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Financial Institutions and

Markets

Prof. Manisha Sanghvi

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Examination Marks

Final Examination 60

Mid Term Examination 20

Presentation 10Attendance / Class Participation 10

Total 100

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Course Contents Introduction to Financial markets and Institutions Bond Market

Money Market

Capital Market Mutual Funds

Foreign Exchange

Investment Banking Commercial Banking

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Indian Financial System

The economic development of a nation is reflected by the progress ofthe various economic units, broadly classified into corporate sector,government and household sector. While performing their activitiesthese units will be placed in a surplus/deficit/balanced budgetarysituations.

There are areas or people with surplus funds and there are those with adeficit. A financial system or financial sector functions as anintermediary and facilitates the flow of funds from the areas of surplusto the areas of deficit. A Financial System is a composition of variousinstitutions, markets, regulations and laws, practices, money manager,analysts, transactions and claims and liabilities.

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Financial System;The word "system", in the term "financial system", implies a setof complex and closely connected or interlined institutions,agents, practices, markets, transactions, claims, and liabilities inthe economy. The financial system is concerned about money,credit and finance-the three terms are intimately related yet aresomewhat different from each other. Indian financial systemconsists of financial market, financial instruments and financialintermediation. These are briefly discussed below

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Financial Institutions

Includes institutions and mechanisms which

Affect generation of savings by the community

Mobilisation of savings

Effective distribution of savings

Institutions are banks, insurance companies,mutual funds- promote/mobilise savings

Individual investors, industrial and tradingcompanies- borrowers

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Financial market Defined as the market in which financial assets are created or transferred

These assets represent a claim to the payment of a sum of moneysometime in the future and/or periodic payment in the form of interest ordividend.

Classification

Money market

(Short term instrument) Organized (Banks)

Unorganized (money lenders, chit funds, etc.)

Capital markets

(Long term instrument)

Primary Issues Market

Stock Market

Bond Market

The most important distinction between the two????

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Financial markets facilitate:

The raising of capital

The transfer of risk

International trade

They are used to match those who want capital to those who have it. Typically aborrower issues a receipt to the lender promising to pay back the capital. These

receipts are securities which may be freely bought or sold. In return for lendingmoney to the borrower, the lender will expect some compensation in the form ofinterest or dividends.

Financial markets could mean:

Organizations that facilitate the trade in financial products. i.e. Stock exchanges

facilitate the trade in stocks, bonds and warrants.

The coming together of buyers and sellers to trade financial products. i.e. stocks andshares are traded between buyers and sellers in a number of ways including: the useof stock exchanges; directly between buyers and sellers etc.

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Financial Markets

OTC

Auction Market

Organized Market

Intermediation financial market

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Types of Financial markets Capital markets

Stock markets, which provide financing through the issuance ofshares or common stock, and enable the subsequent tradingthereof.

Bond markets, which provide financing through the issuance ofBonds, and enable the subsequent trading thereof.

Commodity markets Money markets

which provide short term debt financing and investment.

Derivatives markets

which provide instruments for the management of financial risk.

Futures

Forward

Options .

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Insurance markets

which facilitate the redistribution of various risks.

Foreign exchange markets

which facilitate the trading of foreign exchange.

Credit market where banks, FIs and NBFCs purvey short, medium and

long-term loans to corporate and individuals.

The capital markets consist of primary markets andsecondary markets. Newly formed (issued) securities arebought or sold in primary markets. Secondary marketsallow investors to sell securities that they hold or buyexisting securities.

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Purpose of Financial MarketsPurpose: To facilitate the transfer of funds between borrowers and

lenders Trade TIME & RISK

Price discovery: Trading on secondary markets provides publicinformation on asset prices (market price = last traded price ofan asset)

Lower search costs: Since all trading parties converge to thesame location, matching is made easier

Provides liquidity: investors can sell assets prior to maturity onsecondary markets to satisfy their time preference forconsumption and diversification needs.

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FM Participants

Firms - Net Borrowers

Households (Individuals/Consumers)- Net Savers

Financial Institutions -Borrowers and Savers Government (Federal/State/Local)

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Money Market Main Function

To channelize savings into short term productiveinvestments like working capital .

Instruments in Money MarketCall money market

Treasury bills market

Markets for commercial paper

Certificate of depositsBills of Exchange

Money market mutual funds

Promissory Note

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Capital Markets

Provided resources needed by medium and largescale industries.

