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Prudent Corporate Advisory Services — Debt Investor Presentation (March 2015)
57 slides from Prudent Corporate Advisory Services's debt investor presentation, March 2015
Slide 1: Presentation on Indian Debt Market
Presentation on Indian Debt Market
Slide 2: Overview of Financial Markets
Overview of Financial Markets
Slide 3: The Basic Premise of Financial Markets
The Basic Premise of Financial Markets- • As we know, a market is where buyers and sellers meet to exchange goods, services, money, or anything of value. In a financial market, the buyers are investors, or lenders: the sellers are issuers, or borrowers. An investor / lender is an individual, company
Slide 4: What is a Security?
What is a Security? • Security is a generic term that refers to a debt or equity IOU issued by a borrower or issuer. - Debt security or bond – an IOU promising periodic payments of interest and/or principal from a claim on the issuer's earnings - Equity or stock – an IOU promising a share in the own
Slide 5: Types of Financial Markets
• Types of Financial Markets • There are two general classifications of financial markets: • · Money markets • · Capital markets • Money Markets – Money markets trade short-term, marketable, liquid, low-risk debt securities. These securities are often called "cash equivalents" because of their safet
Slide 6: Capital Markets
• Capital Markets • Capital markets trade in longer-term, more risky securities. There are three general subsets of capital markets: bond (or debt) markets, equity markets, and derivative markets. Today, we will discuss debt markets in more detail and will have a cursory glance at equity markets and
Slide 7: Primary and secondary bond markets
• After completing all of the details, HT Manufacturing issues the bonds to investors using two methods. 1) The investment banks use their brokers to find buyers for the bonds, and HT Manufacturing sells the bonds directly to the investors. 2) The investment banks also act as dealers by buying some
Slide 8: Equity and Derivative Markets
• Equity markets, also called stock markets, specialize in the buying and selling of equity securities (stocks) of companies. As in the debt markets, the equity markets have a primary and secondary market. • The primary market is where companies originally issue stock in their companies, a process k
Slide 9: The Structure of Indian Debt Market
The Structure of Indian Debt Market
Slide 10: Market Participants In the Debt Market
Market Participants In the Debt Market- 1. Central Governments, raising money through bond issuances, to fund budgetary deficits and other short and long term funding requirements. 2. Reserve Bank of India, as investment banker to the government, raises funds for the government through bond and t-bi
Slide 11: Market Participants: PSU Financial Institutions and Banks
7. Public Sector Financial Institutions regularly access debt markets with bonds for funding their financing requirements and working capital needs. They also invest in bonds issued by other entities in the debt markets. 8. Banks are the largest investors in the debt markets, particularly the treasu
Slide 12: Market Participants: Mutual Funds, FIIs, Provident Funds
Mutual Funds are not permitted to borrow funds, except for very short-term liquidity requirements. Therefore, they participate in the debt markets pre-dominantly as investors, and trade on their portfolios quite regularly. 10. Foreign Institutional Investors FIIs can invest in Government Securities
Slide 13: Participants and Instruments In Debt Markets
Participants and Instruments In Debt Markets
Slide 14: Instruments
Instruments • Short term instruments • Long term instruments • Call/Notice Money (1-14 days) • Government of India dated securities (GOISECs) • Term Money – FDs (upto 1 year) • Inflation linked bonds • Repo (1-14 days)- 1 yr • Zero coupon bonds • CBLO (1 day to 3 months)-(Collateral • State governme
Slide 15: Instruments
Instruments • Short term instruments • Call/Notice Money (1-14 days) • Term Money – FDs (upto 1 year) • Repo (1-14 days)- 1 yr • CBLO (1 day to 3 months)-(Collateral Borrowing &Lending Obligation) • Treasury Bills (91 day, 182 and 365 day) • Fixed deposit • Certificates of Deposits (upto 1 year) • C
Slide 16: Money Market
Money Market Call / Notice Money • It is an important segment of the Indian money market. In this market, banks and primary dealers borrow and lend funds to each other on unsecured basis. • If the period is more than 1 day and up to 14 days it is called “notice money”. • Money lent for 15 days to 1
Slide 17: Repo
Repo • Repurchase agreements are contracts for the sale and future repurchase of a financial asset, most often sovereign securities. • On the termination date, the seller repurchases the asset at the price agreed at inception of the repo. • The difference between the sale and repurchase prices repre
Slide 18: Collateralized Borrowing and Lending Obligation (CBLO)
Collateralized Borrowing and Lending Obligation (CBLO) • As an alternative to the call money market, CCIL has developed CBLO, a money market instrument recognized by RBI. • An instrument issued at a discount and in electronic book entry form, for initial maturities ranging from one day to one year.
