"Planning Your Financial Future": Mangala Boyagoda 26 October 2010

“Planning Your Financial Future”
Mangala Boyagoda
26th October 2010
Why do we save money?
Wealth Lanka Management (Pvt.) Ltd

Wealth Lanka Management (Pvt.)
Ltd
Ltd
WealthTrust
Wealth LankaCorporation
Management (pvt) Ltd
(Pvt.)
Ltd
Sri Lanka Savings- Domestic & National
Per cent of GDP
30.0
25.0
20.0
15.0
10.0
5.0
0.0
2005 2006 2007 2008 2009
Year
Domestic Savings National Savings

Factors Influencing Investment Decisions
• Credit Risk
• Liquidity
• Return

Risk Reward
• High Risk = High Return
• Low Risk = Low Return

Inflation

Movements
Movements in
in Selected
Selected Interest
Interest Rates
Rates
% Deposit Rates of Commercial Banks,

Treasury bill yield and Monthly AWPR
22.50
20.50
18.50
16.50
14.50
12.50
10.50
8.50
6.50
4.50
Oct -03
Oct -08
Dec -02
Nov -00
Nov -05
Dec -07
Jan -00
Jun -00
Jan -05
Jun -05
Jan -10
Jun -10
Jul -02
Jul -07
May -03
May -08
Feb -02
Mar -04
Feb -07
Mar -09
Apr -01
Apr -06
Aug -04
Sep -01
Sep -06
Aug -09
Monthly AWPR AWDR Ltd AWFDR T-Bill yield (91-day)
Real Return
NON Treasury Bills
T
A CBSL Securities
N
G
Government Loans
I Treasury Bonds
B
L Commercial Papers
E
Pro Notes
I Bankers Acceptance
N
V Debentures
E
S Asset Backed Notes
T
Corporate Bonds
M
E Mortgage-Backed Securities
N
T Investments in Unit Trusts
S Shares
Why Capital Market !
• High Intermediation Cost
• Assets and Liability Mismatch
• Negative Real Return to Savers

Market Overview -
Rs billion
• Banking Sector Deposits - 1,672

• Banking Sector Loans - 1,137
• Govt: Securities - 4,161
• Listed Entities - 235
• Stock Exchange Mkt Cap: - 1,691
• Listed Debt Mkt Cap: - 22
• Unlisted Corp Debt Est - 45
• Lease Securisation Est - 15
Capital Market
Debt Market Equity Market

TRADITONAL LOAN
Collateral/Security Lender
Borrower (Bank)
Cash
Debt SECURITIES
Issue of Debt.Security. Purchaser
Issuer (Bank)
Cash

Debt Market Overview
Government Debt Corporate Debt

• Short term paper
• Short term paper
• Medium term paper
• Medium term paper
• Long term paper
• Long term paper

Government Securities
• Treasury Bills
• Treasury Notes
• Treasury Bonds
• Government Agency Securities

Ltd
Ltd
Corporate Debt Instruments
Short-term Instruments
· Commercial Papers
· Bankers Acceptance
· Short-Term Pro Notes
Medium-term Instruments
· Debentures
· Medium-Term Pro Notes
· Asset Backed Notes
· Floating Rate Notes
· Preference Shares of Listed Companies
· Lease Securitisation Certificates
Long-term Instruments
· Corporate Bonds
· Mortgage Backed Securities
· Municipal and Infrastructure Bonds
Debt Market Players
• Issuers
• Investors
• Intermediaries

Security: Unsecured
• Unsecured Debentures
Debt is not secured by any specific asset
-Issuer:
• Assets are not tied up
• More future borrowing capacity
• Higher interest cost
-Investor
• No claims to specific assets in the event of default.
• Demand higher coupon.

Security: Secured
• Secured Debentures
Debt is secured by specific assets
Issuer:
• Assets are tied up
• Reduces future borrowing capacity
• Lower interest cost
Investor:
• Claim to specific assets in the event of default.
• Accept lower coupon.

