S

Bond characteristics
Security issued borrowing arrangement
IOU-issued by borrower
Obligation to the issuer to make
specified payments
it has par value, coupon rate and
maturity rate
Bond Indenture-agreement between
issuer and borrower mention par
value ,coupon rate and maturity rate

Bond Prices

An estimation of expected cash flows

An estimation of the required return
Bond value with semi annual interest
Price yield relationship
Relationship between bond price and
time

Bond yields

Current yield
Yield to maturity
Yield to call
Realised yiled to maturity
Yield to maturity and default risk
Yield to maturity versus holding
period return

Risks in Bonds

Interest rate risk

Inflation risk default
Real interest rate risk
Default risk
Call risk
Liquidity risk
Reinvestment risk
Foreign exchange risk

Interest Rate Risk

Interest Rate vary over time, causing
fluctuations in bond prices. A rise in
interest rates will depress the market
prices of outstanding bonds, where as a
fall in interest rates will push the market
prices up
Interest rate risk is known as market risk
measured by the percentage of change in
the value of bond in response to a given
interest rate change.

Interest Rate Risk-2

Current price
pv of
pv
of principal
of bond
= interest
+
repayment
payment
Longer maturity period-greater
sensitivity of price to changes in
interest rate
Larger coupon payment-leser
sensitivity of price to changes in

2.Inflation Risk
Interest rates are nominal terms.
They express the rate of exchange
between current and future rupee
Real interest rate should be adjusted
for the expected inflation
During inflationary situation floating
rate bonds are popular and shorter
maturity bonds become more
popular

Real interest Rate Risk

Shift in demand and supply for funds
will change the real rate of interest
It is scarcely be predicted
This risk is faced by borrower and
lender

Default Risk
Borrower may not pay interest and
principal on time
It would have immediate impact on
its market price
These bonds have lower credit
rating

Call Risk
Isuer has an option to redeem the
bond before its scheduled maturity
When interest rate decreases issuer
would like to redeem
This expose investor to call Risk

Liquidity Risk
Market for debt is over the counter
market
Investors face difficulty in trading
debt instruments when quantity is
large
They have to pay premium while
buying
Provide discount while selling

Reinvestment Risk
When bond pays periodic interest
there is a risk that the interest
payment may have to be reinvested
at a lower interest rate.
Risk is greater for bonds with longer
maturity and for bonds with higher
interest payments

Foreign Exchange Risk

If a bond has payments that are
denominated in a foreign currency its
rupee cash flows are uncertain
The risk that the foreign currency will
depreciate in relation to the indian
rupee Is referred to as the foreign
exchage risk

Rating of Bonds----Assignement

Determinants of Interest
Rate
I short term risk free rate
II Maturity premium
III Default Premium
IV special Premium

I-Short Term Risk Free Rate

Inflation rate
Real growth rate
Time preference rate

II-Maturity premium
Future expectation
Liquidity preference
Preferred habitat

III-Default Premium
Business risk
Financial risk
Collateral risk

IVSpecial features
Call and put features
Conversion features
Other features