Professional Documents
Culture Documents
UNIT 1
INTRODUCTION
Companies and governments need money for
developmental activities
They can borrow from banks or raise money from the
public by issuing bonds
A bond is nothing but a loan for which the public is the
lender
A bond can be considered as an IOU given by the
borrower (issuer) to the lender (investor)
The issuer of the bonds pays interest to the lender at
a pre-determined rate and schedule
Bonds are called as fixed-income securities as the
investor is aware of the exact amount he will get back
if he holds the security till maturity
Bond
DIFFERENCES BETWEEN
BOND AND EQUITY
BOND MARKET
TRADE TIMINGS
Monday to Friday
PHASES OF TRADE
PHASES OF TRADE
BOND VALUATION
Requirements
An estimate of expected cash flows
An estimate of the required rate of return
The formula :
P=A*(1+r)-1 / r(1+r)
P= Present Value in rupees
A= Annual coupon amount
n= Number of years to Maturity
r= Periodic required return
M= Maturity Value
+ M/ (1+r)
YIELD CURVES
YIELD CURVES
Year
Interest
rate
8%
10
2
3
Year
Price
YTM
925.93
8%
841.75
8.995
11
758.33
9.660
11
683.18
9.993
1000/1.08= 925.93
1000/(1.08*1.10) = 841.75
1000/(1.08*1.10*1.11) =
758.33
841.75=1000/
(1+y2)2
YIELD CURVES
0
Bond A
Bond
B
1
8%
2
Rs.1000
10%
Rs.1000
FORWARD RATES
EXPECTATION HYPOTHESIS
Return
EXPECTATION HYPOTHESIS
3
Term
SEGMENTATION THEORY
Thank
you