Security: Guaranteed
• Guaranteed Debentures
Payment of interest and principal is guaranteed by a
third party (guarantor) in the event the issuer is unable to
honor obligation.
Issuer:
• Assets are not tied up
• Leaves future borrowing capacity
• Pays guarantee commission
Investor:
• Minimal default risk
• Accept lower coupon

Subordination
• Subordinated Debentures
In the event of winding up, claims of the debt holders
rank after all claims of secured and unsecured
creditors but in priority to the claims and rights of
shareholders.
• Unsubordinated Debentures
In the event of winding up, claims of the debt
holders rank pari passu with all other unsecured
creditors but in the priority to the claims and rights of
shareholders.
Subordinated debt must pay a higher coupon than

comparable unsubordinated debt.

Term to Maturity
• Issuer considerations
– Maturity / timing of cash flows of investment
– Interest rate expectations
– Investors appetite
• Investor considerations
– Maturity of liabilities
– Interest rate expectations
– Tolerance for interest rate risk
Longer maturity debt must offer a higher coupon than a

comparable shorter maturity debt

Coupon rate: regular or lump sum
• Zero coupon bonds
– No regular interest payment sold below par
– No reinvestment risk
– Provide a known cash flow at maturity
• Coupon bonds
– Regular interest payments
– Issuer must consider patterns of cash flows

Coupon rate: fixed or variable
• Fixed rate
– Rate fixed over the maturity of the bond
– Issuer & investor locked into a rate
• Variable/Floating rate
– Rate linked to some benchmark rate
– Future coupon rate is uncertain
If the interest rates are expected to go up during the term to
maturity, issuer better off with a fixed rate and investor is better of
with a variable rate.
If interest rates are expected to decline during the term to
maturity, issuer is better off with a variable rate and investor is
better of with a fixed rate.

Coupon rate: frequency of payment
Payment options: Monthly, quarterly, semi-annually
• Issuer Considerations
– Cash flow patterns of business
– Investor appetite
• Investor considerations
– Frequency if income requirements
– Compare annualized (effective) rate of interest.

Cash flows to a coupon to a corporate bond
• Two types of cash flows

- Periodic interest payments
- Principal at maturity
Example:
13.5% Rs.100/- = 3 year ABC Glass Co. debentures paying semi-
annual interest, purchased in the primary market.
Period
(Months) 0 6 12 18 24 30 36
CF -100 6.75 6.75 6.75 6.75 6.75 106.75

Call Option
• Gives the issuer right to redeem bonds before maturity
Issuer:
• Has the ability to redeem and re-issue at a lower coupon
if rate interest falls
• Must pay a higher coupon than comparable non-callable
bonds.
• Must pay a “call premium” at the time call.
Investor:
• Faces the “call risk”

Put option
Gives the bond holder the right to sell to the issuer at a pre-specified
price before maturity.
Issuer:
• May be able to sell at a lower coupon rate than comparable non-
puttable bonds.
• Faces uncertainty regarding cash flow needs for redemption.
Investor:
• Has value if puttable price >market price at the time of exercise
• Has the ability to exploit reinvestment opportunities at higher
coupon rates.

Conversion option
Gives the bond holder the right to convert into
common shares
Issuer:
• No need to have cash for principal payment if
converted.
• Can sell bonds at a lower coupon rate than
comparable non-convertible bonds.
• Earnings dilution and higher costs of servicing
equity after conversion.
Investor:
Upward potential if the share price goes up.
Lower coupon rate.
WHAT ARE COMMERCIAL PAPERS ?
Commercial Papers are an unsecured promissory notes

issued by an issuer for specific amount payable to the
order of a specified person or bearer, on a specific date.
The word bearer indicates that CPs are negotiable

securities while anybody holding them has the option to
hold them to maturity. This aspect of negotiability gives
the necessary flexibility for these instruments to be readily
discountable in the secondary market.

