Analysis of Fixed and Floating

Interest Rates
For Power Grid Corporation of India Ltd
Summer internship

Under Guidance of:

Prof. Nalin Jain and
Mr. K.C.Pant

By:
Madhusudan Partani
PGDM-18
FORE School of Management
 Flow of Presentation

Objectives, Scope, Data

Financial Statement Analysis
Process of Debt Raising
Yield, Duration and Convexity of Bonds
Floating and Fixed Interest Rates
Findings and Recommendations
 Introduction of Company

Power Grid Corporation of India Limited ( PGCIL)

was incorporated on 23rd October, 1989 as National
Power Transmission Corporation Limited..
Renamed on 23rd Oct, 1992
Sole CTU( Central transmission Unit) in the country
From Power Transmission, diversified into Telecom
and Consultancy.
 Bond Market

Fixed Income Instruments

Major Players
 Government ( Central, State and Municipal Bodies)
 PSUs
 Corporate
 Banks

Usually Tradable ( NSE-WDM Segment)

Different Maturities ( 180 Days to 15 years)


 Objectives

Financial Statement Analysis of PGCIL

Procedure of Debt raising through Bonds
Characteristics of Bonds
Analysis of Fixed and Floating Interest Rates

 Scope

Study of Bonds
For FSA, the results of last 8 years and FY 2008-09 is
considered
For Understanding the procedural aspects, PG XXX
issue is studied
Only 5 Bonds are considered for Analysis under fixed
and floating rates.
FRBs of other issuers and also Gsec and few PSU
Bonds are also studied
 Data

Primary
 Working manuals of Company
 Approval letters, Files, Workings,
 Data pertaining to Bonds issue
 Discussion with merchant Banker and Internal staff of the co.

Secondary
 FIMMDA and Reuters
 Balance Sheets of last 8 years
 IndiaStat.com and also NSE WDM Segment
 Objectives

Financial Statement Analysis of PGCIL

Procedure of Debt raising through Bonds
Characteristics of Bonds
Analysis of Fixed and Floating Interest Rates


 Financial Statement Analysis

Capital Composition
Sources and Applications of Funds
Ratios
Cash Flow Analysis

ØTo understand the financial performance and position
of the company
Capital Compostion
 Cash Flow Analysis
200903 Change 200803

Cash and Cash Equivalents at Beginning of the year 1865.59 1196.82

Net Cash from Operating Activities 6641.09 122% 2990.83

Net Cash Used in Investing Activities -9156.75 71% -5343.31

Net Cash Used in Financing Activities 3078.95 2% 3021.25

Net Inc/(Dec) in Cash and Cash Equivalent 563.29 -16% 668.77

Cash and Cash Equivalents at End of the year 2428.88 30% 1865.59

*Detailed Break-up is available on

 Ratios

Debt Equity Ratios

Interest Coverage ratio


 Other ratios are available on request

 Procedural Aspects of Debt raising
(Bonds)
Issue Process
Dematerialization
Listing Agreement
Debt Servicing
Procedure of Issuing Bonds
Dematerialization Process
 Debt Servicing

Record date
BO Position
Registrar and Transfer Agents ( RTA)
Demat and Physical Holding
DP s
PAN
Master File
List o Beneficiaries sent to Bank
Single Investor
 Characteristics of Bonds

Yield
 Current
 YTM

Duration
 Macaulay's
 Modified

Convexity
 Yield

Current Yield
Yield to Maturity
Annualised yield
Yield to Call/ Yield to Put
 Duration and Convexity

Macaulay’s Duration = Average time to receive back

the investment ( considering the YTM)
Modified Duration= Sensitivity of bond's price to
changes in the yield to maturity
Convexity is a measure of the curvature or 2nd
derivative of how the price of a bond varies with
interest rate, i.e. how the duration of a bond changes
as the interest rate changes
 Analysis

All PGCIL Bonds and two each of PFC and GOI.

Tenure/ Maturity
Average Tenure
Coupon Rate
STRPP
Characteristics of Duration
Characteristics of Convexity
 Analysis of Fixed and Floating Rate

Fixed rates
Floating rates
FRBs
Computation of Floating Rates
 Fixed vs Floating

Rate Determination
 Fixed: Book Building for Coupon Rate
 Floating: Book Building for Spread

Effect of Interest Rates Movements


 Indian issuers going for FRBs

GOI
 GOI FLOATING RATE +0.13% 2011
 GOI FLOATING RATE +0.50% 2015

Indian Railway Finance Corporation Limited (IRFCL)

Power Finance Corporation Limited,
ICICI Bank
EXIm Bank

 Analysis

All PGCIL Bonds and two each of PFC and GOI.

