04-09-2019

Capital Markets
Section 3 – Primary & Secondary Market
Products

Objective
• Types of Shares
• Principle Features of Bond
• Issuers of Debt instruments
• Characteristics of Indian Debt market

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Types of Equity Shares

Stocks can be classified into multiple categories on various parameters – size of
the company, dividend payment, industry, risk, volatility, as well as fundamentals.

Type of Ownership:

Types of Equity Stocks

Stocks on the basis of ownership rules: This is the most basic parameter for classifying stocks. In
this case, the issuing company decides whether it will issue common, preferred or hybrid
stocks.
• Preferred & common stocks:
The key difference between common and preferred stocks is in the promised dividend
payments. Preferred stocks promise investors that a fixed amount will be paid as
dividends every year. A common stock does not come with this promise. For this reason,
the price of a preferred stock is not as volatile as that of a common stock. Another key
difference between a common stock and a preferred stock is that the latter enjoy
greater priority when the company is distributing surplus money. Another distinction is
that preferred shareholders may not have voting rights unlike holders of common stocks.

• Hybrid stocks:
Some companies also issue hybrid stocks. These are often preferred shares that come
with an option to be converted into a fixed number of common stocks at a specified
time. These kinds of stocks are called ‘convertible preferred shares’. Since these are
hybrid stocks, they may or may not have voting rights like common stocks.

• Stocks with embedded-derivative options:

Some stocks come with an embedded derivative option. This means it could be
‘callable’ or ‘putable’. A ‘callable’ stock is one which has the option to be bought back
by the company at a certain price or time. A ‘putable’ share gives the stockholder the
option to sell it to the company at a prescribed time or price. These kinds of stocks are
not commonly available.

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Types of Equity Stocks

Stocks on the basis of market capitalization: Listed stocks are also classified on the
basis of the market value of the total shareholding of a company. This is
calculated using market capitalization, where you multiply the share price by the
total number of issued shares. There are three kinds of stocks on the basis of
market capitalization:
• Small-cap stocks:
o ‘Cap’ is the short form of ‘Capitalization’. As the name suggests, these are
stocks with relatively smaller market cap. They often represent small-size
companies.
o These stocks are the best option for an investor who wishes to generate
significant gains in the long run; as long he does not require current
dividends and can withstand price volatility. This is because small
companies have the potential to grow rapidly in the future. So, an investor
may profit by buying the stock when it is cheaply available in the
company’s initial stage. However, many of these companies are relatively
new. So, it is difficult to predict how they will perform in the market.
o Being small enterprises, growth spurts dramatically affect their values and
revenues, sending prices soaring. On the other hand, the stocks of these
companies tend to be volatile and may decline dramatically.
o SEBI has defined small cap stocks as 251st company onwards in terms of
full market capitalization.

Types of Equity Stocks

• Mid-cap stocks:
o Mid-cap stocks are typically stocks of medium-sized companies.
o These are stocks of well-known companies, recognized as seasoned
players in the market. They offer you the twin advantages of acquiring
stocks with good growth potential as well as the stability of a larger
company.
o Mid-cap stocks also include baby blue chips – companies that show
steady growth backed by a good track record. They are like blue-chip
stocks (which are large-cap stocks), but lack their size. These stocks tend
to grow well over the long term.
o SEBI has defined mid cap stocks as 101st to 250th company in terms of full
market capitalization.

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Types of Equity Stocks

• Large-cap stocks:
o Stocks of the largest companies in the market such as Tata, Reliance,
ICICI are classified as large-cap stocks. They are often blue-chip firms.
o Being established enterprises, they have at their disposal large reserves of
cash to exploit new business opportunities. However, the sheer size of
large-cap stocks does not let them grow as rapidly as small cap
companies and the smaller stocks tend to outperform them over time.
o Investors, however, gain the advantages of reaping relatively higher
dividends compared to small- and mid-cap stocks, while also ensuring the
long-term preservation of their capital.
o SEBI has defined large cap stocks as 1st to 100th company in terms of full
market capitalization.