Slide 19: Treasury Bills
Treasury Bills • Promissory notes of the central government and therefore qualify as being free of credit risks. • Issued to meet short term funding requirements of the government account with Reserve Bank. • Sale is by auction. Any individual, corporate, bank, primary dealer or other entity is free
Slide 20: Commercial Paper (CP)
Commercial Paper (CP) • Promissory notes issued by the corporate sector for raising short term funds. • Sold at a discount to face value. • Maturity can range between a minimum of 7 days and a maximum of 1 year. • CPs are required to be rated and the minimum rating eligibility is P2. • Every CP issu
Slide 21: Certificate of Deposit (CD)
Certificate of Deposit (CD) • Similar to CPs except that the issuer is a bank. • Minimum amount of a CD can be Rs. 1 lakh and maturity between 7 days and 1 year. • Financial Institutions can issue CDs only for maturities between 1 and 3 years.
Slide 22: Bills Rediscounting Scheme
Bills Rediscounting Scheme • The RBI introduced the Bills Market Scheme (BMS) in 1952 which was later modified into the New Bills Market Scheme (NBMS). • Under this scheme commercial banks can rediscount the bills which were originally discounted by them with approved institutions (viz., Commercial
Slide 23: Cash Reserve Ratio (CRR)
Cash Reserve Ratio (CRR) • Amount of funds that the banks have to keep with RBI. If RBI decides to increase the percent of this, the available amount with the banks comes down. • RBI uses this method (increase of CRR) to drain out the excessive money from the banks. • Currently at 4.00 %.
Slide 24: Repo Rate, Reverse Repo and SLR
Repo Rate • Rate at which banks borrow from RBI. • Currently at 8 %. Reverse Repo • Rate at which RBI borrows from banks. • Currently at 7 %. Statutory Liquidity Ratio (SLR) • A percentage of time and demand liabilities banks have to invest in government bonds and other approved securities. • Curren
Slide 25: Derived Instruments
Derived Instruments Pass Through Certificate • Fixed-income securities that represent an undivided interest in a pool of federally insured mortgages put together by the Government National Mortgage Association. • Mortgage-backed certificates are the most common type of pass-through, where homeowners
Slide 26: Hedging Mechanism
Hedging Mechanism Interest Rate Swaps • A swap is defined as “a financial transaction in which two counterparties agree to exchange streams of payments, or cash flows, overtime” on the basis agreed at the inception of the contract. • Interest payment streams of differing character, on an agreed, or
Slide 27: Interest Rate Options
Interest Rate Options • An agreement between two parties in which one grants to the other the right to buy (call option) or sell (put option) an asset under specified conditions (price, time) and assumes the obligation, to sell or buy it. • The party who has the right, but not the obligation, is the
Slide 28: Long term instruments
• Long term instruments • Government of India dated securities (GOISECs) • Inflation linked bonds • Zero coupon bonds • State government securities (state loans) • Public Sector Undertaking Bonds (PSU Bonds) • Corporate debentures • Bonds of Public Financial Institutions (PFIs)
Slide 29: Government of India dated securities (GOISECs)
• Government of India dated securities (GOISECs): • GOISECs are issued by the Reserve Bank of India on behalf of the Government of India. These form a part of the borrowing program approved by Parliament in the Finance Bill each year (Union Budget). • They have maturity ranging from 1 year to 30 yea
Slide 30: Inflation linked bonds
• Inflation linked bonds: These are bonds for which the coupon payment in a particular period is linked to the inflation rate at that time - the base coupon rate is fixed with the inflation rate (consumer price index-CPI) being added to it to arrive at the total coupon rate. Investors are often loat
Slide 31: Zero coupon bonds and State government securities