INTERMEDIATION COST
11.50% 5.275% 14.50%
2.65%
Deposit Rate Cost of Funds Lending Rate Cost of Funds for Borrowers
(11.00 %) (12.35) (15.00%) ( 16.275 %)
3..00%

0.00 %
Equity Market

Source : Bloomberg Wealth Lanka Management (Pvt.) Ltd
Movements in Capital Markets

Ltd
Types of Equity Securities Traded
• 1 Ordinary Shares
• Voting Shares
• Non Voting Shares
• 2 Preference Shares
• 3 Warrants

Ordinary Shares
Shares that gives the ownership of a Company

is called an ordinary Share. An ordinary share
holders encounters the Market Risk .Companies
not obligated to pay dividends to the
shareholder. In the even the Company
announces Bankruptcy the ordinary share
holders claim will be only settle after all other
liabilities are settled. Ordinary Shares are
issued with and with out voting rights.
Preference Shares
Equity Investment of a Company where
entitle to receive a Fixed dividend out of
profit.
In the event of a liquidation preference
shareholders are given priority only over
the ordinary shareholders.

Share Warrants
The warrant is a mandate where the

holder has the right to purchase shares of
a company in a future date at a agreed
price.

What is the Stock Exchange
Any corporate body incorporated either in Sri
Lanka or overseas including statutory
corporations are eligible to seek a listing on the
stock exchange to raise DEBT or Equity through
public offering.
Companies desiring to be admitted to the official
list of the exchange and to secure a quotation of
their securities will be required to comply with
the relevant provision of the Company Act no 17
of 1982 and the Securities and Exchange
Commission Act No 36 of 1987 (as amended)
and the listing rules of the Exchange.

Structure
 The Colombo Stock Exchange (CSE) is a
company limited by guarantee established
under the Company act NO 17of 1982 and
is licensed by the Securities & Exchange
Commission (SEC) to operate as a Stock
Exchange in Sri Lanka. It is the only Stock
Exchange and also the member of
International Federation of Stock
Exchanges.
Ownership and the Organization
Structure (CSE)
• The CSE is a member owned Exchange and
currently has members of 15 .Each member is
licensed to performed the duties as a stock
broker. All the members are corporate entities.
Some are subsidiaries of large financial
institutions such as commercial banks, merchant
banks and investment banks. Foreign ownership
in member firms is permitted.
• The main policy making body of the stock
Exchange is the Board of Directors, which
consists of 9 persons. Four Directors are
appointed by the ministry of Finance.

CSE Regional Branch Network
• Matara
• Kandy
• Kurunegala
• Jaffna

Clearing and Settlement
• Central Depository System (Pvt) Ltd
(CDS) Incorporated in 1991 as a fully
owned subsidiary of the Colombo Stock
Exchange and registered with SEC As a
Market Intermediary

CDS Facilities and Services
• Opening of Client Accounts
• Deposit of Securities
• Withdrawal of Securities
• Transfer of securities
• Clearing
• Settlement
• Record keeping
• Handling of new and subsequent Issues
• Stock Borrowing & Lending

Two Major Indices
 All Share Price Index
 Milanka Price Index

All Share Price Index (ASPI)
• The ASPI indicates the price fluctuation of
all listed companies and covers all the
traded companies during a market day.
• ASPI= market Capitalization of all listed Companies*100
• Base Market Capitalization
• Market Capitalization=Current No of listed shares *

market price
• Base Market Capitalization=Base No of listed
shares*Base market price
Milanka Price Index (MPI)
• The Milanka Price Index Comprises of 25
selected companies. The criteria taken in
to account in it construction are size and
liquidity. Size has been measured by
market Capitalization as at the end of each
quarter.
• MPI = Selected Companies*1000
Base Market Capitalization of those
25 companies as at 31st Dec
1998
Sector Price Indices
20 sector indices are calculated on an on
going basis and closing values are
published at the end of each trading day.
The sector price indices will give the future

trend of the market.

