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FM-Bond Markets in India
FM-Bond Markets in India
FM-Bond Markets in India
Dr.L.Goverthanan
Source – RBI Website & Books on Investment
Bonds in India
Types of Bonds
Bonds are long term debt instruments. • Normal Bond – Periodic Interest payment +
The issuer of the Bond owes to the holder of the bond, repayment of principal on maturity.
1. Periodic payment of Interest • Perpetual Bond- Only Interest is paid
2. Repayment of principal on maturity (as per terms periodically for ever.
of issue)
• Zero-coupon Bond- No periodic interest
payments but on maturity face value is paid.
Depending on the issuer of Bonds it is classified further
into Government Bonds and Corporate Bonds. • Deep discount bond-No periodic interest
Bonds are generally secured.
payments but on maturity face value is paid.
• Inflation adjusted bond- Coupon is reset
Trading is done in Market popularly known as Bond
periodically based on Inflation.
Market / Debt Market / Credit market • Sovereign Gold bond – Redemption at Market
value. Interest periodically paid at 2.5%
Bonds in India (…)
Government Bonds (Guaranteed by Govt.)
• Treasury Bills (T-Bills)
They are issued by GOI for 91D, 182D and 364
days.
• Long term Government Bonds
These are issued for a period ranging from 5 to
40 years.
• The Bonds issued by States are called SDLs( State
Development Loans)
• x100
. The value of i in the below equation is called YTM.
Bond Valuation Functions in Excel
• PRICE(settlement, maturity, rate, yld, redemption, frequency, [basis])
• The PRICE function syntax has the following arguments:
• Settlement Required. The security's settlement date. The security settlement date is the
date after the issue date when the security is traded to the buyer.
• Maturity Required. The security's maturity date. The maturity date is the date when the
security expires.
• Rate Required. The security's annual coupon rate.
• Yld Required. The security's annual yield.
• Redemption Required. The security's redemption value per $100 face value.
• Frequency Required. The number of coupon payments per year. For annual payments,
frequency = 1; for semiannual, frequency = 2; for quarterly, frequency = 4.
• Basis Optional. The type of day count basis to use.
Deep discount Bond
• A bond is considered Deep discount Bond if it is sold at a significantly
lower price than par value, usually at 20% or more.
Bond Valuation Functions in Excel …
• YIELD(settlement, maturity, rate, pr, redemption, frequency, [basis])
• he YIELD function syntax has the following arguments:
• Settlement Required. The security's settlement date. The security settlement date is the
date after the issue date when the security is traded to the buyer.
• Maturity Required. The security's maturity date. The maturity date is the date when the
security expires.
• Rate Required. The security's annual coupon rate.
• Pr Required. The security's price per ₹100 face value.
• Redemption Required. The security's redemption value per ₹100 face value.
• Frequency Required. The number of coupon payments per year. For annual payments,
frequency = 1; for semiannual, frequency = 2; for quarterly, frequency = 4.
• Basis Optional. The type of day count basis to use.
Relationship among Bond price, Coupon
yield and YTM
• When the market price of the bond is less than the face value, i.e., the bond sells at a
discount, YTM >> coupon yield.
• When the market price of the bond is more than its face value, i.e., the bond sells at a
premium, coupon yield >> YTM.
• When the market price of the bond is equal to its face value, i.e., the bond sells at par,
YTM = coupon yield.
Risk
• Market Risk
• Reinvestment Risk
• Liquidity risk
Valuation of Equity
• Dividend Discount Model (DDM)
• …… (A)
• ……. (B)
• Substituting B in A, we get
•
• + + +…+ +
• when n->
Valuation of Equity (…)
• When Dividend is constant and paid in perpetuity
Bond value
Yield rate
600 6%
6%
400 4%
200 2%
0 0%
1 2 3
Axis Title