|

 
 





 
Prof. Manisha Sanghvi
j

 


|inal Examination 60

Mid Term Examination 20

Presentation 10

Attendance / Class Participation 10

Total 100
 ð
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h ›ntroduction to |inancial markets and ›nstitutions
h Bond Market
h Money Market
h Capital Market
h Mutual |unds
h |oreign Exchange
h ›nvestment Banking
h Commercial Banking

 
|

 
h The economic development of a nation is reflected by the progress of
the various economic units, broadly classified into corporate sector,
government and household sector. While performing their activities
these units will be placed in a surplus/deficit/balanced budgetary
situations.
h There are areas or people with surplus funds and there are those with a
deficit. A financial system or financial sector functions as an
intermediary and facilitates the flow of funds from the areas of surplus
to the areas of deficit. A |inancial System is a composition of various
institutions, markets, regulations and laws, practices, money manager,
analysts, transactions and claims and liabilities.
h |

 

The word "system", in the term "financial system", implies a set
of complex and closely connected or interlined institutions,
agents, practices, markets, transactions, claims, and liabilities in
the economy. The financial system is concerned about money,
credit and finance-the three terms are intimately related yet are
somewhat different from each other. ›ndian financial system
consists of financial market, financial instruments and financial
intermediation. These are briefly discussed below
|

 
  


h ›ncludes institutions and mechanisms which
h Affect generation of savings by the community
h Mobilisation of savings
h Effective distribution of savings
h ›nstitutions are banks, insurance companies,
mutual funds- promote/mobilise savings
h ›ndividual investors, industrial and trading
companies- borrowers
|

  
h Ñefined as the market in which financial assets are created or transferred
h These assets represent a claim to the payment of a sum of money
sometime in the future and/or periodic payment in the form of interest or
dividend.
Classification

Money market
h (Short term instrument)
h Organized (Banks)
h Unorganized (money lenders, chit funds, etc.)

Capital markets
h (Long term instrument)
h Primary ›ssues Market
h Stock Market
h Bond Market
The most important distinction between the two????
|

 
 




h The raising of capital

h The transfer of risk
h ›nternational trade

They are used to match those who want capital to those who have it. Typically a
borrower issues a receipt to the lender promising to pay back the capital. These
receipts are securities which may be freely bought or sold. ›n return for lending
money to the borrower, the lender will expect some compensation in the form of
interest or dividends.
|

 
 
 


h Organizations that facilitate the trade in financial products. i.e. Stock exchanges
facilitate the trade in stocks, bonds and warrants.

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

  
h OTC
h Auction Market
h Organized Market
h ›ntermediation financial market
Types of Financial markets
h ð

 
 

h Stock markets, which provide financing through the issuance of

shares or common stock, and enable the subsequent trading
thereof.
h Bond markets, which provide financing through the issuance of
Bonds, and enable the subsequent trading thereof.
h ð 
 

h  
 

h which provide short term debt financing and investment.

h Ñ


 

h which provide instruments for the management of financial risk.

h |utures
h |orward
h Options .
h ›

 
 

h which facilitate the redistribution of various risks.

h |  
 
 

h which facilitate the trading of foreign exchange.

h ð 
 
h where banks, |›s and NB|Cs purvey short, medium and
long-term loans to corporate and individuals.

The capital markets consist of primary markets and

secondary markets. Newly formed (issued) securities are
bought or sold in primary markets. Secondary markets
allow investors to sell securities that they hold or buy
existing securities.
@ 

|

  
@

h To facilitate the transfer of funds between borrowers and
lenders
h Trade T›ME & R›SK

h @


 
     


information on asset prices (market price = last traded price of
an asset)

h ‰  


 
 
  
same location, matching is made easier

h @ 





  
 
  
secondary markets to satisfy their time preference for
consumption and diversification needs.
|@   


h |irms - Net Borrowers

h Households (›ndividuals/Consumers)- Net Savers
h |inancial ›nstitutions -Borrowers and Savers
h Government (|ederal/State/Local)
Money Market
h Main Function
Ëo channelize savings into short term productive
investments like working capital .

h ›nstruments in Money Market

Ëðall money market
Ëreasury bills market
ËMarkets for commercial paper
Ëðertificate of deposits
ËBills of Exchange
ËMoney market mutual funds
ËPromissory Note
ð  
Provided resources needed by medium and large
scale industries.