Types of Equity Stocks

Stocks on the basis of dividend payments: Dividends are the primary source of income
until the shares are sold for a profit. Stocks can be classified on the basis of how much
dividend the company pays.
• Income stocks:
o These are stocks that distribute a higher dividend in relation to their share price
(higher dividend yield). They are also called dividend-yield or dog stocks. So, a
higher dividend means larger income. This is why these stocks are also called
income stocks.
o Income stocks usually represent stable companies that distribute consistent
dividends. However, these companies often are not high-growth companies.
As a result, the stock’s price may not rise much. Preferred stocks are also
income stocks, since they promise regular dividend payments.
o Income stocks are thus preferred by investors who are looking for a secondary
source of income. They are relatively low-risk stocks.
o Investors are not taxed for their dividend income. This is another reason that
long-term, relatively low-risk investors prefer income stocks.
o E.g. – Coal India Ltd.
So how to find such stocks? Use the dividend-yield measure to identify stocks that
pay high dividends. The dividend yield gives a measure of how much an investor
is earning (per share) from the investment by way of total dividends. It is
calculated by dividing the dividend announced by the share price, and then
written in percentage format. For example, a stock with a price of Rs. 1000 offers a
dividend of Rs. 5 per share has a dividend yield is 0.5%.

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Types of Equity Stocks

• Growth Stocks:
o Not all stocks pay high dividends. This is because, companies prefer to
reinvest their earnings for company operations. This usually helps the
company grow at a faster rate. As a result, such stocks are often called
growth stocks.
o Since the company grows at a faster rate, the value of the shares also
rises. This helps the investor earn a higher return when the stock is sold,
although this comes at the expense of lower income through dividends.
o For this reason, investors choose such stocks for their long-term growth
potential, and not for a secondary source of income.
o However, if the company ceases to grow, it cannot be called a growth
stock. This makes such stocks more risky than income stocks.
o E.g. – HDFC Bank Ltd.

Types of Equity Stocks

Stocks on the basis of fundamentals: Followers of value investing believe that a
share price should track the intrinsic value of the company’s share. They, thus,
compare share prices with per-share earnings, profits and other financials to
arrive at the intrinsic value per share.

o If a share price exceeds this intrinsic value, the stock is believed to be

overvalued. In contrast, if the price is lower than the intrinsic value, the
stock is considered to be undervalued.
o Undervalued stocks are also called ‘value stocks’. They are preferred by
value investors, as they believe the share price will eventually rise in the
future.

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Types of Equity Stocks

Stocks on basis on Risk: Some stocks are riskier than others. This is because their
share prices fluctuate more. However, just because a stock is risky does not mean
investors should avoid it. Risky stocks generally have the potential to make you
greater profits. Low-risk stocks, in contrast, give you lower returns.
• Blue-chip stocks:
o These are stocks of well-established companies with stable earnings. These
companies have lower liabilities like debt. This helps the companies pay
regular dividends.
o Blue-chip stocks are thus considered safe and stable. They are named
after blue-colored chips in the game of poker, as the chips are
considered the most valuable.

• Beta stocks:
o Analysts measure risk – called beta – by calculating the volatility in its
price. Beta values can have positive or negative values. The sign merely
denotes if the stock is likely to move in sync with the market or against the
market.
o What really matters is the absolute value of beta. Higher the beta, greater
the volatility and thus more the risk. A beta value over 1 means the stock
is more volatile than the market. Thus, high beta stocks are riskier.
However, a smart investor can use this to make greater profits.

Types of Equity Stocks

Stocks on the basis of price trends: Prices of stocks often move in tandem with
company earnings. Stocks are thus classified into two groups:
• Cyclical stocks:
o Some companies are more affected by economic trends. Their growth
moderates in a slow economy, or fastens in a booming economy. As a
result, prices of such stocks tend to fluctuate more as economic
conditions change.
o They rise during economic booms, and fall as the economy slows down.
Stocks of automobile companies are the best example of cyclical stocks.