• Zero coupon bonds: These are bonds for which there is no coupon payment. They are issued at a discount to face value with the discount providing the implicit interest payment. In effect, these can be construed as long duration T - Bills or as bonds with cumulative interest payment. • State governm
Slide 32: Public Sector Undertaking Bonds (PSU Bonds)
• Public Sector Undertaking Bonds (PSU Bonds) : These are long term debt instruments issued by Public Sector Undertakings (PSUs). The term usually denotes bonds issued by the central PSUs (ie PSUs funded by and under the administrative control of the Government of India). The issuance of these bonds
Slide 33: Bonds of Public Financial Institutions (PFIs)
• Bonds of Public Financial Institutions (PFIs) : Apart from public sector undertakings, Financial Institutions are also allowed to issue bonds, that too in much higher quantum. They issue bonds in 2 ways - through public issues targeted at retail investors and trusts and also through private placem
Slide 34: Corporate debentures
• Corporate debentures: These are long term debt instruments issued by private sector companies. These are issued in denominations as low as Rs.1,000 and have maturities ranging between one and ten years. Long maturity debentures are rarely issued, as investors are not comfortable with such maturiti
Slide 35: Bond Basics & Valuation of Bonds
Bond Basics & Valuation of Bonds
Slide 36: Bond Terminology
• Bonds represent loans by investors to a company. In a bond contract, the investor purchases a certificate from the issuer in exchange for a stream of interest payments and the return of a principal amount at the end of the contract. In this section we will discuss the terminology of the bond marke
Slide 37: Face value and maturity date
Face (par) value The amount printed on the certificate. The face value represents the principal in the loan agreement, which is the amount the issuer pays at maturity of the bond. Maturity date The date the loan contract ends. At this time, the issuer pays the face value to the investor who owns the
Slide 38: Process for Issuing Bonds
• Process for Issuing Bonds A simple example will illustrate the process for issuing bonds. Example ABC Company needs capital to purchase a new piece of equipment for its operations. The company meets with financial advisors and investment bankers to discuss the possibilities of raising the necessar
Slide 39: Setting the coupon rate and issuing bonds
2. Investment bankers set the coupon rate for the bonds. The investment bankers attempt to gauge the interest rate environment and set the coupon rate commensurate with other bonds with similar risk and maturity. The coupon rate dictates whether the bonds will be sold in the secondary market at face
Slide 40: Bonds become available in the secondary market
4. The bonds become available in the secondary market. Once the bonds are sold in the primary market to investors, they become available for purchase or sale in the secondary market. hese transactions usually take place between two investors – one investor who owns bonds that are no longer needed fo
Slide 41: Pricing Bonds
Pricing Bonds • Pricing a bond involves finding the present value of the cash flows from the bond throughout its life. The formula for calculating the present value of a bond is: • V = C[1 / (1+R)]1+ C[1 / (1+R)]2+ ... + C[1 / (1+R)]T+ F[1 / (1+R)]T • Where: V = Present value of the bond C = Coupon
Slide 42: Example: Present value of a bond
Example: • What is the present value of a bond with a two-year maturity date, a face value of Rs.1,000, and a coupon rate of 6%? The current prevailing rate for similar issues is 5%. To apply the formula, C = Rs.60 (Rs.1,000 x 0.06), R = 0.05, T = 2, and F = Rs.1,000. V = C[1 / (1+R)]1 + C[1 / (1+R)
Slide 43: Price and interest rate inverse relationship
• The present value of Rs.1,018.59 is the price that the bond will trade for in the secondary bond market. You will notice that the price is higher than the face value of Rs.1,000. In the time since these bonds were issued, interest rates have fallen from 6% to 5%. Investors are willing to pay more
Slide 44: Current Yield, YTM & Duration of a Bond
Current Yield, YTM & Duration of a Bond
