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Capital Market Types of Bonds

Ways to raise money from Market

Borrow Money (Debt) Bonds

Junk Bonds

Gilt Edged Bonds

Bearer bonds

Bank Loan

Give Partnership (Equity) IPO Shares

Venture Capitalist
Angel Investors fund

Debt Types

Bonds, Debentures, Loans, ECB, T-Bills, Commercial Papers, Certificate of deposits

Creditor to company & First claim during liquidation
Yield (rate of return) and the maturity always inversely related

Bonds

Carry fixed interest payable every year by the company

For e.g. To whoever pays me Rs. 1000, Ill pay annual 10% interest rate (Rs. 100)
And after 5 years, Ill also repay the principle amount Rs. 1000
SEBI Rule If bond maturity > 18 months then getting credit rating is mandatory

Junk Bonds (High Yield Bond)

Credit rating companies like CRISIL, S&P, Moodys etc. give credit ratings (AA, A, BBB, C, D etc.) to a bond based on reliability & market
value of a company
If any Bond gets C or D rating, it means it is not creditworthy & may default on this loan; hence not much people will not invest in it.
Hence to allure investors they provide various schemes or higher Interest rates on bands
For e.g. If you give me Rs. 1000, Ill give you 25% interest rate per year

Gilt Edged Securities

Government Securities & Treasury Bills (via RBI) & well-known companies with high credit ratings issues bonds
High credit ratings assure an investor of its credibility & hence Gilt edged securities pay low rates generally 4% annually

Bearer Bonds
 Same as regular bonds, but dont have Holders Name on them, instead have coupons attached with them.
So, if anyone doesnt want to withdraw the whole money, he can cut a few coupons and sell them to a broker to withdraw partial amount.

Bond Yield

Bond yield to maturity Total ROI of buyer on maturity

If bond price decreases, Bond yield increases

For ex. Bond value is Rs. 1000 for 10 % annually

Hence initial bond yield is 10% for first investor

If he sells it to second investor at Rs. 900 then his bond yield will be 10/900 11%

Factors deciding Bond Yield

Assured return with good credit rating Low bond yield

Bankruptcy rumour in market for a company panic sales by investors Bond yield goes high
Credit rating down next time have to offer higher interest rate Junk bond

Debt Instruments

Credit rating Gilt securities vs Junk bonds

Bond vs Debenture
Optionally fully convertible debentures (OFCD)
Other types of Debentures
Inflation indexed bonds (IIB)

Credit rating for Sovereign Bonds (Rating of Countries)

Credit rating companies like CRISIL, S&P, Moodys etc. also give credit ratings (AA, A, BBB, C, D etc.) to countries based on their eco-
political conditions
India hold a credit rating in medium risk category just above the junk status

Factors affecting credit rating

Fiscal deficit

Inflation

Infrastructure

Foreign investment

GDP growth
Bond vs Debenture

Bond is the terminology used in England while debenture is the terminology used in America
The term bond is used for a Government or PSU security while the term debenture is used for private companies securities
In India, Bondholders are secured by access to the underlying asset in case of default by the issuer.
Debentures, on the other hand, are unsecured, with debenture holders not having recourse to assets in the case of default by the debenture
issuer.

Optionally fully-convertible debentures (OFCD)

Investors have option to change Debentures to Shares

If debentures are changed to shares then from companies point of view

No further interest payment headache

No profit to the company No share

Will only share dividend when company makes profit

If debentures are changed to shares then from investors point of view

If company makes higher profit

He will get bigger dividend

Other Types of Debentures

Non-Convertible debentures
Partially convertible debentures 100 Debenture Rs. 70 (Non-convertible) + Rs. 30 ( Can be converted to Equity)
Fully convertible debentures 100 Debenture Fully converted to equity (No Choice)
Optionally convertible debentures Choice after two years For ex. 1 Debenture = 3 shares
Redeemable vs irredeemable before Maturity period
Fixed interest rate vs Index-linked interest rate (Sensex etc.)

Inflation Indexed Bonds Primary Market Operations

Interest Rate: Real vs. Nominal

Why Gold consumption bad?

Saving from Gold is not being used for capital expansion

Gold import high Trade deficit high
Current Account Deficit increases Rupee value decreases Crude oil price increases
Crude oil price increases Petrol, Diesel price increases Inflation increases
Real Interest rate becomes even more (negative) More Gold consumption
This vicious cycle continues Leading state to hyperinflation
Can not ban Gold import ban Leads to smuggling
Solution Provide new investment avenues with positive REAL interest rate

Inflation Indexed Bonds

Inflation Indexed Bonds works on the principle of WPI Inflation Rate + X % Profit
Compounded half yearly & can be traded at secondary market viz. from one investor to the other

IIB (Inflation indexed bonds) IINSS-C (Inflation Indexed National Savings Securities-
Cumulative)

For Institutional Investors (80%) + Retailers (20%) For Only retail investors viz.

Individual / NRI

HUF (Hindu undivided family)

Charity organizations

Educational bodies

Direct sold by RBI RBI via. Nationalized banks

Matures Period of 10 years Matures Period of 10 years

Penalty if redeemed early Senior citizen has been given some relief in redeeming terms

Compounded half yearly Compounded half yearly

1.44% + WPI (2004) 1.5% + CPI (Combined) 2010 base year

Can be traded in secondary market None

Capital gain tax applies NA

Inflation indexed bonds losing shine

 Mutual funds invested heavily in IIBs during high inflation period
But WPI is falling gradually since 2015
Hence net interest rate of IIB stands out near 4 %
Hence players exiting the game.

Credit Default Swap

Insurance policy on bonds paying a certain premium

When company defaults & even on liquidation cant recover the money than insurance company will pay the investor.

India Yearbook English India Yearbook Hindi Economic Survey 2017

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