• Defensive stocks:
o Unlike cyclical stocks, defensive stocks are issued by companies relatively
unmoved by economic conditions. Best examples are stocks of
companies in the food, beverages, drugs and insurance sectors.
o Such stocks are typically preferred when economic conditions are poor,
while cyclical stocks are preferred when the economy is booming.

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Debt Market
• The Debt Market is the market where fixed income securities of
various types and features are issued and traded.

• Debt Markets are therefore, markets for fixed income securities issued
by Central and State Governments, Municipal Corporations, Govt.
bodies and commercial entities like Financial Institutions, Banks,
Public Sector Units, Public Ltd. companies and also structured finance
instruments.

• Simply put, a bond/debenture can be defined as a loan for which an

investor is the lender. The issuer of the bond pays the investor interest
(at a predetermined rate and schedule) in return for the funding.

• The maturity date refers to the date on which the issuer has to repay
the principal to the investor.

Difference between Debt

& Equity Markets
• Ownership: When an investor invests money via equity, he becomes
an owner in the corporation issuing the equity shares.

• Voting Rights & Share in profits: With ownership he also gets voting
right in the company and a share in future profits. In case of debt, the
investor becomes a creditor to the issuing entity.

• As a creditor, he has higher claim to the assets of the entity as

compared to a shareholder in the event of the company filing for
bankruptcy.

• However, a debt investor does not get voting rights or a share in

future profits. He is only repaid in the form of a predetermined interest
rate.

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Features of a Bond
• Face/ PAR Value:
o Face value (or par value or principal) is the amount the investor will get back
from the issuer once the debt instrument matures. Bonds may be issued at face
value or at a discount to the face value.
o Investors should also keep in mind that the price at which the instrument trades
in the market is not the face value.
o The price of an instrument can keep fluctuating throughout its life based on
market forces.

If a bond trades for a price higher than its face value, then it is said to be traded at a
premium. If it is trading below the face value, it is said to be traded at a discount.

Example: Premiums and Discounts - Imagine that par value of ABC Corp. is Rs. 1,000,
which would =100. If the ABC Corp. bonds trade at 85 what would is the value of the
bond? What if ABC Corp. bond trades at 102?
Answer: At 85, the ABC Corp. bonds would trade at a discount to par at Rs.850. If ABC
Corp. bonds trades at 102, the bonds would trade at a premium of Rs. 1,020.

Par value is the amount the holder will receive at the bond's maturity. It can be any
amount but is typically Rs.1,000 per bond. Par value is also known as principal value,
face value, maturity value or redemption value. Bond prices are quoted as a
percentage of par.

Features of a Bond
• Coupon or Interest Rate:
o The coupon is the amount the investor will receive via interest payments
for the debt instrument. It is called coupon, since earlier there used to be
physical coupons on the instrument which the holder had to tear off to
redeem the interest.
o While most bonds pay interest on a semi-annual basis, some may even
pay interest on a monthly, quarterly or annual basis.
o The interest is calculated and paid on the face value of the instrument,
irrespective of its price in the market.
o Based on the instrument, the coupon may either be fixed or floating.
o In the case of a fixed coupon the rate of interest remain constant till the
maturity of the instrument. In case of a floating-rate coupon, the interest
rate may be adjusted by the issuer if required.
o To find the coupon's value, simply multiply the coupon rate by the par
value.
o The rate is for one year and payments are usually made on a semi-annual
basis.
o The coupon rate also affects a bond's price. Typically, the higher the rate,
the less price sensitivity for the bond price because of interest rate
movements.

