BondsAn Investment Operation is one which upon thorough analysis promises safety of principal and an adequate return.

Operations not meeting these requirements are speculative -Benjamin Graham

Prof. Madhu Iyengar

4/14/2012 Unitedworld-PGPM 1

Structure
Session 8 Hedge Funds Case Study 3 Class Participation Quiz 5 Session 7 Internals -1 Session 9-10 Retail Financial Services Presentations

Session 11 12 13 Microfinance Debates/Discussions Case Study 4 Quiz 6 Session 14 15 16 Mutual Funds Guest Lecture Quiz 7

Session 4 5 6 Bond Markets Case Study 2 Assignment-2 Quiz 2 , 3 ,4 Session 3 Equity Quasi Equity Products Work shop on equity market and research

Financial Products

Session 17-18 Presentations Credit Cards Quiz 8

Session 19-20 Presentations Housing Finance Quiz 9 Session 1-2 Overview, Financial Markets Class Assignment-1/Case Study 1 Quiz 1 Unitedworld-PGPM

Session 21-22 Presentations-Provident Funds, Post Office Savings Schemes Quiz 10 2

An Anecdote
Three people, a mathematician, a chartered accountant and a stock market analyst, are interviewed for a post. The interviewer calls the mathematician and asks What is two plus two? He replies, Four. The interviewer asks, Four exactly? The mathematician looks at the interviewer incredulously and says Yes, four exactly Then interviewer calls in the accountant and asks the same question, What is two plus two? The accountant says On an average four; give or take 10% but on average four. Then the interviewer calls in the stock market analyst and poses the same question, What is two plus two? The analyst gets up , locks the door, closes the shade, sits down next to the interviewer and says, Tell me any number you like, I shall make the answer for you.
4/14/2012 Unitedworld-PGPM 3

Lesson Plan

Segments of Fixed Income Securities G-Sec Market Corporate Bonds Public Sector Unit Bonds Foreign Bonds

4/14/2012

Unitedworld-PGPM

Segments to Fixed Income Securities

Government Securities Corporate Securities/Bonds Public Sector Unit Bonds

4/14/2012

Unitedworld-PGPM

Bond Market Segments

WHOLSALE DEBT MARKET SEGMENT: Consists mainly of Banks, FIs, FIIs, MFs, PFs, Insurance Companies & Corporates. Many of these participants are also issuers of debt instruments. Banks are the largest investors in the G-Secs( treasury bonds) since they have a statutory requirement.

4/14/2012

Unitedworld-PGPM

Bond Market Segments

RETAIL MARKET SEGMENT: To make the debt market accessible to the retail investors, the Government, RBI & SEBI introduced trading in G Secs for retail investors. National Securities Clearing Corporation of India Limited acts as a clearing & settlement agency for all deals of the retail investor.

4/14/2012

Unitedworld-PGPM

Bond Market Segments

RETAIL DEBT MARKET SEGMENT: The prices will be quoted on a dirty price( clean price+ accrued interest ) basis. Settlement is T+ 2 basis i.e. Trading day + 2 days.

4/14/2012

Unitedworld-PGPM

Government Securitites

Issued via auctions Face Value of all securities is Rs 100/= Interest is paid on a semi- annual basis.

4/14/2012

Unitedworld-PGPM

Government securities:

Participants are: Banks Insurance Companies Provident Funds Mutual Funds Trusts Corporate Treasuries FIIs

4/14/2012

Unitedworld-PGPM

10

G-SEC Market
Types Of Instruments In The G-sec Market: Fixed Coupon Bond Treasury Bills Floating Rate Bonds Zero Coupon Bond/Deep Discount Bond Inflation Indexed Bond

4/14/2012

Unitedworld-PGPM

11

Public Sector Units Bonds:

Issued by Public Sector Units including Financial Institutions Can be Taxable Bonds or Tax Free Bonds

4/14/2012

Unitedworld-PGPM

12

Corporate Bonds

Bonds with Embedded Options ( Callable Bonds & Puttable Bonds )

Floating Rate Interest Bond Bonds with Conversion Option ( Eg: Debentures which can be converted into Equity)

4/14/2012

Unitedworld-PGPM

13

Bonds With Embedded Options

CALLABLE BONDS:

A bond that can be redeemed by the issuer prior to maturity. Usually, a premium is paid to the bondholder when the bond is called by the issuer.

4/14/2012

Unitedworld-PGPM

14

Bonds With Embedded Options

PUTTABLE BONDS:

The holder of the puttable bond has the right but no obligation, to demand early repayment of principal. The put option is usually exercisable on specified dates. Price of puttable bond=Price of Straight bond+ Price of put option.

4/14/2012

Unitedworld-PGPM

15

Floating Rate Interest Bonds

Floating Rate securities are bonds for which the coupon Interest payments over the life of the security vary based on a specified interest rate or index. These bonds have coupons that are reset periodically, based on prevailing market interest rate. New coupon Rate=Reference rate+- quoted margin

4/14/2012

Unitedworld-PGPM

16

Foreign Bonds

Foreign Bonds: bonds issued in one country by an issuer that is domiciled in another country. Common names for these bonds are derived from the country in which they are issued and traded. Eg Yankee bonds, issued and traded in US but issued by non-us corporation. Samurai bonds: bonds issued by non-Japanese issuers but traded in Japan. Eurobonds: are issued outside the legal system of one country. Euro bonds are identified by the currency in which they are denominated EuroYen, EuroDollar etc. Sovereign bonds - Bonds issued by national governments in foreign currencies are normally referred to as sovereign bonds. Off the run and on the run securities - Once a new Treasury security of any maturity is issued, the previously issued security with the same maturity becomes the off-the-run bond or note. On-the-run bond or note is the most frequently traded Treasury security of its maturity. Because on-the-run issues are the most liquid, they typically are a little bit more expensive and, therefore, yield less than their off-the-run counterparts.
4/14/2012 Unitedworld-PGPM 17

Class Discussion-3( Class participation)

Inflation Indexed Bonds
Performance Bonds CAT Bonds Shibosai Bonds

4/14/2012

Unitedworld-PGPM

18

Recap

Segments of Fixed Income Securities G-Sec Market Corporate Bonds Public Sector Unit Bonds Foreign Bonds

4/14/2012

Unitedworld-PGPM

19

Q&A
Any Queries?

4/14/2012

Unitedworld-PGPM

20