Purpose for these resources

Expansion

Capacity Expansion

›nvestments

Mergers and Acquisitions

Ñeals in long term instruments and sources of

funds
Main Activity

|unctioning as an institutional mechanism to channelize

funds from those who save to those who needed for
productive purpose.

Provides opportunities to various class of individuals and

entities.
 @
  
   

^hen companies need financial resources for its he place where such securities are traded by these
expansion, they borrow money from investors investors is known as the secondary market.
through issue of securities.

Securities issued Securities like Preference Shares and Debentures

a)Preference Shares cannot be traded in the secondary market.
b)Equity Shares
c)Debentures

Equity shares is issued by the under writers and Equity shares are tradable through a private broker
merchant bankers on behalf of the company. or a brokerage house.

People who apply for these securities are: Securities that are traded are traded by the retail
a)High networth individual investors,F› s,MF s etc
b)Retail investors
c)Employees
d)Financial ›nstitutions
e)Mutual Fund Houses
f)Banks

One time activity by the company. Helps in mobilising the funds for the investors in
the short run.
 
 
ð  
h Market for long-term capital. Ñemand comes
from the industrial, service sector and
government
h Supply comes from individuals, corporates,
banks, financial institutions, etc.
h Can be classified into:
h Gilt-edged market
h ›ndustrial securities market (new issues and stock
market)





 
ð  
h Setting up of SEB›
h ›ntroduction of free pricing in the primary capital market and abolition of
capital control
h Standardization of disclosures in public issue
h Permission to |››s to operate in the ›ndian capital market.
Modernisation of trading infrastructure ± on-line screen based
electronic trading system
h Shift from account period settlement to (14 days) to rolling settlement
(T+2)
h Safety and ›ntegrity Measures ± margining system, intra-day trading
limit, exposure limit and setting up of trade/settlement guarantee fund
h Clearing of transactions through the clearing house
h Ñematerialization of securities ±Two depositories in the country
h Reconstitution of Governing Boards of Stock Exchanges
h ›ntroduction of trading in equity derivative products
h ›ndian corporate allowed to access
h ›nternational capital markets through
h American Ñepository Receipts
h Global Ñepository Receipts
h |oreign Currency Convertible Bonds
h External Commercial Borrowings
 |

 
  



  
 


  

 
h Transfer of funds between borrowers and lenders. They are frequently referred to as
|inancial ›ntermediaries (ie. act in the capacity as a go-between when financial
markets are insufficient by themselves)

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h Ñ
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›nsurance
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Session 2
 Making money:
Interest and capital gains
There are two ways to make money from a bond ʹ either by
earning 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), you͛ll collect five interest
payments of Rs 60 for a total of Rs 300.


 



@
 Y
 % 6% 
 Y
 & 6% 
 Y
 ' 6% 
 Y
 ( 6% Y
 ) 6% 

 


  %000!  %000!  %000! 
  %000! 
  %000! 
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%000.00 60.00 60.00 60.00 60.00 60.00 %'00.00
Ú ou could also decide to sell that bond to
someone else for $1,100. In that case you͛d
earn a capital gain of $100 (plus whatever
interest payments you had received in the
meantime).

Ú
ow, why would someone pay you $1,100 for

a bond that only cost you $1,000?
 —elling bonds
Ë our $1,000 bond pays 6% interest. —ince you bought that bond,
however, interest rates have gone down. —imilar companies are
now only offering a 5% interest rate on their bonds. our original
rate looks pretty good to another investor. —o you can sell that 6%
bond at a higher cost than you paid for it, which is called selling
for a ¢
.
ˆowever, if interest rates have gone up, and similar companies
are now offering 8%, you may have to sell your bond for less ʹ
which is known as selling at a Ô .
ËInterest rates and bond prices, then, are like a see-saw ʹ when
interest rates go down, bond prices go up (and vice versa).
ond Issuers
h Government Bonds
h Municipal Bonds
h Corporate Bonds
h ›nternational Bonds
h Eurobond
h |oreign bonds
h Global Bonds