Purpose for these resources Expansion Capacity Expansion Investments Mergers and Acquisitions

Deals in long term instruments and sources offunds

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Main Activity

Functioning as an institutional mechanism to channelizefunds from those who save to those who needed forproductive purpose.

Provides opportunities to various class of individuals andentities.

P i M k S d M k

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Primary Markets Secondary Markets

When companies need financial resources for itsexpansion, they borrow money from investorsthrough issue of securities.

The place where such securities are traded by theseinvestors is known as the secondary market.

Securities issueda)Preference Sharesb)Equity Sharesc)Debentures

Securities like Preference Shares and Debenturescannot be traded in the secondary market.

Equity shares is issued by the under writers andmerchant bankers on behalf of the company.

Equity shares are tradable through a private brokeror a brokerage house.

People who apply for these securities are:a)High networth individualb)Retail investorsc)Employeesd)Financial Institutionse)Mutual Fund Houses

f)Banks

Securities that are traded are traded by the retailinvestors,FIs,MFs etc

One time activity by the company. Helps in mobilising the funds for the investors inthe short run.

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The Indian Capital Market

Market for long-term capital. Demand comesfrom the industrial, service sector andgovernment

Supply comes from individuals, corporates,banks, financial institutions, etc.

Can be classified into:

Gilt-edged market Industrial securities market (new issues and stock

market)

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Major Reforms in

Indian Capital Market

Setting up of SEBI

Introduction of free pricing in the primary capital market and abolition ofcapital control

Standardization of disclosures in public issue

Permission to FIIs to operate in the Indian capital market.

Modernisation of trading infrastructure on-line screen basedelectronic trading system

Shift from account period settlement to (14 days) to rolling settlement(T+2)

Safety and Integrity Measures margining system, intra-day trading

limit, exposure limit and setting up of trade/settlement guarantee fund Clearing of transactions through the clearing house

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Dematerialization of securitiesTwo depositories in the country

Reconstitution of Governing Boards of Stock Exchanges

Introduction of trading in equity derivative products

Indian corporate allowed to access

International capital markets through American Depository Receipts

Global Depository Receipts

Foreign Currency Convertible Bonds

External Commercial Borrowings

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Financial InstitutionsSpecialize in market activities that help facilitate the Transfer of funds between borrowers and lenders. They are frequently referred to as

Financial Intermediaries (ie. act in the capacity as a go-between when financialmarkets are insufficient by themselves)

Types of Financial Institutions:

Depository: Commercial Banks, Thrifts, Credit Unions, Savings and Loan

Non Depository: Investment companies (mutual funds), Pension funds,Insurance

Finance companies: Corporations that have financial arms such as, LIChousing finance, IDBI

Government Sponsored Enterprises (GSE)

Information collectors: Analysts, Rating agencies, Auditors

Market makers & dealers: Brokers, Specialist firms

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Bond Market

Session 2

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Making money:

Interest and capital gains

There are two ways to make money from a bond either byearning interest or capital gains.

Let's say that you have a Rs 1,000 bond that pays 6% interest for

five years. If you hold that bond until the very end of this term

(known as the maturity date), youll collect five interest

payments of Rs 60 for a total of Rs 300.

60.00

Year 1 (6% interest

on 1,000)

Year 2 (6% interest

on 1,000)

60.00

Year 3 (6% interest

on 1,000)

60.00

Year 4 (6%

interest on 1,000)

60.00 60.00

Year 5 (6%

interest on 1,000)

1,300.00

Total principal and

interest (at maturity

date of 5 years)Principal

amount

Rs 1000.00

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You could also decide to sell that bond to

someone else for $1,100. In that case youdearn a capital gain of $100 (plus whatever

interest payments you had received in the

meantime).

Now, why would someone pay you $1,100 for

a bond that only cost you $1,000?

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Selling bonds

Your $1,000 bond pays 6% interest. Since you bought that bond,however, interest rates have gone down. Similar companies are

now only offering a 5% interest rate on their bonds. Your original

rate looks pretty good to another investor. So you can sell that 6%

bond at a higher cost than you paid for it, which is called sellingfor a premium.

However, if interest rates have gone up, and similar companies

are now offering 8%, you may have to sell your bond for less

which is known as selling at a discount.Interest rates and bond prices, then, are like a see-saw when

interest rates go down, bond prices go up (and vice versa).

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Bond Issuers

Government Bonds

Municipal Bonds

Corporate Bonds

International Bonds

Eurobond

Foreign bonds

Global Bonds

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Bonds terminology Issuer

A bond is a debt security, similar to an I.O.U. When youpurchase a bond, you are lending money to a government,municipality, corporation, federal agency or other entity knownas the issuer.