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Features of a Bond
• Maturity:
o Maturity is the time at which the bond tenure ends and the holder
receives the final payment of principal and interest (repayment of the
loan).
o The "term to maturity" is the amount of time from today until the bond
actually matures. There are 3 basic classes of maturity:
• Short-Term Maturity – 1 to 5 years in length
• Intermediate-Term Maturity – 5 to 12 years in length
• Long-Term Maturity – 12 years or more in length

o Maturity is important because:

• It indicates the length of time in which an investor will receive interest
as well as when he or she will receive principal payments.
• It affects the yield on the bond; longer maturities tend to yield higher
rates.
• The price volatility of a bond is a function of its maturity. A longer
maturity typically indicates higher volatility.

Yield
• The return (in terms of percentage) paid on an instrument in
the form of dividend or interest is called Yield. Based on the
kind of investment, there are many different kinds of yields.

• In the debt markets, yield to maturity (YTM) is the most popular

measure to quantify the rate of return paid on a fixed income
instrument.

• Yields and Bond Prices are inversely related. Hence, an

increase in price will reduce the yield and vice versa.

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Who is an Issuer of the

Bond
• Any corporate or government entity that issues a fixed income
security is termed as an issuer.

• While selecting a debt instrument, the investor should primarily

consider the stability of the issuer (refer to the credit rating of
the debt issue and the issuer), since this assures repayment of
the principal.

• Instruments issued by the Central or State governments are far

more stable than those issued by any corporate.

Why to invest in Debt/

Fixed Income Securities
• The common trend among retail investors is investing in equity, since equities
are perceived to offer a higher scope of better returns over the long term.
However, to build a diversified and stable portfolio, investing in debt securities
is a must since it assures fixed income.

• The primary advantage of a fixed income security is a steady and predictable

source of payments by way of interest and repayment of principal at the time
of maturity of the instrument.

• Debt instruments are generally issued by eligible entities (public or private)

against money borrowed by them from investors.

• Debt securities enjoy relatively higher safety towards repayment.

• Government securities (also called G-Secs) offer the investor virtually zero
default risk, making these one of the most stable forms of fixed income
instruments. Another advantage is that the investor is not liable to pay any TDS
on interest payments from G-Secs.

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Importance of the Debt

market to the Economy
• Debt markets are vital to the sustained growth of any economy since they
offer efficient mobilization and allocation of financial resources.

• Debt instruments are used to finance developmental activities undertaken by

the Government.

• They also aid in managing the liquidity in the economy.

• Borrowings from the debt market allow the Government to reduce its
dependence on external sources of funding.

• It also reduces the pressure on institutional financing to fund public sector or

private sector projects.

The price of instruments in debt markets is based on the forces of demand and
supply. The price of the instrument is also governed by changes in economic
conditions, money market conditions, changes in prevalent interest rates, rates of
new issues and credit quality of the issuer.

Risks associated with debt

Markets
• The default risk associated with debt securities is inability of the
issuer to make timely payments towards interest or principal of
the security.

• Some instruments may also be likely exposed to a risk

emerging from an adverse change in interest rate, which
would affect the returns/yield from existing instruments.

• Another risk is reinvestment rate risk i.e. the possibility of a

reduction in interest rates resulting in a lack of options to invest
the interest received.

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Regulators
The issue & trade of securities in India are regulated by
either RBI or SEBI.

• Government securities and bonds, instruments

issued by banks and financial institutions are
regulated by RBI

• Issues of non-government securities (i.e. issue by

corporates) are regulated by SEBI

Segments in secondary
Debt market
The secondary debt market in India can be broadly categorized
into –

o Wholesale Debt Market – comprising of investors like Banks,

financial institutions, RBI, insurance companies, Mutual
funds, corporates and FIIs.
o Retail Debt Market – comprising of investors like individuals,
pension funds, private trusts, NBFCs and other legal entities.

The Commercial Banks and the Financial Institutions are the most
prominent participants in the Wholesale Debt Market in India.

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Structure of Corporate
Debt market
• The corporate debt market can be classified into
Primary market and Secondary market.

• In the primary market, corporate debt is via private

placements like corporate bonds placed with
wholesale investors like banks, financial institutions,
mutual funds, etc.