 



h ›


hA bond is a debt security, similar to an ›.O.U. When you
purchase a bond, you are lending money to a government,
municipality, corporation, federal agency or other entity known
as the issuer.
h @
 *

h ›t is the value stated on the face of the bond.
h ›t represents the amount the firm borrows and promises to repay
at the time of the maturity.
h ›t is also known as the principal, face value, or par value.
h Par value will vary depending on the type of bond. Most
corporate bonds have a Rs 100 face value, sometimes it can be
Rs 1000.
h ›t is important to remember that bonds are not always sold at par
value. ›n the secondary market, a bond's price fluctuates with
interest rates. ›f interest rates are higher than the coupon rate on
a bond, the bond will have to be sold below par value (at a
"discount"). ›f interest rates have fallen, the price will be higher.
h 

h Maturity is the length of time before the principal is returned
on a bond. ›t is also called term-to-maturity. At the time of
maturity, the issuer is no longer obligated to make interest
payments.
h Maturities range significantly, from 1 year to 40+ years for
some corporate bonds.
h The bonds of different maturities will behave somewhat
differently. |or example, bonds with long-term maturities will
be more sensitive to changes in interest rates. Shorter term
bonds are more stable and, because you are more likely to
hold it to maturity, are more predictable. There are some
circumstances where a bond will be "called" before maturity.
h Short-term notes: maturities of up to 4 years; Medium-term
notes/bonds: maturities of five to 12 years; Long-term bonds: maturities
of 12 or more years.
h ð
h The coupon rate is the interest rate that is paid out to the bond holder.
h The name derives from the old system of payment, in which bond holders
would need to send in coupons in order to receive payment.
h The coupon is set when the bond is issued and is usually expressed as an
annual percentage of the par value of the bond.
h Payments usually occur every six months, but this can vary. ›f there is a 5%
coupon on a Rs 1000 face value bond, the bondholder will receive Rs 50
every year.
h ›f two bonds with equal maturities and face values pay out different
coupons, the prices of these bonds will behave differently in the secondary
market. |or example, the bond with a lower coupon rate will be less
expensive because the bondholder is going to be getting more of his/her
return from the return of principal at maturity than will the holder of a bond
with a higher coupon.
h There are some bonds that do not pay out any coupons; these are called
zero-coupon bonds .
CREћT RAT›NGS
h 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.

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h ´ ð 

h ´ero Coupon Bonds are issued at a discount to their face value and at the
time 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.
h The difference between issue price (discounted price) and redeemable price
(face value) itself acts as interest to holders. The issue price of ´ero
Coupon Bonds is inversely related to their maturity period, i.e. longer the
maturity period lesser would be the issue price and vice-versa. These types
of bonds are also known as Ñeep Ñiscount Bonds.
|
 #
 

h ›n some bonds, fixed coupon rate to be provided to the

holders is not specified. ›nstead, the coupon rate keeps

fluctuating from time to time, with reference to a
benchmark rate. Such types of bonds are referred to as
|loating Rate Bonds.
|or better understanding let us consider an example of
one such bond from ›ÑB› in 1997. The maturity period of
this floating rate bond from ›ÑB› was 5 years. The coupon
for this bond used to be reset half-yearly on a 50 basis
point mark-up, with reference to the 10 year yield on
Central Government securities (as the benchmark). This
means that if the benchmark rate was set at ³X´ %, then
coupon for ›ÑB›s floating rate bond was set at ³(X + 0.50)´
%.
h Coupon rate in some of these bonds also have floors
and caps. |or example, this feature was present in the
same case of ›ÑB›s floating rate bond wherein there
was a floor of 13.50% (which ensured that bond
holders received a minimum of 13.50% irrespective of
the benchmark rate).
h On the other hand, a cap (or a ceiling) feature signifies
the 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 markets
where coupon rates are reset at longer time intervals
(after one year or more), these are well known as
Variable Rate Bonds and Adjustable Rate Bonds.
Coupon rates of some bonds may even move in an
opposite direction to benchmark rates. These bonds
are known as ›nverse |loaters and are common in
h |ixed
h Stays same until maturity; ie: buy a Rs 1000 bond with 8%
fixed interest rate and you will receive Rs 80 every year until
maturity and at maturity you will receive the Rs 1000 back.

