c


 
 


 
   
 





 



 


ICRA was established in the year 1991 by the collaboration of financial
institutions, investment companies, and banks. The company has formed the ICRA
group together with its subsidiaries. The company is headed by Mr. Piyush G.
Mankad and offers products like short-term debt schemes, Issue-specific long-
term rating and offers fund based as well as non-fund based facilities to its clients.

 

ÔÊ To access the credit instrument and award it a grade consonant to the risk
associated with such instrument.
ÔÊ To assist investors in making well informed investment decision
ÔÊ To assist issuers in raising funds from a wider investors bas
ÔÊ To enable banks, investment bankers and brokers in placing debt with
investors by providing them with a marketing too.
ÔÊ To provide regulators with a market driven system to encourage the
healthy growth of the capital markets in a disciplined manner without
costing an additional burden on the Government for this purpose.
ÔÊ In addition to being a leading credit rating agency with expertise in virtually
every sector of the Indian economy, ICRA has broad-based its services for
the corporate and financial sectors, both in India and overseas, and
currently offers its services under the following banners:

ʹ  

  

!" 

  
!  
!#
  
 
i


  i
Ê
The rating methodology comprises the study of industry as well as the company͛s
SWOT analysis.

ÔÊ Marketing strategies
ÔÊ Competitive edge
ÔÊ £evel of technological development
ÔÊ Operational efficiency
ÔÊ Competence and effectiveness of management
ÔÊ HRD policies and practices
ÔÊ Hedging of risks
ÔÊ Cash flow trends and potential
ÔÊ £iquidity
ÔÊ Financial flexibility
ÔÊ Asset quality and past record of servicing debts and obligation
ÔÊ Government policies and status affecting the industry

£
$
%&


 ' 
 

£AAA: Highest Safety

£AA: High Safety
£A: Adequate Safety
£ : Moderate Safety
£ : Inadequate Safety
£ : Risk Prone
£C: Substantial Risk
£D: Default, Extremely speculative

(

)*  
 

MAAA: Highest Safety

MAA: High Safety
MA: Adequate Safety
M : Inadequate Safety
MC: Risk prone
MD: Default
 '



A-1: Highest Safety

A-2: High Safety
A-3: Adequate Safety
A-4: Risk prone
A-5: Default
c+
 


      
   

,   

The four principal strategies used to manage bond portfolios are:

ÔÊ Passive, or "buy and hold"

ÔÊ Index matching, or "quasi passive"
ÔÊ Immunization, or "quasi active"
ÔÊ Dedicated and active

Ê  &
 


The passive buy-and-hold investor is typically looking to maximize the income
generating properties of bonds. The premise of this strategy is that bonds are
assumed to be safe, predictable sources of income. uy and hold involves
purchasing individual bonds and holding them to maturity. Cash flow from the
bonds can be used to fund external income needs or can be reinvested in the
portfolio into other bonds or other asset classes. In a passive strategy, there are
no assumptions made as to the direction of future interest rates and any changes
in the current value of the bond due to shifts in the yield are not important. The
bond may be originally purchased at a premium or a discount, while assuming
that full par will be received upon maturity. The only variation in total return from
the actual coupon yield is the reinvestment of the coupons as they occur. On the
surface, this may appear to be a lazy style of investing, but in reality passive bond
portfolios provide stable anchors in rough financial storms. They minimize or
eliminate transaction costs, and if originally implemented during a period of
relatively high interest rates, they have a decent chance of outperforming active
strategies. 


 + Ê &
£ 


£adders are one of the most common forms of passive bond investing. This is
where the portfolio is divided into equal parts and invested in laddered style
maturities over the investor's time horizon. An example of a basic 10-year
laddered $1 million bond portfolio with a stated coupon of 5% is shown below

*  + - . / 0 1 2 3 4
Princi $100,0 $100,0 $100,0 $100,0 $100,0 $100,0 $100,0 $100,0 $100,0 $100,0
pal 00 00 00 00 00 00 00 00 00 00
Coupo
n
$5,000 $5,000 $5,000 $5,000 $5,000 $5,000 $5,000 $5,000 $5,000 $5,000
Incom
e
Dividing the principal into equal parts provides a steady equal stream of cash flow
annually

- Ê 
*
&
 

Indexing is considered to be quasi-passive by design. The main objective of
indexing a bond portfolio is to provide a return and risk characteristic closely tied
to the targeted index. While this strategy carries some of the same characteristics
of the passive buy-and-hold, it has some flexibility. Just like tracking a specific
stock market index, a bond portfolio can be structured to mimic any published
bond index. One common index mimicked by portfolio managers is the

£
 &

*

Due to the size of this index, the strategy would work well with a large portfolio
due to the number of bonds required to replicate the index. One also needs to
consider the transaction costs associated with not only the original investment,
but also the periodic rebalancing of the portfolio to reflect changes in the index.

 . Ê 
5 
&
 


This strategy has the characteristics of both active and passive strategies. y
definition, pure immunization implies that a portfolio is invested for a defined
return for a specific period of time regardless of any outside influences, such as
changes in interest rates. Similar to indexing, the opportunity cost of using the
immunization strategy is potentially giving up the upside potential of an active
strategy for the assurance that the portfolio will achieve the intended desired
return. As in the buy-and-hold strategy, by design the instruments best suited for
this strategy are high-grade bonds with remote possibilities of default. In fact, the
purest form of immunization would be to invest in a zero-coupon bond and match
the maturity of the bond to the date on which the cash flow is expected to be
needed.
Duration, or the average life of a bond, is commonly used in immunization. It is a
much more accurate predictive measure of a bond's volatility than maturity. This
strategy is commonly used in the institutional investment environment by
insurance companies, pension funds and banks to match the time horizon of their
future liabilities with structured cash flows. It is one of the soundest strategies
and can be used successfully by individuals. For example, just like a pension fund
would use an immunization to plan for cash flows upon an individual's retirement,
that same individual could build a dedicated portfolio for his or her own
retirement plan.

/ &
 


The goal of active management is maximizing total return. Along with the
enhanced opportunity for returns obviously comes increased risk. Some examples
of active styles include interest rate anticipation, timing, valuation and spread
exploitation, and multiple interest rate scenarios. The basic premise of all active
strategies is that the investor is willing to make bets on the future rather than
settle with what a passive strategy can offer.





There are many strategies for investing in bonds that investors can employ. The
buy-and-hold approach appeals to investors who are looking for income and are
not willing to make predictions. The middle-of-the-road strategies include
indexation and immunization, both of which offer some security and
predictability. Then there is the active world, which is not for the casual investor.
Each strategy has its place and when implemented correctly, can achieve the
goals for which it was intended.
 (
"6(#67


8&(77#$&*
$
 
19(&9+443