• The Secondary market for corporate debt is

available on platforms offered by various
exchanges in the country.

Debt Instruments
The following are the instruments available in the
corporate debt market –
• Non-Convertible Debentures
• Partly-Convertible Debentures/Fully-Convertible
Debentures (convertible in to Equity Shares)
• Secured Premium Notes
• Debentures with Warrants
• Deep Discount Bonds
• PSU Bonds/Tax-Free Bonds

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Debt Instruments
Non Convertible Debentures (NCDs):
• Whenever a company wants to raise money from the public it issues a debt
paper for a specified tenure where it pays a fixed interest on the investment.
This paper is known as a debenture.
• Some of the debentures are termed as convertible debentures since they can
be converted into equity share on maturity.
• A Non - Convertible debenture or NCD does not have the option of
conversion into shares and on maturity the principal amount along with
accumulated interest is paid to the holder of the instrument.
There are two types of NCDs - secured and unsecured.
o A secured NCD is backed by the assets of the company and if it fails to
pay the obligation, the investor holding the debenture can claim it
through liquidation of these assets.
o Contrary to this there is no backing in unsecured NCDs if company
defaults. However, any company seeking to raise money through NCD
has to get its issue rated by agencies such as CRISIL, ICRA, CARE and Fitch
Ratings.
o A higher ratings (e.g. CRISIL AAA or AA-Stable) means the issuer has the
ability to service its debt on time and carries lower default risk. A lower
rating signifies a higher credit risk.

Debt Instruments

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Debt Instruments
• Secured premium notes (SPNs) are financial instruments which are
issued with detachable warrants and are redeemable after certain
period.
• SPN is a kind of non-convertible debenture (NCD) attached with
warrant.
• It can be issued by the companies with the lock-in-period of say four
to seven years. This means an investor can redeem his SPN after lock-
in-period.
• SPN holders will get principal amount with interest on instalment basis
after lock in period of said period. However, during the lock in period
no interest is paid.
• Thus, SPNs are nothing but a share warrant which are only issued by
the listed companies after getting the approval from the central
government.
• SPN is a hybrid security i.e. it combines both features of equity and
debt products.
• SPN = NCD + Convertible warrants

Debt Instruments
• Deep Discount Bond (DDB) is technically called a Zero Coupon Bond
(ZCB). This means the investment does not give any interest payouts.
A DDB/ ZCB is a debt security that doesn't pay interest (a coupon)
but is issued at a discount, rendering profit at maturity when the bond
is redeemed for its full face value.

• The Deep Discount Bond is however different from a cumulative

deposit in the much longer tenure. Where a standard cumulative
deposit scheme has a maximum tenure of 5 years in India, the deep
discount bond has a minimum of 5 year tenure.

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Debt Instruments
Tax Free Bonds:The income by way of interest on these Bonds is fully
exempt from Income Tax and shall not form part of Total Income as
per provisions under section 10 (15) (iv) (h) of I.T. Act, 1961. These
bonds are generally issued by Government Backed entities and thus
have very low default risk.

• These bonds can be applied in Physical or Dematerialized mode

• These bonds generally come with long tenures of 10, 15 and/or 20
years, however, these bonds can be traded on the listed
exchange if applied in demat mode
• There is no Cap on investment made in these bonds
• Retail Individual Investors get higher interest rates, so for an
Individual, HUF to be eligible for higher rates the maximum
investment amount is Rs.10 Lakhs
• The interest offered is benchmarked to the Government security
of similar maturity, subject to conditions laid down by CBDT.
• These bonds however, do not provide any additional tax benefits.

Debt Instruments
• PSU bonds:
o Issued by undertakings of the Government of India.
o Minimum maturity is 5 years for taxable bonds and 7 years for tax
free bonds.
o These bonds are not guaranteed by GOI.
o They are promissory notes transferable by endorsement and
delivery.
o If dematerialised, they are eligible for Repo.
o No stamp duty or transfer deed is required at the time of transfer
of bonds transferable by endorsement.

