bonds
Bonds contain a provision that adjusts the bonds par
value for inflation .
Inflation reduces the purchasing power from bond
cash flows.
For most inflation linked bonds , the par value of the
bond is adjusted at each payment date to reflect
changes in inflation .
Coupon payments get adjusted with this as it equal to
coupon multiplied by the inflation adjusted par value .
25. Bonds with Embedded Provisions
In US they are called Treasury inflation protected securities .(TIPS)
In UK – index linked gilts
Hongkong – iBonds
India recently launched a new kind of bond to give individual investors
some protection against inflation, but they don’t make sense for
everyone.
The new bonds, officially called the Inflation Indexed National Savings
Securities, are available for sale to individuals until Dec. 31.
Unlike a traditional bond where the interest rate is fixed, in the
inflation-linked bonds, the government will pay an interest of 1.5% per
year above the rate of inflation as measured by the Consumer Price
Index.
The interest rate will be reset every six months, to reflect any changes
in inflation
26. Bonds with Embedded Provisions
Structured Debt Securities
Securitization :
Creation and issuance of new debt securities , called
structured debt securities that are backed by a pool of
other debt securities .
It is pooling of financial assets and issuing debt
securities against this pool .
It creates Liquidity and option to raise money from
illiquid assets .
27. Bonds with Embedded Provisions
Structured Debt Securities
Securitization :
Securitization turns mortgages into liquid assets. The process works like this: A bank or
other institution gathers hundreds or thousands of mortgages into a "pool." It then
divides that pool into shares and sells those shares as securities. Buyers of these securities
gain the right to collect mortgage payments made by the hundreds or thousands of
homeowners whose mortgages have been pooled, which is why they're called "mortgage-
backed securities.“
Securitization allows banks to convert their mortgages to cash, which they can then use to
lend money to more home buyers. This ensures that there is a steady supply of credit
available to the housing market. And as long as the homeowners whose loans were
pooled make their payments on time, buyers of the securities get a nice return on their
investment.
Disadvantages
Unfortunately, securitization can also encourage lenders to lend money to high-risk
people who are unlikely to pay it back. That's because once a mortgage has been
securitized and sold off to investors, the lender no longer has any money at stake; all the
risk has been passed off to the investors. This is what happened in the housing bubble of
the early to mid-2000s. When homeowners began defaulting on loans in record
numbers, the securities backed by those mortgages lost their value.
28. Bonds with Embedded Provisions
Structured Debt Securities
Mortgage backed Securities :
Debt Securities are issued against a pool of underlying
residential mortgage loans (home loans) or on a pool of
underlying commercial mortgage loans.
Asset backed Securities :
Similar to Mortgage backed securities except that the types
of loans underlying are debt obligations such as credit card
receivables , auto loans , corporate bonds etc.
Investors who buy structured debt securities receive a
portion of the pooled monthly loan payments .
29. Risk of Investing in debt Securities
Debt securities is considered less risky , still bind
holders still face a number of risks
Credit Risk
Interest rate Risk
Inflation Risk
Liquidity Risk
Reinvestment Risk
Call Risk
30. Risk of Investing in debt Securities
Credit Risk :
It is referred to as default risk , is the risk of bond
issuer failing to make full and timely payments of
interest and principal .
Risk of decline in price of the bond in case of suspect
of default by issuer .
31. Risk of Investing in debt Securities
Credit Risk of a bond can be assessed by reviewing credit rating .
Credit ratings agencies assess the credit quality of the bond and assign them ratings .
Highest ratings are assigned to bonds that are considered to have low risk of default
Credit rating is assigned at issue and also reviewed over the time .
Better the credit rating , better the access to capital at lower rate .
32. Risk of Investing in debt Securities
Investment grade bonds Non Investment grade binds
High degree of credit
worthiness
Invested by insurance
companies , pension funds
Lower coupon or yield
Less credit worthy
Also referred as Junk bonds
Higher yield -high risk
Invested by hedge funds etc
33. Risk of Investing in debt Securities
Interest Rate Risk :
Interest rate changes . Risk resulting due interest rate .
Bond price decrease with increase of interest rate .
Bond prices are inversely proportional to interest rates
It adversely effects fixed rate binds and zero coupon
bonds
Floating rate bonds coupon are set to current market
interest rates at each payment date , so interest rate risk is
minimal when interest rate increase. But when Interest
rates decline bind holders receive less coupon payment as
coupon rate is reset as per market.
34. Risk of Investing in debt Securities
Inflation Risk :
Promised interest payment and principal payment
does not count or change with inflation .
Purchasing power of cash flows comes down.
Inflation linked bonds can protect from inflation.
35. Risk of Investing in debt Securities
Liquidity Risk :
Risk of unable to sell a bind prior to the maturity date with
out having to accept a significant discount to market value .
Bonds that don’t trade very frequently face this risk .
Reinvestment Risk :
In falling interest rates scenario , the cash flows on bonds
have to be invested at lower coupon .
Call Risk :
Risk that issuer might buy back the bind prior to maturity
or exercise call option if interest rates are falling . Bind
holders will than have to invest proceeds at a lower interest
rate .
36. Valuation of Debt Securities
The value of a debt security is estimated using a
discounted cash flow approach.