COMB
250
90
200
150
100 124% 201.75
LAST YEAR
50
0
0 0 0 0 0 0 0 0 0 0 0 0 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9
2 0 1 2 0 1 2 0 1 2 0 1 20 1 2 0 1 2 0 1 2 0 1 20 1 2 0 1 2 0 1 2 0 1 2 0 0 2 0 0 2 0 0 2 0 0 2 0 0 2 0 0 2 0 0 2 0 0 2 0 0 2 0 0 2 0 0 20 0 2 0 0 2 0 0 2 0 0 20 0 2 0 0 2 0 0 2 0 0 2 0 0 2 0 0 2 0 0 2 0 0 2 0 0 2 0 0 2 0 0 2 0 0 2 0 0 2 0 0 2 0 0 2 0 0 2 0 0 20 0
/ / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / /
0 4 03 0 3 0 3 0 3 02 02 0 2 02 01 01 01 1 2 12 12 12 1 1 1 1 11 1 1 10 1 0 1 0 1 0 09 09 0 9 09 0 8 08 0 8 0 8 0 7 0 7 07 07 07 0 6 06 06 06 05 0 5 05 0 5
1 / 24 / 17 / 10 / 3 / 2 4 / 1 7 / 10 / 2 / 2 2 / 1 5 / 7/ 29 / 2 1 / 1 4 / 7/ 27 / 20 / 1 3 / 6/ 29 / 21 / 14 / 7 / 3 0 / 2 3 / 15 / 8 / 31 / 2 4 / 17 / 10 / 31 / 24 / 1 7 / 10 / 2/ 25 / 1 8 / 1 1 / 4/ 28 / 21 / 1 3 / 5 /
JKH
200
78
180
160
140
120
100
80
186
60
138%
LAST YEAR
40
20
0
0 0 0 0 0 0 0 0 0 0 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9
2 0 1 2 0 1 2 0 1 2 0 1 2 0 1 2 0 1 2 0 1 2 0 1 2 0 1 20 1 2 0 0 2 0 0 2 0 0 20 0 2 0 0 2 0 0 2 0 0 2 0 0 2 0 0 20 0 2 0 0 2 0 0 2 0 0 2 0 0 2 0 0 2 0 0 20 0 2 0 0 2 0 0 2 0 0 20 0 2 0 0 2 0 0 2 0 0 2 0 0 2 0 0 2 0 0
/ / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / /
04 03 0 3 0 3 0 2 02 02 01 0 1 0 1 1 2 12 1 2 1 2 1 1 11 11 10 10 10 09 0 9 09 09 08 0 8 0 8 07 07 07 07 06 0 6 0 6 0 5 05 0 5
1/ 2 3 / 15 / 5/ 25 / 1 7 / 9/ 2 8 / 19 / 8 / 29 / 1 8 / 10 / 2 / 23 / 1 3 / 5/ 2 6 / 16 / 8 / 3 0 / 22 / 1 1 / 2/ 2 5 / 17 / 7 / 29 / 2 1 / 13 / 2 / 2 4 / 16 / 8/ 29 / 2 1 / 12 /
SAMP
300
250
77/=
200
150
100
196% 228/=
50
LAST YEAR
0
1 0 10 1 0 10 10 10 10 10 10 10 1 0 09 09 09 0 9 09 09 09 0 9 09 09 0 9 09 09 09 09 09 09 09 09 09 09 09 09 0 9 09 09 09 0 9 09 09 09 0 9
/ 20 /20 /20 /20 /20 /20 /20 /20 /20 /20 /20 /20 /20 /20 /20 /20 /20 /20 /20 /20 /20 /20 /20 /20 /20 /20 /20 /20 /20 /20 /20 /20 /20 /20 /20 /20 /20 /20 /20 /20 /20 /20 /20
04 03 03 02 0 2 02 02 0 1 01 0 1 01 1 2 1 2 1 2 12 11 1 1 11 11 10 1 0 10 10 0 9 09 0 9 0 9 08 08 0 8 0 8 0 7 07 0 7 07 06 06 06 06 0 6 0 5 05 05
1/ 1 2 / 5/ 2 6 / 19 / 12 / 5 / 26 / 1 9 / 11 / 4/ 23 / 16 / 9 / 2/ 2 4 / 17 / 1 0 / 3/ 2 3 / 16 / 9/ 2 / 25 / 1 7 / 10 / 2 / 26 / 1 9 / 12 / 4/ 28 / 21 / 14 / 7/ 2 9 / 22 / 1 5 / 8/ 1 / 25 / 1 5 / 7/
A New Trend In Investment

UNIT TRUST
A New Concept In Investment
UNIT TRUST Offers
 Convenience
 Simplicity
 Short cut to the Stock Market

WHAT IS A UNIT TRUST?
A “UNIT TRUST” is a pooled investment plan

where the capital contributions of investors are
combined into a legally formed Trust Fund.
The money is then invested by professional fund

managers, acting on behalf of the investors, in a
portfolio of marketable securities.

