Beruflich Dokumente
Kultur Dokumente
Instruments (Bonds/Equities)
Bond valuation
Sources of Finance
Bond basics
Components
Types of Bond
CREDIT RATINGS
Each of the agencies assigns its ratings based on an in-depth analysis of the issuer's financial
condition and management, economic and debt characteristics, and the specific revenue sources
securing the bond.
t=1
t=2
t=3
FV3 = 100 par
Assume that 10 years ago, a 20-year bond was issued and will
mature in 10 years. The par value is Rs.1000. It promises to
pay the owner 9% (fixed rate) coupon interest each year.
What is todays bond price?
This bond will pay (0.09)(Rs.1000) = Rs.90 coupon interest each year,
and will also pay off the Rs.1000 par value at t=10 years from today.
Currently, lets assume that the 10 year market required rate of interest
or return on this and comparable bonds is r=8.5% per year. Anyone
that buys this bond today will expect to earn this rate over the next 10
year. The bonds time line appears below:
kD=8.5%
t=0
t=1
PV0 = ?
90 coupon
t=9
t=10
90 coupon
1000 par
+ 90 coupon
=1090
1
1
1
PAR
1
1000
PV0 C
90
n
n
10
10
r
0.085
r
1
r
1
r
0
.
085
1
0.085
1
0
.
085
Bond Value
1,100.00
k = 10%
k = 8%
k = 6%
1,000.00
900.00
Rs.863.73
$870.10
800.00
12 11 10 9
Time to Maturity
Current yield =
Current Yld = Rs.80/863.73 = 9.26%
Change in price
Beginning price
C.G.Y.=(870.10-863.73)/863.73= 0.74%
Total Return = 9.26% + 0.74% = 10%
Bond
Details
Orde
Boo
... ..
......
1
2
3
t
1 r 1 r 1 r
1 r
t=0
t=1
t=2
t=9
t=10
t=11
V0 = ?
D1
D2
D9
D10
D11
Example: valuation of a
Constant Growth common stock
The D0=Rs.5.00 per share has already been paid out and
is no longer part of the firm.
The intrinsic value V0 of the stock will be the Present
Value of all the future forecasted dividends, beginning
with D1.
Cash dividends
The change in stock price (capital gain or loss)
Ten (10) future years of individual cash flows that can be paid out to
stockholde Refer to the valuation model at bottom of slide.
A terminal value, i.e., what the stock will be worth in exactly 10 years
(V10), assuming constant growth (maturity) at rate g following year 10.
D11
D1
D2
D3
D10
1
...
..
1 r 1 1 r 2 1 r 3
1 r 10 r - g 1 r 10
An example of nonconstant
growth valuation
Lets just assume here that the firms stock has r=10%
per year.
An example of nonconstant
growth valuation, continued
t=0
t=2
t=3
D1=0
D2=0
D3=0
t=4
t=5
t=6
t=7
t=8
An example of nonconstant
growth valuation, continued
D8
D5
D6
D7
D4
1
V0
4
5
6
7
1 r 1 r 1 r 1 r r - g 1 r 7
0.50
0.65
0.80
0.90
1
1.00
V0
4
5
6
7
1 0.1 1 0.1 1 0.1 1 0.1 0.1 - 0.06 1 0.1 7
V0 0.3415 0.4036 0.4516 0.0.4618 (25)(0.5132)
V0 $14.49 per share
t=1
t=2
t=17
t=18
t=19
D1=0
D2=0
D17=0
D18=6.00
D19
g=7%
Most financial analysts use the FCF model. FCF is the cash
that can be paid out to the firms investors, both the debt and
equity holde
The FCF model will give a value that is the total value of the
firms capital, i.e., the sum of both debt and equity. Note the
following items:
... ..
......
1
2
3
t
1 wacc 1 wacc 1 wacc
1 wacc
Depositories(DP)
Depositories (DP)
Individual
Firms
FI & FFI
securities
Broker
securities
Broker
Individual
Firms
FI & FFI
Clearing Banks
Axis Bank Ltd., Bank of India, Canara Bank, Citibank N.A, HDFC Bank, Hongkong &
Shanghai Banking Corporation Ltd., ICICI Bank, IDBI Bank, IndusInd Bank, Kotak
Types of Settlement
Rolling Settlement:
In a Rolling Settlement trades executed during the day are settled based on the
net obligations for the day.
In NSE, the trades pertaining to the rolling settlement are settled on a T+2 day
basis.
Types of Market
Normal Market
All orders which are of regular lot size or multiples thereof are traded in the Normal
Market. For shares that are traded in the compulsory dematerialised mode the
market lot of these shares is one. Normal market consists of various book types
wherein orders are segregated as Regular lot orders, Special Term orders,
Negotiated Trade Orders and Stop Loss orders depending on their order attributes.
Odd Lot Market
All orders whose order size is less than the regular lot size are traded in the odd-lot
market. An order is called an odd lot order if the order size is less than regular lot
size. These orders do not have any special terms/attributes attached to them. In an
odd-lot market, both the price and quantity of both the orders (buy and sell) should
exactly match for the trade to take place. Currently the odd lot market facility is
used for the Limited Physical Market as per the SEBI directives.
Auction Market
In the Auction Market, auctions are initiated by the Exchange on behalf of trading
members for settlement related reasons. There are 3 participants in this market
Initiator - the party who initiates the auction process is called an initiator
Competitor - the party who enters orders on the same side as of the initiator
the party who enters orders on the opposite side as of the initiator
Order Books
Price Bands
Daily price bands are applicable on securities as below:
Price bands of 20% (either way) on all remaining scrips (including debentures,
warrants, preference shares etc).
Circuit Breakers
there would be a one-hour market halt if the movement takes place before 1:00
p.m.
In case after 1:00 p.m. but before 2:30 p.m. there would be trading halt for
hour.
after 2:30 p.m. there will be no trading halt at the 10% level and market shall
continue trading.
there shall be a two-hour halt if the movement takes place before 1 p.m.
after 1:00p.m. but before 2:00 p.m., there shall be a one-hour halt.
If the 15% trigger is reached on or after 2:00 p.m. the trading shall halt for
remainder of the day.
In case of a 20% movement of the index, trading shall be halted for the remainder
of the day.
The pay-in and pay-out days for funds and securities are prescribed as per the
Settlement Cycle. A typical Settlement Cycle of Normal Settlement is given
below:
Activity
Day
Trading
RollingSettlementTrading
Clearing
CustodialConfirmation
T+1workingdays
DeliveryGeneration
T+1workingdays
Settlement
SecuritiesandFundspayin
T+2workingdays
SecuritiesandFundspay
out
T+2workingdays
PostSettlement
ValuationDebit
T+2workingdays
Auction
T+3workingdays
BadDeliveryReporting
T+4workingdays
Auctionsettlement
T+5workingdays
Closeout
T+5workingdays
Rectifiedbaddeliverypayinandpay-out
T+6workingdays
Re-baddeliveryreporting
andpickup
T+8workingdays
Closeoutofre-baddelivery
T+9workingdays