Tenure/ Maturity
Average Tenure
Coupon Rate
STRPP
Observations
 Bonds for Analysis
Bond Date of Loan Coupon Redemption Maturity Intrest Loan Repayment
Description Drawn Rate Date (Yrs.) Payment Amount Structure
(Rs. Crs)

Bonds VIII 27-04-2000 10.35% 4/2014 14 Half-Yrly 20.00 5 Yr.Moratorium +

Issue 10 Eq Ann.Inst

Bonds IX 22-08-2000 12.25% 8/2012 12 Half-Yrly 576.50 3 Yr.Moratorium +

Issue 10 Eq Ann.Inst

Bonds X 21-06-2001 10.90% 6/2015 14 Annual 761.52 3 Yr.Moratorium +

Issue 12 Eq Ann.Inst

Bonds XIII- 31-07-2002 7.85% 07/2008 6 Annual 250.50 1 Yr.Moratorium +

Issue 6 Eq Ann.Inst

Bonds XIV- 17-07-2003 6.10% 07/2015 12 Annual 699.00 1 Yr.Moratorium +

Issue 12 Eq Ann.Inst
 Floating Rate

Assumptions
Reference Rates
 Average Monthly yield of 10 Year GSec preceding the reset
month
 Average Yield of 10 year GSec for 12 months preceding the
reset month.
Average Yield of 10 year GSec for 6 months preceding the
reset month ( for Semi Annual Intrest Payment)
 Average of 1 Year GSec for the past 3 days preceding the reset
date.

 Floating Rate under Reference Rate of Average yield of 1 Year
Gsec –PG VIII

Date of Issue: 27th April, 2000

Intrest Payment: Semi Annually
Coupon Rate: 10.35%
Loan Amount: Rs. 20 Crores
Repayment: 5 years Moratorium and 10 equal
Instalments
Maturity: 27th April, 2014
 Determination of Spread

Date Yield-1yr GSec Average yield Coupon Rate Spread

26-04-2000 9.291
25-04-2000 9.306 9.3140% 10.35% 1.03600%
24-04-2000 9.345 931.40%
 Computation of Floating
Intrest
Rate
Average Yield of 1 years GSec
Reference Period
( 3 days preceding Intrest rate )
Average Govt yield Spread Floating rate Fixed rate
Payment
27-Oct-00 Oct- 23, 24, 25 10.39233% 1.036% 11.428% 10.35%
Apr-01 Apr- 23, 24, 26 8.88833% 1.036% 9.924% 10.35%
Oct-01 Oct- 23, 24, 25 6.89533% 1.036% 7.931% 10.35%
Apr-02 Apr- 23, 24, 26 6.17367% 1.036% 7.210% 10.35%
Oct-02 Oct- 23, 24, 25 5.64967% 1.036% 6.686% 10.35%
Apr-03 Apr- 23, 24, 25 5.12000% 1.036% 6.156% 10.35%
Oct-09 Oct- 22, 23, 26 4.47700% 1.036% 5.513% 10.35%
Apr-10 Apr- 22, 23, 26 4.92367% 1.036% 5.960% 10.35%
 Fixed and Floating Rates
Intrest Payment-Fixed Intrest Payment-Floating
Year Opening Redemption Interest Year Opening Redemption Interest
Balance Balance

Oct-00 20 0 1.035 Oct-00 20 0 1.142833

Apr-01 20 0 1.035 Apr-01 20 0 0.992433

Apr-08 14 2 0.7245 Apr-08 14 2 0.62202

Oct-08 12 0 0.621 Oct-08 12 0 0.50484

Apr-09 12 2 0.621 Apr-09 12 2 0.30672

Oct-09 10 0 0.5175 Oct-09 10 0 0.27565

Apr-10 10 2 0.5175 Apr-10 10 2 0.297983

17.595 12.57485
 Floating Rate under Reference Rate of Average yield
of 10 year Gsec Bond XIII- Opt-II

Computation of Spread

Avg Spread for AAA Bonds for 10

Jun-02
Years 138
May-02 127
Apr-02 173
Mar-02 200
Feb-02 198
Jan-02 159
Avg. 165.8333
 Computation of Floating
Rates

Average Yield for 10Yrs GSec ( 12 Months preceding Coupon

period )
Interest Reference Average Govt yield Spread Floating rate Fixed rate
Payment Period