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Bond with maturity

• Suppose an investor is considering the purchase of a five year
Rs. 1,000 par value bond, bearing a nominal rate of interest of
7% p.a. The cash flows are:

Year Cash flow Year Cash flow

(discounted @ 7%)
0 (1000)
0 (1000)
1 70
1 70/(1+0.07)^1
2 70
2 70/(1+0.07)^2
3 70 3 70/(1+0.07)^3
4 70 4 70/(1+0.07)^4
5 70+1000 5 70/(1+0.07)^5 +
1000/(1+0.07)^5
The sum of all discounted
Total 1,000
cash flows are 1000 which is
equal to the Investment cost

Bond A Bond B
Maturity 5 years Maturity 5 years
Coupon 7% Coupon 8%
Face Value 1000 Face Value 1000

Year Cash flow Year Cash flow

0 (1000) 0 (1000)

1 70 1 80

2 70 2 80

3 70 3 80

4 70 4 80

5 70+1000 5 80+1000

Total Coupon received in 5 years is Total Coupon received in 5 years is

Rs. 400
Rs. 350

Which Bond will you choose??? Bond A or Bond B???

In Bond A you are getting Rs. 350 till maturity while in Bond B it will be Rs. 400. In order to get the similar
Yield in Bond A as like Bond B, the buyer will demand a discount in price. Maybe in this case around Rs.
40 basis the Time Value of Money and thus the price of bond A will become Rs. 960 so that the YTM of
Bond A is equal to the YTM of Bond B.
This phenomena also explains the interest rate and the price relationship in a bond i.e., if Interest rates
go up prices of the bonds comes down and vice versa

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But lets say the investors required rate of return is 8% for

the same bond. What is the price he is willing to pay?
Year Cash flow (discounted @ 8%)

0 (1000)

1 70/(1+0.08)^1

2 70/(1+0.08)^2

3 70/(1+0.08)^3

4 70/(1+0.08)^4

5 70/(1+0.08)^5 + 1000/(1+0.08)^5

The sum of all these cash flows comes to Rs. 960.51. This implies that
the Rs. 1000 bond is worth Rs. 960.51 today if the required rate of
return is 8%. The investor will not be willing to pay more than Rs.
960.51 for the bond today. Thus,
Bond value = PV of interest +PV of maturity value
If the bond is traded at premium than YTM will be lower than coupon
rate and vice versa.

Fundamentals of bond
valuation
Ct n Pp
Pm   
t 1 (1  i ) t
(1  i ) n

Where:
Pm=the current market price of the bond
n = the number of years to maturity
Ct = the annual coupon payment for bond i
i = the prevailing yield to maturity for this bond issue
Pp=the par value of the bond

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Fundamentals of bond valuation (semi-annual coupon)

2n
Ct 2 Pp
Pm   
t 1 (1  i 2 ) t
(1  i 2 ) 2n

• Where:
• Pm=the current market price of the bond
• n = the number of years to maturity
• Ct = the annual coupon payment for bond i
• i = the prevailing yield to maturity for this bond
issue
• Pp=the par value of the bond

Price : 10yr, 6% coupon and $1,000 par value, paying

coupon of Rs. 60 each

20
30 1000
P 
1.03
t 20
t1 (1.03)
P$1000
• Ct = 30 (semiannual)
• P=1000 ,T= 20 periods
• r = 3% semi annual
• Alternatively: Rs. 30xAnnuity factor
(3%, 20) +Rs.1000x PVfactor (3%, 20)

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Yield to maturity
20
35 1000
950   
(1 r ) (1 r )
t T
t 1

• 10 yr Maturity Coupon Rate = 7%

• Price = $950
• Solve for r = semiannual rate
• R= 3.8635%

Yield to Maturity (YTM)

• We can calculate the bond`s yield or the rate of return when its current
price and cash flows are known. Suppose the market price of a bond is
883.40 (face value 1000), coupon 6% for 5 years, after which it will be
redeemed. What is the bonds rate of return?

