Presented by:

Amanpreet

Sourabh modgil

Meaning Bond is a debt security in which the authorized issuer

owes the holder a debt and is obliged to repay theprincipal and interest at a later date, termed maturity.It is issued by public authorites,credit intuition,companies and supranational institutions in theprimary markets.

A bond is a promissory note and financial debt.Instrument issued by corporates and governments tocollect funds from public or investors by offering fixedinterest or there form of returns with specific maturityterm to the investors. In India the term bond isassociated generally with loan able instrument issuedby public undertaking.

FEATURES OF BOND

• Nominal, principal or face amount

• Issue price

• Maturity date

(1) short term

(2) medium term

(3) long term

• Coupon

• Coupon dates

• Indentures and covenants

• Optionality

(1) call ability

(2) put ability

(3) call dates and put dates

(4) convertible bonds

• Convertible bonds

• Exchangeable bonds

TYPES OF BONDS

• Fixed rate bonds• Floating rate bond• High yield bond• Zero coupon bond• Inflation linked bonds • Assets-backed securities• Subordinated bonds • Perpetual bonds• Bearer bond• Registered bonds• Book entry bonds • Municipal bond

• Lottery bond

• War bond

• Other index bond

Bond management

Bond evaluation

conceptSale and purchase

Rating agencies

Bond valuation

Time valuation concept

Bond return

Yield to maturity

Yield to cost

strategies

Bond management strategiesBond

management strategies

Passive strategies

Buy and hold strategies

Ladder strategies

Semi active strategies

Maturity matching

duration

immunizationMaturity matching

Active strategies

Sector and asset substitution

Maturity adjustment

Quality diversification

Coupon adjustment or

yield substitution

Mapping expected returns

Passive strategy Buy and hold strategy : A buy and hold strategy

essentially means purchasing and holding a security to maturity or redemption and then reinvesting cash proceeds in similar securities.

Advantages

Any capital change resulting from interest rate change is neutralized or ignored.

Primarily used by income maximizing investors who are interested in the largest coupon income over a desired horizon.

Bond ladder strategy: building a bond ladder meansbuying bonds scheduled to come due at several differentdates in the future, rather than all in the same year.

This process is known as laddering because each group onbonds represents a rung on the investments maturityladder.

Advantages:

Beneficial in both situation when interest rate rise or fall.

Effective tool for someone who needs large mounts of moneyavailable on certain future dates, for example, to pay for achild education.

Disadvantages

if interest rates plunge, invester would be better off owningonly long term bonds

Ladders also not make sense for investors with smalllamounts of money.

Semi active strategies 1. Immunization because of changes in the shape of the

term structure and changes in the level of interest rates,investor faces interest rate risk. The elimination ofthese risk is called bond immunization.

Immunization is the investment of asset in such amanner that the existing business is immunized to ageneral change in the rate of interest provided that theaverage duration of assets is equal to average duration ofliabilities.

Two types of interest riska) Price risk : the price risk occurs due to decrease in price

or value of bond as a result of increasing in interest ratein the market.

b) Coupon reinvestment risk: CRR arises because theyield to maturity computation implicitly assumes that allcoupon flows will be reinvested at the promised yield tomaturity.

2. Duration: duration is a concept , which means theweighted average measure of time period of bond’s life.

This is valuable in understanding how bond’s pricechange in response to interest rate change.

Properties

I. High coupon rate result in shorter duration and lessvolatility in price

II. The bond has no coupon rate, the duration is equalto maturity period.

III. Higher , YTM leads to shorter duration , YTM andduration have inverse relationship.

IV. The duration of a coupon bond increases atdecreasing rate with maturity.

Advantages: Necessary for a study of the effect ofchanges in interest rates on bond prices and yields.

3 Dedication: dedication is concerned with financing astream of liabilities over time.

The purpose of dedication is to fund a sequence ofliability payments as they come due with no interest raterisk.

It involve four steps:

I. Liability payment stream is determined

II. Bond universe is selected according to qualitycriteria.

III. Investor objectives and constraints are identified

IV. Optimal portfolio is chosen

Active Strategies Sector and asset substitution among bonds say from

central government securities to higher yielding semigovernment bonds or from government to corporate bonds.

Maturity adjustments by shortening the maturities wheninterest rates are expected to rise and lengthening thematurities when interest rates are expected to fall.

Quality diversification into various grade of risk, throughexpected or actual ratings of bonds by rating agencies.

Coupon adjustments or yield substitutions: bonds oflower coupons are preferred when speculative capital gainsor losses are aimed at.

EVALUATION OF BONDS1. Goodwill of the cooperation

2. Past earning of the profit

3. Purpose of collection money

Valuation of bonds The value of a bond is simply the present value of the security future cash flows.

Market price and expected yield are the major determinants of bond.

Current year = coupon rate (current year is the coupon payment as a % of current market price.

CY = CR/P

CURRENT YIELD – Current yeild held investor to measure threirannual cash flows on a bond every year. if the bond is purchased at the face value the current yeild and coupon rate will the same. So with the help of current yeild the investors can find out the rate of cash flow from their investment evry year.

HOLDING PERIOD RETURN - A Bond is held for no. of years. So, it become necessary to calculate the rate of return of that period.

Yeild to maturity - (ytm) is the rate of return and investors expects to earn if the bond is held till maturity.

It is the single discount factor that makes present value of future cash flow from a bond equal to the current price of the bond. YTM is the discounted cash flow of the returns from the bond which represents interest payment And premium or discount in the price.

YMT is a measure of yield not a measure of returns from a coupon bond.

ASSUMPTIONS The investors holds the bond till maturity

The intering coupon received a re-invested and the computed at the YTM rate or at the same interest rat as the same ytm of the bond

There is no default in payment of coupon or maturity of value.

Valuation of YTM

Simple model

NPV model