h Payable at Maturity
h Receive no payments until maturity and at that time you
receive principal plus the total interest earned compounded
semi-annually at the initial interest rate.
II. Classification on the asis of Variability
of Maturity
h ð

+ 

h The issuer of a callable bond has the right (but not the
obligation) to change the tenor of a bond (call option). The issuer
may redeem a bond fully or partly before the actual maturity
date. These options are present in the bond from the time of
original bond issue and are known as embedded options.
h This embedded option helps issuer to reduce the costs when
interest rates are falling, and when the interest rates are rising it
is helpful for the holders.
h @
+ 

h The holder of a puttable bond has the right (but not an

obligation) to seek redemption (sell) from the issuer at any
time before the maturity date.
h ›n riding interest rate scenario, the bond holder may sell a
bond with low coupon rate and switch over to a bond that
offers higher coupon rate. Consequently, the issuer will have
to resell these bonds at lower prices to investors.
h Therefore, an increase in the interest rates poses additional
risk to the issuer of bonds with put option (which are
redeemed at par) as he will have to lower the re-issue price
of the bond to attract investors.
h ð+ 

h The holder of a convertible bond has the option to convert

the bond into equity (in the same value as of the bond) of the
issuing firm (borrowing firm) on pre-specified terms.
h This results in an automatic redemption of the bond before
the maturity date. The conversion ratio (number of equity of
shares in lieu of a convertible bond) and the conversion price
(determined at the time of conversion) are pre-specified at
the time of bonds issue.
h Convertible bonds may be fully or partly convertible. |or the
part of the convertible bond which is redeemed, the investor
receives equity shares and the non-converted part remains
as a bond.
ð  



  
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h " 

h Amortizing Bonds are those types of bonds in which the

borrower (issuer) repays the principal along with the coupon over
the life of the bond.
h The amortizing schedule (repayment of principal) is prepared in
such a manner that whole of the principle is repaid by the
maturity date of the bond and the last payment is done on the
maturity date. |or example - auto loans, home loans, consumer
loans, etc.
Ñ




 


ðentral Government —ecurities
—tate Government —ecurities
Government ʹ Guaranteed Bonds
P—
ðorporate
Medium ʹ long term bonds issued by RBI on behalf of
GOI.
ðoupon payment are semi annually
Medium ʹ long term bonds issued by RBI on behalf of
state govt.
ðoupon payment are semi annually
Medium ʹ long term bonds issued by govt agencies
and guaranteed by central or state govt.
ðoupon payment are semi annually
Medium ʹ long term bonds issued by P— .
51% govt equity stake
—hort - Medium term bonds issued by private
companies.
ðoupon payment are semi annually
 
   






h ›nterest Rate Risk
h The price of the bond will change in the opposite
direction from the change in interest rate. As interst
rate rises the bond price decreases and vice versa.
h ›f an investor has to sell a bond prior to the maturity
date, it means the realisation of capital loss.
h This risk depends on the type of the bond; callable
puttable etc????

h Reinvestment ›ncome or Reinvestment Risk

h The additional income from such reinvestment called
interest on interest, depends on the prevailing interest
rate levels at the time of reinvestment.
h Call Risk
h The issuer usually retains this right in order to have

flexibility to refinance the bond in the future is market

    below the coupon rate
h Ñisadvantage for investors for callable bond: cash flow

pattern not known with certainty, interest rate drop,

capital appreciation will reduce.
h Credit Risk
h ›f the issuer of a bond will fail to satisfy the terms of

the obligation with respect to the timely payment of

interest and repayment of the amount borrowed.
h Yield = market yield + risk associated with credit risk
h ›nflation Risk
h Purchasing power risk arises because of the
variation in the value of cash flow from the
security due to inflation.
h Eg: ???
h Exchange Rate Risk
h Risk associated with the currency value for non-
rupee denominated bonds. Eg: US treasury bond
h Liquidity Risk
h ›ts depends on the size of the spread between bid and

ask price quoted. Wider the spread is risky.

h |or investors keeping till maturity, this is uminportant.

h Market to market should be calculated portfolio value.

h Volatility Risk
h Value of bond will increase when expected interest

rate volatility increases.

h Risk Risk
h Natural uncertainty.

h Avoid securities in which knowledge is less.

