FIXED INCOME SECURITIES BOND Bonds refer to debt instruments bearing interest on maturity Organizations may borrow funds by issuing debt securities named bonds having a fixed maturity period more than one year and pay a specified rate of interest coupon rate on the principal amount to the ID: 1028737
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1. ANALYSIS OF EQUITY AND DEBT INSTRUMENTSFIXED INCOME SECURITIES
2. BONDBonds refer to debt instruments bearing interest on maturity. Organizations may borrow funds by issuing debt securities named bonds, having a fixed maturity period (more than one year) and pay a specified rate of interest (coupon rate) on the principal amount to the holders.Thus a bond is like a loan: the issuer is the borrower (debtor), the holder is the lender (creditor), and the coupon is the interest. Bonds provide the borrower with external funds to finance long-term investments.
3. BOND FEATURESNominal, Principal or Face Amount—The amount over which the issuer pays interest, and which has to be repaid at the end.Maturity date—The date on which the issuer has to repay the nominal amount. The length of time until the maturity date is often referred to as the term or maturity of a bond.
4. Coupon—The interest rate that the issuer pays to the bond holders. Usually this rate is fixed throughout the life of the bond. The name coupon originates from the fact that in the past, physical bonds were issued which had coupons attached to them. On coupon dates the bond holder would give the coupon to a bank in exchange for the interest payment.
5. TYPES OF BONDSMUNICIPAL BONDSMunicipal bonds are debt obligations issued by states, cities, countries and other governmental entities, which use the money to build schools, highways, hospitals, and many other projects for the public good.When you purchase a municipal bond, you are lending money to a state or local government entity, which in turn promises to pay you a specified amount of interest (usually paid semiannually) and return the principal to you on a specific maturity date.
6. GOVERNMENT BONDSGovernment Bonds are securities issued by the Government for raising a public loan.They consist of Government Promissory Notes, Bearer Bonds.Government Securities are mostly interest bearing dated securities issued by RBI on behalf of the Government of India. GOI uses these funds to meet its expenditure commitments. These securities are generally fixed maturity and fixed coupon securities carrying semi-annual coupon
7. Features of Government SecuritiesIssued at face value Ample liquidity as the investor can sell the security in the secondary market Interest payment on a half yearly basis on face value Can be held in D-mat form. Rate of interest and tenure of the security is fixed at the time of issuance and is not subject to change. Redeemed at face value on maturity Maturity ranges from of 2-30 years.
8. Corporate BondsCorporate bonds are debt obligations issued by private and public corporations. They are typically issued in multiples of 1,000 and/or 5,000. Companies use the funds they raise from selling bonds for a variety of purposes, from building facilities to purchasing equipment to expanding their business.
9. Zero Coupon BondsZero coupon bonds are bonds that do not pay interest during the life of the bonds. Instead, investors buy zero coupon bonds at a deep discount from their face value, which is the amount a bond will be worth when it "matures" or comes due.When a zero coupon bond matures, the investor will receive one lump sum equal to the initial investment plus the imputed interest.
10. Mortgage and Asset Backed Bonds Mortgage-backed securities (MBS) and asset backed securities (ABS) represent the largest segment of the global bond market. In simple terms, investing in MBS means lending the money to hundreds of individual mortgage borrowers across the country. Investors are subject to added "prepayment" risk, meaning money invested may be repaid much sooner than maturity.
11. Fixed rate bondsThese bonds carry a fixed rate of interest for the entire life of the bond.All coupon payments are made at the defined fixed rate till the maturity of the bond. Floating rate bondsThese bonds do not have a fixed coupon rate.Such coupon rate changes as per changes in benchmark.
12. STRIPSSTRIPS is also known as separate trading of registered interest and principal of securities. Issuer separates the interest or coupon payment receivable from a bond and converts these payments into separate securities and are sold to investors.
13. Callable bondsRight with the issuer of the bond to fully or partially redeem the bonds before its maturityPuttable bondsRight with the investors to sell the bonds to the issuer at any time before the actual maturity.
14. Convertible bondsConvertible bonds gives its holder a right to convert the bond into equity shares of the issuer company.Such conversion can be done on maturity or before.Convertible bonds are mixture of debt and equity.
