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Debt Market PPT - Pps
Debt Market PPT - Pps
SERVICES
DEBT MARKET
By
ULTIMATE INVESTMENTS
Nurturing
Wealth
The above diagram provides a consolidated picture of the various players in the bond/money markets and the securities.
ZCB: Zero Coupon Bond I/L bonds : Inflation linked bonds FRN : Floating rate notes
Commercial Paper
A Commercial Paper is a short term unsecured
promissory note issued by the raiser of debt to
the investor. In India corporates, primary
dealers (PD), satellite dealers (SD) and financial
institutions (FIs) can issue these notes.
It is generally companies with very good rating
which are active in the CP market, though RBI
permits a minimum credit rating of Crisil-P2. The
tenure of CPs can be anything between 15 days
to one year, though the most popular duration is
90 days. Companies use CPs to save interest
costs
Certificates of Deposit
These are issued by banks/financial
institutions in denominations of Rs 5
lakhs and have maturity ranging from
30 days to 3 years. Banks are
allowed to issue CDs with a maturity
of less than one year while financial
institutions are allowed to issue CDs
with a maturity of at least one year.
Treasury Bills
Treasury Bills are instruments issued by RBI at a
discount to the face value and form an integral
part of the money market. In India treasury bills
are issued in three different maturities 14 days,
182 days and 364 days.
Apart from the above money market instruments,
certain other short-term instruments are also in
vogue with investors. These include short-term
corporate debentures, bills of exchange and
promissory notes.
What is a Repo?
Repo or Repurchase Agreements or Ready Forward transactions
are short-term money market instruments. Repo is nothing
but collateralized borrowing and lending. In a repo, securities
(like Government securities and treasury bills) are sold in a
temporary sale with an agreement to buy back the securities
at a future date at specified price. In reverse repo`s,
securities are purchased in a temporary purchase with an
agreement to sell it back after a specified number of days at
a pre-specified price. When one is doing a repo, it is reverse
repo for the other party.
For example, RBI could engage in a three-day repo transaction
with SBI, i.e., it would sell a security at, say, Rs. 100 to the
SBI agreeing to buy it back at Rs. 100.07, in three days. The
difference in price, is the interest RBI would have to pay for
the money lent by SBI.
Bonds/Debentures
What is the difference between
bonds and debentures?
World over, a debenture is a debt security issued by a corporation
that is not secured by specific assets, but rather by the general
credit of the corporation. Stated assets secure a corporate bond,
unlike a debenture. But in India these terms are used
interchangeably. A bond is a promise in which the Issuer agrees to
pay a certain rate of interest, usually as a percentage of the bond's
face value to the Investor at specific periodicity over the life of the
bond. Sometimes interest is also paid in the form of issuing the
instrument at a discount to face value and subsequently redeeming
it at par. Some bonds do not pay a fixed rate of interest but pay
interest that is a mark-up on some benchmark rate. Typically
PSUs, public financial institutions and corporate issue bonds.
Another distinction is SLR and non-SLR bonds. SLR bonds are
those bonds which are approved securities by RBI which fall under
the SLR(Statutory liquidity ratio) limits of banks.
Inflation Rate
Inflation Rate : Typically a higher inflation
rate means higher interest rates. The
interest rates prevailing in an economy at
any point of time are nominal interest rates,
i.e., real interest rates plus a premium for
expected inflation. Due to inflation, there is
a decrease in purchasing power of every
rupee earned on account of interest in the
future; therefore the interest rates must
include a premium for expected inflation. In
the long run, other things being equal,
interest rates rise one for one with rise in
inflation.
It is a weighted average of
the maturities of all the
instruments in a portfolio
What is convexity?
Convexity is a measure of the way duration and
price change when interest rates change. A bond
is said to have positive convexity if the
instrument's value increases at least as much as
duration predicts when rates drop and decreases
less than duration predicts when rates rise.
Typically, fund managers and investors prefer
bonds with higher convexity. This is because such
bonds rise higher than other bonds when interest
rate falls. And what is more, they fall lower than
other bonds, when interest rate rises. Convexity
is an important factor when interest rates are
volatile
Example :
Fixed rate payment
Fixed rate
player
Floating
rate player
Fixed rate
payment
Terms:
Fixed Interest Rate
: 7% p.a.
Variable Interest Rate : NSE Over-Night MIBOR reset
daily and compounded daily.
Notional Principal Amount : Rs. 50 crore
Period of Agreement
: 1 year
Payment Frequency
: Semi - Annual
Now, suppose the six-month period from the effective
date of the swap to the first payment date comprises
182 days and the daily compounded NSE Over - Night
MIBOR is 6 % p.a. on the first payment date, then the
fixed and variable rate payment on the first payment
date would be as follows:
2.
1.
2.
3.
4.