Par Value

It is the value stated on the face of the bond. It represents the amount the firm borrows and promises to repay

at the time of the maturity.

It is also known as the principal, face value, or par value.

Par value will vary depending on the type of bond. Mostcorporate bonds have a Rs 100 face value, sometimes it can beRs 1000.

It is important to remember that bonds are not always sold at parvalue. In the secondary market, a bond's price fluctuates withinterest rates. If interest rates are higher than the coupon rate ona bond, the bond will have to be sold below par value (at a

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Maturity

Maturity is the length of time before the principal is returnedon a bond. It is also called term-to-maturity. At the time ofmaturity, the issuer is no longer obligated to make interestpayments.

Maturities range significantly, from 1 year to 40+ years forsome corporate bonds.

The bonds of different maturities will behave somewhatdifferently. For example, bonds with long-term maturities will

be more sensitive to changes in interest rates. Shorter termbonds are more stable and, because you are more likely tohold it to maturity, are more predictable. There are somecircumstances where a bond will be "called" before maturity.

Short-term notes: maturities of up to 4 years; Medium-termnotes/bonds: maturities of five to 12 years; Long-term bonds: maturities

of 12 or more years.

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Coupon

The coupon rate is the interest rate that is paid out to the bond holder.

The name derives from the old system of payment, in which bond holderswould need to send in coupons in order to receive payment.

The coupon is set when the bond is issued and is usually expressed as an

annual percentage of the par value of the bond. Payments usually occur every six months, but this can vary. If there is a 5%

coupon on a Rs 1000 face value bond, the bondholder will receive Rs 50every year.

If two bonds with equal maturities and face values pay out differentcoupons, the prices of these bonds will behave differently in the secondary

market. For example, the bond with a lower coupon rate will be lessexpensive because the bondholder is going to be getting more of his/herreturn from the return of principal at maturity than will the holder of a bondwith a higher coupon.

There are some bonds that do not pay out any coupons; these are calledzero-coupon bonds .

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CREDIT RATINGS

Each of the agencies assigns its ratings based on an in-depth analysis of the issuer's financialcondition and management, economic and debt characteristics, and the specific revenue sourcessecuring the bond.

Credit Risk Moody's

Standard and

Poor'sFitch

Prime Aaa AAA AAA

Excellent Aa AA AA

Upper Medium A A A

Lower Medium Baa BBB BBB

Speculative Ba BB BB

Very Speculative B, Caa B, CCC, CC B, CCC, CC, C

Default Ca, C D DDD, DD, D

Credit Ratings

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Types of Bonds

I. Classification on the basis of Variability of Coupon

Zero Coupon Bonds

Zero Coupon Bonds are issued at a discount to their face value and at thetime of maturity, the principal/face value is repaid to the holders. No interest(coupon) is paid to the holders and hence, there are no cash inflows in zero

coupon bonds. The difference between issue price (discounted price) and redeemable price

(face value) itself acts as interest to holders. The issue price of ZeroCoupon Bonds is inversely related to their maturity period, i.e. longer thematurity period lesser would be the issue price and vice-versa. These typesof bonds are also known as Deep Discount Bonds.

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Floating Rate Bonds

In some bonds, fixed coupon rate to be provided to theholders is not specified. Instead, the coupon rate keepsfluctuating from time to time, with reference to abenchmark rate. Such types of bonds are referred to asFloating Rate Bonds.For better understanding let us consider an example ofone such bond from IDBI in 1997. The maturity period ofthis floating rate bond from IDBI was 5 years. The couponfor this bond used to be reset half-yearly on a 50 basispoint mark-up, with reference to the 10 year yield onCentral Government securities (as the benchmark). Thismeans that if the benchmark rate was set at X %, then

coupon for IDBIs floating rate bond was set at (X + 0.50)

%.

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Coupon rate in some of these bonds also have floorsand caps. For example, this feature was present in thesame case of IDBIs floating rate bond wherein there

was a floor of 13.50% (which ensured that bondholders received a minimum of 13.50% irrespective ofthe benchmark rate).

On the other hand, a cap (or a ceiling) feature signifiesthe maximum coupon that the bonds issuer will pay(irrespective of the benchmark rate). These bonds are

also known as Range Notes.More frequently used in the housing loan marketswhere coupon rates are reset at longer time intervals(after one year or more), these are well known asVariable Rate Bonds and Adjustable Rate Bonds.