Jul-03 Jul 01 - Jun 02 8.11% 1.658% 9.77% 7.85%

Jul-04 Jul 02 - Jun 03 6.39% 1.658% 8.05% 7.85%
Jul-05 Jul 03 - Jun 04 5.28% 1.658% 6.94% 7.85%
Jul-06 Jul 04 - Jun 05 6.70% 1.658% 8.36% 7.85%
Jul-07 Jul 05 - Jun 06 7.33% 1.658% 8.99% 7.85%
Jul-08 Jul 06 - Jun 07 7.88% 1.658% 9.54% 7.85%
 Fixed Vs Floating Rate
Rs. (Crs)
Interest Payment-Fixed Interest Payment-Floating
Year Opening Redemption Interest Year Opening Redemption Interest
Balance Balance

Jul-03 250.5 41.75 19.66425 Jul-03 250.5 41.75 24.47293

Jul-04 208.75 41.75 16.38688 Jul-04 208.75 41.75 16.80431

Jul-05 167 41.75 13.1095 Jul-05 167 41.75 11.5839

Jul-06 125.25 41.75 9.832125 Jul-06 125.25 41.75 10.46606

Jul-07 83.5 41.75 6.55475 Jul-07 83.5 41.75 7.508501

Jul-08 41.75 41.75 3.277375 Jul-08 41.75 41.75 3.983458

68.82488 74.81915
 Summary
Average Yield for 10Yrs GSec ( Preceding
Interest Payment )
(Rs. Crs)
Bond Maturity Interest paid Spread Under Fixed Under Savings
till Floating
VIII 14 Apr-10 1.00% 18.009 15.29789 2.71111

IX 12 Feb-10 0.75% 497.8798 334.674 163.2059

X 14 Jun-09 1.015% 560.2883 464.8609 95.42745
XIII-Opt-II 6 Jul-08 1.658% 68.82488 71.82599 -3.00112

1.507% 68.82488 73.49 -4.66512

XIV 12 Jul-09 0.648% 255.49 320.3901 -64.9001

0.711%2 255.49 323.0287 -67.5387

pread is determined taking previous 12 months’ average of Spread as published by F

 Cont
Average Yield for 10Yrs GSec ( Preceding Coupon
period
(Rs. Crs) )
Bond Maturity Interest paid Spread Under Fixed Under Savings
till Floating

VIII 14 Apr-10 1.00% 17.59500 14.59242 3.002577

IX 12 Aug-10 0.75% 508.473 352.3925 156.0805

X 14 Jun-10 1.015% 601.7912 494.247 107.5442

XIII-Opt-II 6 Jul-08 1.658% 68.82488 74.81652 -5.99164

1.507%2 68.82488 70.4959 -1.67103
XIV 12 Jul-10 0.648% 286.4584 353.1248 -66.6663
0.711%2 286.4584 356.0833 -69.6249
 Factors for Consideration

Term
 Short Duration: Fixed
 Long: Floating

Coupon Rate
Market Condition
 XII Issue ( Unfavorable Market Condition)

Quantum of Loan
Repayment Structure
Term

Coupon Rate
 Findings and Recommendations

Fixed Coupon Rate

 Easy Budgeting
 Perferable by Fixed Income Section
 Suitable for Conservative Company

LBut
L Cannot take advantage of Interest Fall
L True market situation is not reflected in interest payment
§ Is to be used when market is very favourable.
 Cont

Floating Rate
 Advantage of Fluctuations
 Returns on security is reflected by Market conditions
 Suitable in case if market is not favorable at the time of issue

But the company will not be able to budget, this can

be solved by maintaining Provisions
Fixed Interest rate with Call Option to issuer
 Can Call for repayment in case of fall in Interest rates.
 Also, since the Investors do not have the Put Option the
uncertainty of Disbursements in case of sudden selling of
bonds by investors is avoided.

 Recommendations

The company can go for Fixed Intrest rate if the market

conditions are favourable at the time of issue.
Also for the meagre loan amount, the company can be
indifferent between the Fixed and the Floating rate.
For a longer maturity bond, Fixed interest is to be
preferred if the yield curve of the GSec is at its low, and
the floating is to be preferred if the yield curve is at its
high.
In case of recession, the yield of GSec, the interest rates
are low; the investors become prudent and prioritise the
security to the returns. Thus at such conditions, fixed
coupon rate can be issued as the company will be able to
attract investment at low coupon rate.