UNIT TRUST ADVANTAGES
 Diversification
 Liquidity
 Convenient
 Lower Transaction cost
 Professional Management

BENEFITS OF INVESTING IN A UNIT TRUST
 Investments are diversified – Less Risk
 Tax Benefits Available
 Access to Professional Investment Managers.
 Access to Investments that would not normally be

accessible to small investors
 Easy Redemption

Current Status
• Five licensed Unit Trust management
companies
• Eighteen Funds operating in the market
• Fourteen open ended and four close ended
funds
• Total Assets Under management of Rs 13.5
billion as on 30th June 2010

Capital Markets
Building Preconditions
Macroeconomic Policies
Financial Sector Reforms
Blocks
Regulatory Framework
Intermediaries Rating Agency
Infrastructure
Facilitating
Clearing & Settlement Bond Insurance
Infrastructure
Custody Liquidity
Accounting Benchmark
Basic
Information Taxes
Legal Derivatives

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“Planning Your Financial Future”

Wealth Lanka Management (Pvt.) Ltd

Domestic Savings National Savings

Wealth Lanka Management (Pvt.) Ltd

Wealth Lanka Management (Pvt.) Ltd

• High Risk = High Return

• Low Risk = Low Return

Wealth Lanka Management (Pvt.) Ltd

Wealth Lanka Management (Pvt.) Ltd

% Deposit Rates of Commercial Banks,

• Assets and Liability Mismatch

• Negative Real Return to Savers

Wealth Lanka Management (Pvt.) Ltd

• Banking Sector Deposits - 1,672

Debt Market Equity Market

Wealth Lanka Management (Pvt.) Ltd

Wealth Lanka Management (Pvt.) Ltd

Government Debt Corporate Debt

Wealth Lanka Management (Pvt.) Ltd

Wealth Lanka Management (Pvt.) Ltd

Wealth Lanka Management (Pvt.) Ltd

Wealth Lanka Management (Pvt.) Ltd

Wealth Lanka Management (Pvt.) Ltd

Wealth Lanka Management (Pvt.) Ltd

Subordinated debt must pay a higher coupon than

Wealth Lanka Management (Pvt.) Ltd

Longer maturity debt must offer a higher coupon than a

Wealth Lanka Management (Pvt.) Ltd

Wealth Lanka Management (Pvt.) Ltd

Wealth Lanka Management (Pvt.) Ltd

Wealth Lanka Management (Pvt.) Ltd

• Two types of cash flows

CF -100 6.75 6.75 6.75 6.75 6.75 106.75

Wealth Lanka Management (Pvt.) Ltd

Wealth Lanka Management (Pvt.) Ltd

Wealth Lanka Management (Pvt.) Ltd

Commercial Papers are an unsecured promissory notes

The word bearer indicates that CPs are negotiable

Wealth Lanka Management (Pvt.) Ltd

Wealth Lanka Management (Pvt.) Ltd

Wealth Lanka Management (Pvt.) Ltd

Wealth Lanka Management (Pvt.) Ltd

Wealth Lanka Management (Pvt.) Ltd

Shares that gives the ownership of a Company

Wealth Lanka Management (Pvt.) Ltd

The warrant is a mandate where the

Wealth Lanka Management (Pvt.) Ltd

Wealth Lanka Management (Pvt.) Ltd

Wealth Lanka Management (Pvt.) Ltd

Wealth Lanka Management (Pvt.) Ltd

Wealth Lanka Management (Pvt.) Ltd

Wealth Lanka Management (Pvt.) Ltd

Wealth Lanka Management (Pvt.) Ltd

• Market Capitalization=Current No of listed shares *

The sector price indices will give the future

Wealth Lanka Management (Pvt.) Ltd

100 124% 201.75

Wealth Lanka Management (Pvt.) Ltd

A New Concept In Investment

UNIT TRUST Offers

Wealth Lanka Management (Pvt.) Ltd

A “UNIT TRUST” is a pooled investment plan