Coupon rates of some bonds may even move in anopposite direction to benchmark rates. These bonds

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Fixed

Stays same until maturity; ie: buy a Rs 1000 bond with 8%fixed interest rate and you will receive Rs 80 every year untilmaturity and at maturity you will receive the Rs 1000 back.

Payable at Maturity

Receive no payments until maturity and at that time youreceive principal plus the total interest earned compoundedsemi-annually at the initial interest rate.

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II. Classification on the Basis of Variability

of Maturity

Callable Bonds

The issuer of a callable bond has the right (but not theobligation) to change the tenor of a bond (call option). The issuermay redeem a bond fully or partly before the actual maturitydate. These options are present in the bond from the time oforiginal bond issue and are known as embedded options.

This embedded option helps issuer to reduce the costs wheninterest rates are falling, and when the interest rates are rising itis helpful for the holders.

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Puttable Bonds

The holder of a puttable bond has the right (but not anobligation) to seek redemption (sell) from the issuer at anytime before the maturity date.

In riding interest rate scenario, the bond holder may sell abond with low coupon rate and switch over to a bond thatoffers higher coupon rate. Consequently, the issuer will haveto resell these bonds at lower prices to investors.

Therefore, an increase in the interest rates poses additionalrisk to the issuer of bonds with put option (which areredeemed at par) as he will have to lower the re-issue priceof the bond to attract investors.

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Convertible Bonds

The holder of a convertible bond has the option to convertthe bond into equity (in the same value as of the bond) of theissuing firm (borrowing firm) on pre-specified terms.

This results in an automatic redemption of the bond beforethe maturity date. The conversion ratio (number of equity ofshares in lieu of a convertible bond) and the conversion price(determined at the time of conversion) are pre-specified atthe time of bonds issue.

Convertible bonds may be fully or partly convertible. For thepart of the convertible bond which is redeemed, the investorreceives equity shares and the non-converted part remainsas a bond.

ass ca on on e as s o r nc pa

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. ass ca on on e as s o r nc paRepayment

Amortizing Bonds

Amortizing Bonds are those types of bonds in which theborrower (issuer) repays the principal along with the coupon overthe life of the bond.

The amortizing schedule (repayment of principal) is prepared insuch a manner that whole of the principle is repaid by thematurity date of the bond and the last payment is done on thematurity date. For example - auto loans, home loans, consumerloans, etc.

D b I

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Debt InstrumentsType Typical Features

Central Government Securities Medium long term bonds issued by RBI on behalf of

GOI.

Coupon payment are semi annually

State Government Securities Medium long term bonds issued by RBI on behalf of

state govt.


Government Guaranteed Bonds Medium long term bonds issued by govt agencies

and guaranteed by central or state govt.


PSU Medium long term bonds issued by PSU.

51% govt equity stake

Corporate Short - Medium term bonds issued by privatecompanies.


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Risk Associated with Investing in

Bonds

Interest Rate Risk The price of the bond will change in the opposite

direction from the change in interest rate. As interstrate rises the bond price decreases and vice versa.

If an investor has to sell a bond prior to the maturitydate, it means the realisation of capital loss.

This risk depends on the type of the bond; callableputtable etc????

Reinvestment Income or Reinvestment Risk

The additional income from such reinvestment calledinterest on interest, depends on the prevailing interestrate levels at the time of reinvestment.

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Call Risk

The issuer usually retains this right in order to haveflexibility to refinance the bond in the future is marketinterest rate dropsbelow the coupon rate

Disadvantage for investors for callable bond: cash flowpattern not known with certainty, interest rate drop,capital appreciation will reduce.

Credit Risk

If the issuer of a bond will fail to satisfy the terms ofthe obligation with respect to the timely payment ofinterest and repayment of the amount borrowed.

Yield = market yield + risk associated with credit risk

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Inflation Risk Purchasing power risk arises because of the

variation in the value of cash flow from thesecurity due to inflation.

Eg: ???

Exchange Rate Risk Risk associated with the currency value for non-

rupee denominated bonds. Eg: US treasury bond

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Liquidity Risk

Its depends on the size of the spread between bid andask price quoted. Wider the spread is risky.

For investors keeping till maturity, this is uminportant.

Market to market should be calculated portfolio value.

Volatility Risk

Value of bond will increase when expected interestrate volatility increases.

Risk Risk Natural uncertainty.

Avoid securities in which knowledge is less.