• YTM is the measure of a bonds rate of return that considers both interest
income and any capital gain or loss. YTM is the bonds IRR. The YTM for the
bond is:

• 883.40 = 60/(1+YTM)^1 + 60/(1+YTM)^2…..60/(1+YTM)^5 +

1000/(1+YTM)^5

• We obtain YTM as 9% (using trial and error method or IRR method)

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Yield to call
• A number of companies issue bonds with a buy back option
or provision. Thus a bond can be redeemed before maturity.
Yield to call would be rate of return in case the bond is called
before maturity. The call period would be different from the
maturity period and the call value would be different from the
maturity value.
• Example: Suppose the 10%, 10 year Rs. 1000 bond is
redeemable (callable) in 5 years at a call price of Rs. 950, YTC
is:

• 950 = Σ 100/(1+YTC)^t + 1000/(1+YTC)^5

• Where t = 1 to 5
• YTC = 11.30% and if calculate the YTM = 10.9%

Practise Sums
• The Rs. 1,000 face value ABC bond has a coupon rate of 6%,
with interest paid semi-annually, and matures in 5 years. If the
bond is priced to yield 8%, what is the bond's value today?
o FV = 1,000
o CF = 60/2 = 30
o N = 5 x 2 = 10
o i = 8%/2 = 4%
o PV = 918.89
• The Rs. 1,000 face value EFG bond has a coupon of 10% (paid
semi-annually), matures in 4 years, and has current price of Rs.
1,140. What is the EFG bond's yield to maturity? PVIF @ 4% =
0.731 and @ 3% = 0.789. PVAF @4% = 6.733 and @ 3% = 7.020
o FV = 1,000
o CF = 100/2 = 50
o N=4x2=8
o PV = 1,140
o i = 3%
o yield-to-maturity = 3% x 2 = 6%

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Practise Sums
• The HIJ bond has a current price of Rs. 800, a maturity value of
Rs. 1,000, and matures in 5 years. If interest is paid semi-
annually and the bond is priced to yield 8%, what is the bond's
annual coupon rate?
o PV = 800
o FV = 1,000
o N = 5 x 2 = 10
o i = 8% / 2 = 4%
o CF = 15.34
o Coupon = 30.68 per year or 3.068%
• The KLM bond has a 8% coupon rate (with interest paid semi-
annually), a maturity value of 1,000, and matures in 5 years. If
the bond is priced to yield 6%, what is the bond's current
price?
o CF = 40
o FV = 1,000
o N = 10
o i = 6%/2 = 3%
o PV = 1,085

Practise Sums
• The NOP bond has an 8% coupon rate (semi-annual interest), a
maturity value of Rs.1,000, matures in 5 years, and a current price
of Rs.1,200. What is the NOP's yield-to-maturity?
o CF = 40
o FV = 1,000
o N = 5 x 2 = 10
o PV = 1,200
o i = 1.797%
o yield-to-maturity = 1.797% x 2 = 3.594%

• Zara Entertainment Inc 9.875% bond matures in ten years. Assume

that the interest on these bonds is paid and compounded
annually. Determine the value of a INR1,000 denomination Zara’s
bond as of today if the required rate of return is 7 percent.
o CF = 9.875%*1000
o FV = 1000
o I = 7%
o N = 10
o PV = 1201.93

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 04-09-2019

Practise Sums
• Calculate the present value of the bond from the above
example if the interest rate is changed to 9%
o CF = 9.875%*1000
o FV = 1000
o I = 9%
o PV = 1056.15
• Neelam Corp 8% bond matures in 8 years. Interest on
these bonds in paid and compounded annually.
Maturity value of the bond is 1000 and the rate of return
is 6%. What is the bond’s current price?
o CF = 8% *1000
o FV = 1000
o I = 6%
o N=8
o PV = 1124.20

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