15. BOND RISKSMarket risk Default riskLiquidity risk Call risk Inflation risk Interest rate risk
16. Default risk and credit ratingMeaning of credit rating-Credit rating is a process of determining the ability of an issuer of a bond in meeting obligations under a debt instrument. Thus it is a process that evaluates the ability of an issuer to make coupon payments and repay principal amount to investors. The agency awards a particular credit rating to the bond in a symbolic form to indicate the level of default risk in a particular bond.
17. Factors considered in credit ratingPast performance of issuerBusiness riskManagement riskFinancial risk
18. Credit rating agencies in IndiaCRISIL (Credit Rating Information Services Of India Ltd)ICRA (Investment Information And Credit Rating Agency Of India Ltd)CARE ( Credit Analysis And Research Ltd)BWR(Brickwork Ratings)SMERA (Small And Medium Enterprises Rating Agency Of India)India Rating And Research Pvt Ltd
19. Advantages of credit rating to investorsFacilitates investment decisionSource of informationFacilitates comparison of investment optionsInvestor protection
20. Disadvantages of credit ratingOpinion and not a guaranteeRatings are based on past performanceBiased ratingsMisleading ratingsDifference in ratings of more than agency
21. Estimating bond yieldsYield is a measure of return an investor earns on a bond. Current yieldYield to maturityYield to call
22. Bond market indicesSovereign bod market indicesTotal return indicesPrincipal return indicesDuration based indicesCorporate bond market index
23. Approaches to equity analysisIntroduction to fundamental analysisFundamental analysis is a study of underlying factors that impact securities pricesThe stock prices would depend upon the earning potential of a company which is affected by factors that are internal or external.
24. Characteristic of fundamental analysis Application of EIC frameworkDetermination of intrinsic worthBased on real information
25. Process of fundamental analysisEconomic analysisGDP growth rateInflationInterest ratesSavings and investment growthBudgetary deficitTaxationInfrastructure facilities MonsoonsBusiness conditionsForeign tradeInternational economic factors
26. Industry analysisIndustry type analysisGrowth industryCyclical industryDefensive industryIndustry life cycle analysisPioneering stageGrowth stageStabilization and maturity stageDecline stage
27. Industry growth analysisIndustry cost structureLabour conditionsCompetitionProduct differentiationEconomies of scaleCapital requirementGovernment policy towards industrySubstitution
28. Company analysisCompany managementIntegrity of managementManagerial competenceEncouragement to innovationLevel of professionalismTenure of top executives
29. Company characteristicsPerception about companyBusiness modelMarket positionLabour relation
30. Company financial performanceSales growthProfitability and earnings growthComposition of capitalOperating efficiencyDividend payoutSolvencyCash flow analysis
31. Technical analysisTechnical analysis refers to analysis of share price and volume data to identify profitable equity investment opportunities and make forecast of future price movements.Characteristics of technical analysisBased on historic price and volume dataCharts, patterns and indicators are major toolsDraws conclusion on trends, sentiments and market timingsRelies on multiple tools
32. Tools of technical analysisChartsTrend linesPrice patternstechnical indicators
33. Line chart
34. Bar chart
35.
36. Candlestick chart
37. Upward trend
38. Downward trend
39. Trading range
40. Support and resistance level
41. PRICE PATTERNSHEAD AND SHOULDERS
42. Double top and bottom
43. Price earnings multiple approach to equity valuationPrice earnings multiple establishes relationship between a company’s earnings and market price of the stock. It is the ratio that represents the market value assigned to company’s earnings.PE= market price of company’s shareEarnings per share
44. Interpretation of PE multipleIt is the price that market is ready to pay per rupee of earnings of the company. PE multiple can be compared with the industry PEPE multiple of two stocks in the same industry can be compared.
45. Limitations of PE multiple There is no standard PE ratio for all companiesExtremely high PE can be dangerous and excessive overvaluationPE is dependent on current market price PE cannot be interpreted in isolation
46. Intrinsic valueThe true value of the stock is its intrinsic valueIntrinsic value is inherent which is derived from company fundamentalsIt considers factors that are internal to a company.
47. Price to book value ratioIt is used to compare a stock markets price with its book value.Book value of share indicates the amount of company’s assets available to equity shareholders after all liabilities are paid. PB= market price per share/ book value per shareBook value per share = total assets- total liabilities and intangible assets/ No. of outstanding shares
48. interpretationIf the ratio is high it would mean that market price is more than the book value of share. if the ratio is low it indicates that market has possibly not discovered the true worth of company’s assets