Value of a bond is the present value of all the future
coupon payments and final principal payment .
Once an estimate of the value of a bond is calculated ,
it is compared with the current price of the bond to
determine whether the bond is over valued ,
undervalued or fairly values .
38. Valuation of Debt Securities
Bond valuation is only one of the factors investors consider
in determining whether to invest in a particular bond.
Other important considerations are: the issuing company's
creditworthiness, which determines whether a bond is
investment-grade or junk; the bond's price appreciation
potential, as determined by the issuing company's growth
prospects; and prevailing market interest rates and
whether they are projected to go up or down in the future.
39. Valuation of Debt Securities
Example 1: Calculate the price of a bond with a par value of $1,000 to be paid in ten years, a coupon rate of 10%, and a
required yield of 12%. In our example we'll assume that coupon payments are made semi-annually to bond holders and
that the next coupon payment is expected in six months. Here are the steps we have to take to calculate the price:
1. Determine the Number of Coupon Payments: Because two coupon payments will be made each year for ten
years, we will have a total of 20 coupon payments.
2. Determine the Value of Each Coupon Payment: Because the coupon payments are semi-annual, divide the
coupon rate in half. The coupon rate is the percentage off the bond's par value. As a result, each semi-annual coupon
payment will be $50 ($1,000 X 0.05).
3. Determine the Semi-Annual Yield: Like the coupon rate, the required yield of 12% must be divided by two
because the number of periods used in the calculation has doubled. If we left the required yield at 12%, our bond price
would be very low and inaccurate. Therefore, the required semi-annual yield is 6% (0.12/2).
4. Plug the Amounts Into the Formula:
From the above calculation, we have determined that the bond is selling at a discount; the bond price is less than its
par value because the required yield of the bond is greater than the coupon rate. The bond must sell at a discount to
attract investors, who could find higher interest elsewhere in the prevailing rates. In other words, because investors can
make a larger return in the market, they need an extra incentive to invest in the bonds.
40. Valuation of Debt Securities
Example 1: Calculate the price of a bond with a par value of $1,000 to be paid in ten years, a coupon rate of 10%, and a
required yield of 12%. In our example we'll assume that coupon payments are made semi-annually to bond holders and
that the next coupon payment is expected in six months. Here are the steps we have to take to calculate the price:
1. Determine the Number of Coupon Payments: Because two coupon payments will be made each year for ten
years, we will have a total of 20 coupon payments.
2. Determine the Value of Each Coupon Payment: Because the coupon payments are semi-annual, divide the
coupon rate in half. The coupon rate is the percentage off the bond's par value. As a result, each semi-annual coupon
payment will be $50 ($1,000 X 0.05).
3. Determine the Semi-Annual Yield: Like the coupon rate, the required yield of 12% must be divided by two
because the number of periods used in the calculation has doubled. If we left the required yield at 12%, our bond price
would be very low and inaccurate. Therefore, the required semi-annual yield is 6% (0.12/2).
4. Plug the Amounts Into the Formula:
From the above calculation, we have determined that the bond is selling at a discount; the bond price is less than its
par value because the required yield of the bond is greater than the coupon rate. The bond must sell at a discount to
attract investors, who could find higher interest elsewhere in the prevailing rates. In other words, because investors can
make a larger return in the market, they need an extra incentive to invest in the bonds.
41. Valuation of debt sec
Discount rate (required rate on the bond given its
riskiness) affects the bonds value relative to the par
value
If bonds coupon rate and discount rate are same the
bonds value is its par value .
If bonds coupon rate is lower than the discount rate
bond value is less than its par value and will trade at a
discount .
If bonds coupon rate is higher than the discount rate
bond value is more than its par value and will trade at
a premium .
42.
43.
44.
45. Yield to Maturity
The discount rate that equates the present value of a binds
promised cash flows to its market price is the bonds yield to
maturity or yield.
An investor can compare this yield to maturity with the required
rate of return on the bond given its riskiness to decide whether
or not to purchase it .
47. Yield to Maturity
Yield is a function of its maturity , liquidity and risk
Low risk bonds such as govt bonds trade at relatively
lower yield to maturity , which imply relatively at
higher prices.
High risk bonds , trade at higher yield to maturity
,which imply relatively lower prices.
Bond prices and bond yields to maturity are inversely
related .
48. Current Yield
A bonds current yield is calculated as the annual
coupon payment divided by current market price .
Current yield provides bond holders with an estimate
of the annualized return from the coupon income only
Ex : Coupon of 4% , and lets the bond is trading at
914.70 .
Current yield = 40(coupon payment)/914.70
= 4.37%
49. Yield Curve
A line that plots the interest rates, at a set point in time, of bonds having equal credit
quality, but differing maturity dates. The most frequently reported yield curve compares
the three-month, two-year, five-year and 30-year U.S. Treasury debt. This yield curve is
used as a benchmark for other debt in the market, such as mortgage rates or bank
lending rates. The curve is also used to predict changes in economic output and growth.
US treasury yield curve
Bond with
comparable
features can be
considered
50. Credit Spreads
Difference between a risky bonds yield and the yield on a
government bond with same maturity is referred as risky
bond’s credit spread .
Credit Spread tells the investor how much extra yield is
being offered for investing in a bond that has higher
probability of default.