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Time value of Money

Present value of money

PV = Pn 1(1+r)n

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Present value of an Ordinary Annuity

When the same amount of rupees is receivedeach year or paid each year is referred to asan annuity.

When the first payment is received oneperiod from now is called as an ordinaryannuity.

PV =1-

1

A (1+r)n

r

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Question

Suppose that an investor expects to receiveRs 100 at the end of each year for the nexteight year. Interest rate 9%

When the first payment is received oneperiod from now is called as an ordinaryannuity.

PV =1-

1

100 (1.09)8

0.09

100 [5.534811] = Rs 533.48

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Bond Pricing

Reason

Indicate the yield received

Should the bond be purchased

Priced at Premium, Discount, or at Par

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Calculating Bond Price

Sum of the present values of all expectedcoupon payments plus the present value of thepar value at maturity.

C = coupon payment, ordinary annuityn = number of payments

i = interest rate, or required yieldM = value at maturity, or par value

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Session 3

Yield YTM Duration

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Question 1

Calculate the Bond price for a 20 year 10%coupon bond with a par value of Rs 1000.Lets suppose the yield on this bond is 11%.

The cash flows for this bond are as follows: 40 semi anually coupon payment of Rs 50

Rs 1000 to be received 40 six month periodfrom now.

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Solution

501-

1 1000

(1.055)40 + (1.055)400.055

Rs 50 1- 0.117463 + Rs 1000.055 8.51332

= Rs 802.31 + 117.46= Rs 919.77

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Question 2

Calculate the Bond price for a 20 year 10%coupon bond with a par value of Rs 1000.Lets suppose the yield on this bond is 6.8%.



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Solution

501-

1 1000

(1.034)40 + (1.034)40

0.034

= Rs 1084.51 + 262.53

= Rs 1,347.04

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Calculate the Bond price for a 20 year 10%coupon bond with a par value of Rs 1000.Lets suppose the yield on this bond is 10%.



Ans Rs 1000

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Price Yield Relationship

When yield increases, investor would not buythe issue because it offers a below marketyield; the resulting lack of demand wouldcause the price to fall.

When yield decreases ??????

This is how bond price falls below its parvalue.

When bond sells below its par value, it is saidto be selling at a discount

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Coupon rate is less than the required yield

Price is less than the par ( Discount Bond)

Coupon rate is equal to the required yield

Price is equal to the par

Coupon rate is more than the required yield

Price is more than the par ( premium

Bond)

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A fundamental property of a bond is that itsprice changes in the opposite direction fromthe change in the required yield

As the required yield increases, the presentvalue of cash flow decreases; hence the pricedecreases.

As the required yield decreases, the presentvalue of cash flow increases; hence the price

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price

yield

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Premium and Discount Bonds

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Pricing Zero-Coupon Bonds

No coupon payment until maturity. Because of this,the present value of annuity formula is unnecessary.

Calculate the price of a zero-coupon bond that ismaturing in 5 years, has a par value of $1,000 and

required yield of 6%....? Determine the Number of Periods

Determine the Yield

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Determining Interest Accrued

Accrued interest is the fraction of coupon paymentthat the bond seller earns for holding the bond for aperiod of time between bond payments

The amount that the buyer pays the seller isthe agreed upon the price plus accruedinterest. This is referred as a Dirty bondprices

The price of a bond without accrued interestis called the Clean bond prices

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Eg: On March 1, 2003, X is selling a corporate bondwith a face value of $1,000 and 7% coupon paidsemi-annually. The next coupon payment after March1, 2003, is expected on June 30, 2003.

What is the interest accrued on the bond?

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Bond Basics

Two basic yield measures for a bond are its couponrateand its current yield.

10-64

valuePar

couponAnnualrateCoupon

priceBond

couponAnnualyieldCurrent

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Yield

Yield is the return you actually earn on thebond--based on the price you paid and theinterest payment you receive

Two Types of Yields:

Current Yield: annual return on the dollar amount paidfor the bond and is derived by dividing the bond'sinterest payment by its purchase price

Yield To Maturity: total return you will receive byholding the bond until it matures or is called.

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Yield

1. Current yield:

Annual coupon receipts/ Market price of the bond

It does not consider:

Time value of money

Complete series of future cash flow

It compares a pre-specified coupon with the currentmarket price, it is called as current yield.