  



h Present value of money
PV = Pn 1
(1+r)n
@ 
 

 
 


h When the same amount of rupees is received
each year or paid each year is referred to as
an annuity.
h When the first payment is received one
period from now is called as an ordinary
annuity.
PV = 1
1-
A (1+r)n

r
 


h Suppose that an investor expects to receive
Rs 100 at the end of each year for the next
eight year. ›nterest rate 9%
h When the first payment is received one
period from now is called as an ordinary
annuity.
PV = 1
1-
100 (1.09)8
0.09
100 [5.534811] = Rs 533.48


@ 

h Reason ±
h ›ndicate the yield received
h Should the bond be purchased
h Priced at ± Premium, Ñiscount, or at Par
ð 


@ 
h Sum of the present values of all expected
coupon payments plus the present value of the
par value at maturity.

C = coupon payment, ordinary annuity

n = number of payments
i = interest rate, or required yield
M = value at maturity, or par value



Yield YTM Ñuration
 


h 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:
h 40 semi anually coupon payment of Rs 50
h Rs 1000 to be received 40 six month period
from now.

 


50 1 1000
1-
(1.055)40 + (1.055)40
0.055

h Rs 50 1- 0.117463 + Rs 100
0.055 8.51332

= Rs 802.31 + 117.46
= Rs 919.77
 


h 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%.
The cash flows for this bond are as follows:
h 40 semi anually coupon payment of Rs 50
h Rs 1000 to be received 40 six month period
from now.

 


50 1 1000
1-

(1.034)40 + (1.034)40
0.034

= Rs 1084.51 + 262.53
= Rs 1,347.04
h 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%.
The cash flows for this bond are as follows:
h 40 semi anually coupon payment of Rs 50
h Rs 1000 to be received 40 six month period
from now.
Ans Rs 1000
@ ! 

 
h When yield increases, investor would not buy
the issue because it offers a below market
yield; the resulting lack of demand would
cause the price to fall.
h When yield decreases ??????
h This is how bond price falls below its par
value.
h When bond sells below its par value, it is said
to be selling at a discount
h Coupon rate is less than the required yield
Price is less than the par ( Ñiscount Bond)
h Coupon rate is equal to the required yield
Price is equal to the par
h Coupon rate is more than the required yield
Price is more than the par ( premium
Bond)
h A fundamental property of a bond is that its
price changes in the opposite direction from
the change in the required yield
h As the required yield increases, the present
value of cash flow decreases; hence the price
decreases.
h As the required yield decreases, the present
value of cash flow increases; hence the price
price

yield
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h No coupon payment until maturity. Because of this,
the present value of annuity formula is unnecessary.
h Calculate the price of a zero-coupon bond that is
maturing in 5 years, has a par value of $1,000 and
required yield of 6%....?
h Ñetermine the Number of Periods
h Ñetermine the Yield
Ñ 


  
h Accrued interest is the fraction of coupon payment
that the bond seller earns for holding the bond for a
period of time between bond payments
h The amount that the buyer pays the seller is
the agreed upon the price plus accrued
interest. This is referred as a Ñ
  


h The price of a bond without accrued interest
is called the ð  

j On March 1, 2003, X is selling a corporate bond
with a face value of $1,000 and 7% coupon paid
semi-annually. The next coupon payment after March
1, 2003, is expected on June 30, 2003.
What is the interest accrued on the bond?


 
h Two basic yield measures for a bond are its  
 and its   
.

nnual cou on
ou on rate €
ar alue

l c ¢

rr
t i l €
¢ric

10-64
! 
h Yield is the return you actually earn on the
bond--based on the price you paid and the
interest payment you receive
h Two Types of Yields:
h Current Yield: annual return on the dollar amount paid
for the bond and is derived by dividing the bond's
interest payment by its purchase price
h Yield To Maturity: total return you will receive by
holding the bond until it matures or is called.
! 
%. ð :
Annual coupon receipts/ Market price of the bond

h ›t does not consider:

h Time value of money
h Complete series of future cash flow

h ›t compares a pre-specified coupon with the current

market price, it is called as   
.
j 
h The current yield for a 15 years 7% coupon
bond with a par value of Rs 1000, selling for
Rs 769.40