Slide 45: Bond structure
Bond structure Serial Number Name of bond BOND e.g. GOI 2020 Nominal/Par Value e.g. Rs.100.00 Coupon rate 12 ¼ % pa. Redemption date Interest e.g. Dec 2020 Rs.12.25
Slide 46: Current Yield and Yield to Maturity
Current Yield, in contrast to the Coupon Yield or Nominal Yield, is a Bond Yield that is determined by dividing the fixed coupon amount (that is paid as a percentage on the face or original value of the specific bond) by the current price value of the particular bond. In other words, Current Bond Yi
Slide 47: Yield to Maturity formula
The concept of Yield to Maturity assumes that the future cash flows are reinvested at the same rate at which the original investment was made. Market price = I/2 I/2 I/2 I/2+FV ---- + ---- + ---- ........... ------ (1+r) (1+r)2 (1+r)3 (1+r)n where I/2 = annual interest rate payable half yearly r = d
Slide 48: Approximate YTM computation
The approximate Yield to Maturity (YTM) can be computed as per the formula given below: YTM* I+(F-M)/N where ---------- = --------- I = Annual interest Rate *(Approx.) (F+M)/2 F = Face value of bond M = Market price of the bond N = Number of years to maturity Suppose Ramesh buys 12% GOI-2008 at Rs 1
Slide 49: YTM example for Suresh
For Suresh, 12+(100-104)/7 YTM = -------------- = 11.20% (100+104)/2
Slide 50: Relationship between prices & yield
Relationship between prices & yield Bond Bond Prices Prices Yields Yields Exampl YTM = 10% YTM = 12% e Coupon = 10% Coupon = 10% Bond price = Rs100 Bond price = Rs 83 Flat yield = 10% Flat yield = 12% --------------------------------- --------------------------------- YTM = 12% YTM = 12% Bond pr
Slide 51: Price Interest rate relationship
Price Interest rate relationship: The price of a government security is inversely related to the market interest rate. As the interest rate increases price decreases and therefore, the yield increases. However, if the interest rates fall the G-Sec become expensive and therefore, the yield falls. • T
Slide 52: Average Maturity and Duration of a Bond
Average Maturity- Average Maturity is the weighted Average of the maturities of all the instruments in a portfolio. Duration of a Bond- • Duration is the measure we use to estimate the average maturity of a bond's cash flows. It represents the weighted average life of the bond, where the weights are
Slide 53: Relation of Duration with Maturity, YTM and Coupon Rate
Relation of Duration with Maturity Date,YTM and Coupon Rate: • A bond's duration generally increases with the time to maturity, holding the coupon rate constant. • The duration of a coupon bond is higher when the bond's yield to maturity is lower. • The higher the coupon rate, the lower the duration
Slide 54: Term Structure of Interest Rates
Term Structure of Interest Rates There are three main patterns created by the term structure of interest rates: Normal Yield Curve: Remember that as general Flat Yield Curve: Sends mixed signalsthat short-term interest current interest rates increase, the price of a bond rates will rise and other s
Slide 55: The Credit Spread
The Credit Spread • The credit spread, or quality spread, is the additional yield an investor receives for acquiring a corporate bond instead of a similar federal instrument. • When inflation rates are increasing (or the economy is contracting) the credit spread between corporate and Treasury securi
Slide 56: Yield Curve Analysis
Yield Curve Analysis • Yield Curve theory – Pure expectations theory - Argues that yields differ with maturities because of market expectations of future changes in interest rates. - For example, the 2-year yield is higher than the 1-year yield because the expectations about the 1-year yield 1-year
Slide 57: Risks in Bond Investing
Risks in Bond Investing • Interest rate risk ( price risk ) - Impact on price of a bond due to changes in interest rate changes • Credit risk - Impact due to credit migration or default risk • Reinvestment risk - Coupons get reinvested at different rates, impacting the total return of the portfolio
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