VALUATION OF
THINLY/NON-TRADED
SECURITIES
2.
3.
When RBI says that the rupee is overvalued, they mean that it has
been appreciating against other major currencies due to their
weakening against dollar which might impact the competitiveness of
India's exports.
REER is the change in the external value of the currency in relation to
its main trading partners. It is Rupee's value on a trade-weighted
basis. It takes into account the Rupee's value not only in terms of
dollar but also Euro, Yen and Pound Sterling.
The exchange rates versus other major currencies are average
weighted by the value of India's trade with the respective countries
and are then converted into a single index using a base period which
is called the nominal effective exchange rate. But the relative
competitiveness of Indian goods increases even when the nominal
effective exchange rate remains unchanged when the rate of price
increases of the trading partner surpasses that of India's. Taking this
into account, prices are adjusted for the nominal effective exchange
rate and this rate is called the "real effective exchange rate."
Construction of risk-free
benchmark :
A risk-free benchmark yield is built using the government
securities (G-secs) as the base. G-secs are used as the
benchmarks as they are traded regularly; are free of
credit risk and are traded across different maturity
spectrums every week. The G-secs are grouped into the
following duration buckets viz., 0.5-1 years, 1-2 years,
2-3 years, 3-4 years, 4-5 years, 5-6 years and 6 years
and the volume weighted yield is computed for each
bucket. Accordingly, there will be a benchmark YTM for
each duration bucket. (Please note that duration is
different from maturity period. As mentioned above,
duration is a measure of a bonds' price risk. It is
weighted average of all the cash flows associated with a
bond in terms of their present value.)
Average
0.5-1.0
yrs
1.0-2.0
yrs
2.0-3.0
yrs
3.0-4.0
yrs
4.0-5.0
yrs
5.0-6.0
yrs
Gilt
6.32%
5.70%
5.90%
6.02%
6.18%
6.43%
6.87%
7.17%
AAA
6.95%
0.63%
0.72%
0.71%
0.71%
0.59%
0.52%
0.51%
AA+
7.29%
0.99%
1.01%
0.96%
0.92%
0.92%
0.98%
1.01%
AA
7.66%
1.33%
1.28%
1.28%
1.24%
1.39%
1.41%
1.44%
AA-
8.18%
1.85%
1.74%
1.74%
1.73%
1.91%
1.97%
2.08%
A+
8.86%
2.50%
2.47%
2.50%
2.49%
2.60%
2.60%
2.60%
9.45%
2.90%
3.03%
3.10%
3.14%
3.28%
3.26%
3.15%
A-
10.38%
3.60%
4.01%
4.19%
4.12%
4.17%
4.18%
4.10%
BBB+
11.30%
4.37%
4.88%
5.10%
5.09%
5.14%
5.15%
5.10%
BBB
12.38%
5.46%
6.02%
6.19%
6.17%
6.16%
6.18%
6.19%
BBB-
13.87%
6.96%
7.52%
7.69%
7.67%
7.66%
7.68%
7.61%
BB+
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
BB
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
BB-
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
B+
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
B-
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
Mark-up/Mark-down yield
All debt securities are prone to certain risk and hence the
marking up or down of yield is essential to get a true picture
about that particular security. The yields calculated above are
marked up/marked down to account for the liquidity risk,
promoter background, finance company risk and the issuer
class risk. The marking differs for rated and non-rated
securities and is as follows : Rated securities: Securities of
less than 2 year duration could be marked up or down upto
0.5% and for securities of more than 2 year duration marking
is allowed upto +/- 0.25% to be provide for the above
mentioned types of risks Non-rated securities : Since nonrated securities tend to be more illiquid than rated securities,
the yields are marked up by adding 0.5% for securities
having a duration of upto two years and 0.25% for securities
having duration of higher than two years to account for the
illiquidity risk
Illustration
Lets take the example of a AAA rated thinly traded debenture of
HDFC which has a duration of 3.25 years and a coupon
rate of 11.45%. Say, we purchased the debenture on July
21, 2002. By looking at the matrix above, we arrive at a
yield of 6.89%.
The enclosed excel sheet provides the calculation of NPV.
(click on the cells to view the formulas -Lets take the
example of a AAA rated thinly traded debenture of HDFC
which has a duration of 3.25 years and a coupon rate of
11.45%. Say, we purchased the debenture on July 21,
2002. By looking at the matrix above, we arrive at a yield of
6.89%.
The enclosed excel sheet provides the calculation of NPV.
(click on the cells to view the formulas -
Gilt Funds
Long Term Plan
Returns
Income Funds
Short-term Plan
Gilt Funds
Short Term Plan
FRIF
Liquid Funds
Risk
90 days
182-365 days
3-6 mos.
12 - 18 mos.
Typical tenor of
Investments
Typical Yields
M + 40 bps
M + 75 bps