Current yield = Rs 70 = 9.10%

Rs769.40
§ield to Maturity
h Given a pre-specified set of cash flows and a price,
the YTM of a bond is that rate which equates the
discounted value of the future cash flows to the
present price of the bond.
!
h Yield to maturity (YTM) is the interest rate (Y) that equates the
present value of cash flow payments received from a debt
instrument with its value today.
h ›t is the most accurate measure of interest rates.
h The yield to maturity is the annual return annual rate
(discounted) earned over a bond kept until maturity.
h The yield to maturity is the discount rate estimated
mathematically that equals the cash flow of payment of interest
and principal received with the purchasing price of the bond.
h This term is also referred to as internal rate of return or as the
expected rate of return of the bond and it is the yield in which
most bond investors are interested in.
!
n
P=Ȉ C + M
t=1
(1+y)n (1+y)n

P= Price of the bond

C = coupon payment
N = No. of years left to maturity
M = Maturity value
Y = yield to maturity
§ield of ond
Eg: You hold a bond whose par value is $100 but has a current
yield of 5.21% because the bond is priced at $95.92. The bond
matures in 30 months and pays a semi-annual coupon of 5%.
h The yield is the interest rate that will make the
present value of cash flow equals to the bond
price.
h YTM is calculated same way as ›RR, the cash
flows are those that the investor would
realized by holding the bond till maturity.
h To compute the YTM requires a trial and error
method
j 
h Calculate the YTM for a 15 years 7% coupon
bond with a par value of Rs 1000. Lets
suppose the bond price is Rs 769.42. The
cash flows for this bond are as follows:
h 30 semi anually coupon payment of Rs 35
h Rs 1000 to be received 30 six month period
from now.
769.42 = Rs 35 1 1000 1
1- 30 30
(1+y) + (1+y)

y
h Trial and error method

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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

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The semiannual bonds effective rate is:

 
 
  
° 
€ ° 
° € ° 
° € °

    
10.25% > 10% (the annual bonds effective
rate), so you would prefer the semiannual bond.
ðalculating ield for ðallable and
Puttable Bonds
h A callable bond's valuations must account for the
issuer's ability to call the bond on the call date
h The puttable bond's valuation must include the
buyer's ability to sell the bond at the pre-specified
put date.
h The yield for callable bonds is referred to as
yield-to-call, and the yield for puttable bonds is
referred to as yield-to-put.
! 
ð)!ð

h Yield to call (YTC) is the interest rate that
investors would receive if they held the bond until
the call date. The period until the first call is
referred to as the call protection period.
h Yield to call is the rate that would make the
bond's present value equal to the full price of the
bond. Essentially, its calculation requires two
simple modifications to the yield-to-maturity
formula:
!ð
h When the bond may be called and at what
price are specified at the time the bond is
issued.
h The price at which bond may be called is
referred to as the call price.
j 
h Consider an 18 years 11% coupon bond
payable semi annually with a maturity value
of Rs 1000 selling at Rs 1169. suppose that
the first call date is 8 years from now and that
the call price is Rs 1055.
h Call price = 1055
h N = 8*2 = 16 m
h C = 1000*11%/2 = 55
h Bond price = 1169

 


1169 = Rs 55 1 1055 1
1- 16 16
(1+y) + (1+y)

h 8.54% is the yield to first call

! 
@ )!@

h This mean that the bond holder can force the issuer
to buy the issue at a specified price.
h Yield to put (YTP) is the interest rate that investors
would receive if they held the bond until its put date.
h To calculate yield to put, the same modified equation
for yield to call is used except the bond put price
replaces the bond call value and the time until put
date replaces the time until call date.
h M = put price
h n = number of periods until assumed put date.
j 
!@
h Consider an 18 years 11% coupon bond
payable semi annually issue selling Rs 1169.
assume that issue is putable at par (Rs 1000)
in five years.
h Put price = 1000
h N = 5*2 = 10 m
h C = 1000*11%/2 = 55

 


1169 = Rs 55 1 1000 1
1- 10 10
(1+y) + (1+y)

h 6.94% § 7% is the yield to put