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Example

The current yield for a 15 years 7% couponbond with a par value of Rs 1000, selling forRs 769.40

Current yield = Rs 70 = 9.10%

Rs769.40

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Yield to Maturity

Given a pre-specified set of cash flows and a price,the YTM of a bond is that rate which equates thediscounted value of the future cash flows to thepresent price of the bond.

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YTM

Yield to maturity (YTM) is the interest rate (i) that equates thepresent value of cash flow payments received from a debtinstrument with its value today.

It is the most accurate measure of interest rates.

The yield to maturity is the annual return annual rate(discounted) earned over a bond kept until maturity.

The yield to maturity is the discount rate estimatedmathematically that equals the cash flow of payment of interestand principal received with the purchasing price of the bond.

This term is also referred to as internal rate of return or as theexpected rate of return of the bond and it is the yield in whichmost bond investors are interested in.

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YTM

n

P = C + Mt=1

(1+y)n (1+y)n

P= Price of the bond

C = coupon payment

N = No. of years left to maturity

M = Maturity valueY = yield to maturity

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Yield of Bond

Eg: You hold a bond whose par value is $100 but has a currentyield of 5.21% because the bond is priced at $95.92. The bondmatures in 30 months and pays a semi-annual coupon of 5%.

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The yield is the interest rate that will make thepresent value of cash flow equals to the bondprice.

YTM is calculated same way as IRR, the cashflows are those that the investor wouldrealized by holding the bond till maturity.

To compute the YTM requires a trial and error

method

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Example

Calculate the YTM for a 15 years 7% couponbond with a par value of Rs 1000. Letssuppose the bond price is Rs 769.42. Thecash flows for this bond are as follows:

30 semi anually coupon payment of Rs 35


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769.42 = Rs 351-

1 1000 1

(1+y)30

+ (1+y)30

y

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Trial and error method

Annual Interestrate

PV of 30payments of Rs

35

PV of Rs 1000 30periods from

now

PV of cash flows

9 % 570.11 267 837.11

9.5% 553.71 248.53 802.24

10% 538.04 231.38 769.42

11.5 % 532.04 215.45 738.49

11 % 508.68 200.64 709.32

Would you prefer to buy a 10-year, 10% annual

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coupon bond or a 10-year, 10% semiannual coupon

bond, all else equal?

10.25%12

0.1011

m

i1EFF%

2m

Nom

The semiannual bonds effective rate is:

10.25% > 10% (the annual bonds effective

rate), so you would prefer the semiannual bond.

Calculating Yield for Callable and

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Calculating Yield for Callable and

Puttable Bonds

A callable bond's valuations must account for theissuer's ability to call the bond on the call date

The puttable bond's valuation must include thebuyer's ability to sell the bond at the pre-specifiedput date.

The yield for callable bonds is referred to asyield-to-call, and the yield for puttable bonds is

referred to as yield-to-put.

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Yield to Call (YTC)

Yield to call (YTC) is the interest rate thatinvestors would receive if they held the bond untilthe call date. The period until the first call isreferred to as the call protection period.

Yield to call is the rate that would make thebond's present value equal to the full price of thebond. Essentially, its calculation requires twosimple modifications to the yield-to-maturity

formula:

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YTC

When the bond may be called and at whatprice are specified at the time the bond isissued.

The price at which bond may be called isreferred to as the call price.

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Example

Consider an 18 years 11% coupon bondpayable semi annually with a maturity valueof Rs 1000 selling at Rs 1169. suppose thatthe first call date is 8 years from now and thatthe call price is Rs 1055.

Call price = 1055

N = 8*2 = 16 m

C = 1000*11%/2 = 55

Bond price = 1169

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Solution

1169 = Rs 551-

1 1055 1

(1+y)16

+ (1+y)16

y

8.54% is the yield to first call

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Yield to Put (YTP)

This mean that the bond holder can force the issuerto buy the issue at a specified price.

Yield to put (YTP) is the interest rate that investorswould receive if they held the bond until its put date.

To calculate yield to put, the same modified equationfor yield to call is used except the bond put pricereplaces the bond call value and the time until putdate replaces the time until call date.

M = put price n = number of periods until assumed put date.

E l f YTP

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Example of YTP

Consider an 18 years 11% coupon bondpayable semi annually issue selling Rs 1169.assume that issue is putable at par (Rs 1000)in five years.

Put price = 1000

N = 5*2 = 10 m

C = 1000*11%/2 = 55

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Solution

1169 = Rs 551-

1 1000 1

(1+y)10

+ (1+y)10

y

6.94% 7% is the yield to put

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19176731 ppt 1bond market

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