Bond Analytics / Analysis: Presentation By: R.Natarajan

Bond Analytics / Analysis
Presentation By: R.Natarajan

Determinants of Bond’s
• Face Value
Price
• Coupon
• Coupon payment Dates
• Current Date
• Maturity Date
Price of a Bond
• Step –I to determine its cash flow
1.Periodic coupon interest payment up to

maturity
2.Discount coupon cash flows by expected rate
of return
3.Par/ maturity value at maturity
4.Discount maturity cash flow (principal) by
expected rate of return
Bond Price
X= C1/(1+i)1+C2/(1+i)2+………..+Cn/(1+i)n
OR
c   1 
X  1   n 
i   (1  i )  
Price= X+[M/(1+i)n]
Bond Price
• 9% Coupon Bond with
20 years to maturity
with par value Rs 4.50   1 
100/- X 1   40  
• C=Rs4.50 0.06   (1  0.06)  
• 40 semiannual
payments : n=40
• Required return =12%
• i=0.06
• X= 67.71 4.50   1  
X 1   
• M=100/(1.06)40 = 9.72 0.06  10.2857  
• P=77.43
Yield & Price Relationship
• When coupon rate equals required yield: price =
par value
• When price = par value coupon: coupon rate equals
required yield
• Coupon rate > required yield: price >par value

• When price > par value coupon rate >required yield
• Coupon rate < required yield: price< par value

• When price < par value : coupon rate < required
yield
Analysis of Bond Price Change
• Mr. X purchases a 20 year ,9% bond, at Rs
77.43 yielding 12%
• He expects to hold it for four years
• He believes that yield on comparable 16-

year bond then will be 8%
• What happens to the price of the bond after

4 years?
• 16 year Bond yielding
8% four years from
now : price = Rs 108.94
• Present value of 32
coupon payments at 4.50   1 
4% X= Rs 80.43
X 1   32  
0.04   (1  0.04)  
• Present value of
par/maturity value at
4%=
100/3.50805=Rs28.51
• Price change = Rs 31.51
• Entire price change not due to decline
in market yield
• If yield remained at 12% what would
have been the price of the bond at the
end of 4-years?
• Please see the next slide
• Present value of 32
coupons= Rs 63.38
• Present value of par
value= 100/6.4534
=Rs15.50 45   1 
X 1   32  
• Bond price =Rs 78.88 0.06   (1  0.06)  
• Price change due to
time path =
• Rs (78.88-77.43)=
Rs1.45
BOND PRICING THEOREMS
– THEOREM 5: For a given change in YTM,
the percentage price change in case of
bonds of high coupon rate will be smaller
than in case of bonds of low coupon rate,
other things remaining same.
– Ex: Bond A Bond B
– Face value 100 100
– Years to Maturity 4 4
– Coupon 10% 12%
– YTM 10% 10%
– Market Price at YTM of 10% 100 106.34
– Market Price at YTM of 12%
93.97 100.044
– Change in Price
6.03% 5.92%
BOND PRICING THEOREMS
– THEOREM 6: A change in the YTM
affects the bonds with a higher YTM more
than it does the bonds with a lower YTM
– Ex: Bond A Bond B

– Face value 100 100
– Years to Maturity 6 4
– Coupon 12% 12%
– YTM 10% 20%
– Price 108.7 73.4
– Price at YTM of 20% increase
100 63.80
– Change in Price
8% 13%
Coupon rate and Term to
Maturity
• To invest in a bond with minimal interest
rate risk
• A bond with high coupon payments and a
short term to maturity would be optimal.
• ONE who predicts the interest rates to
decline would best potentially capitalize on
a bond with low coupon payments and a
long term to maturity
• These factors would magnify a bond's
price increase.
Bond Risks
• Bonds are low-risk.
• Considered less risky and volatile than common
stocks
• Risk of investing in bonds can be broken down into
two categories:
– Risk 1: Credit Risk
– Risk 2: Market Risk
• Basic source of risk: Impact of interest rate change

after purchase
– Bond price
– Reinvestment rate of return
Interest risk on bonds
• Price risk
• Reinvestment rate risk

Price of Zero Coupon Bond
• No periodic coupon payment
• Price present value of expected cash flow
• Cash flow on maturity
• Price P=M[1/(1+i)n]
- P =price; M= maturity value
- i= periodic interest rate (annual interest/2)

- n= 2xN
- N= Number of years
Classification of Investments
• Held to Maturity (HTM)
• Available for Sale (AFS)
• Held for Trading (HFT)
Available for Sale (AFS)
• Securities of non HTM and non HFT
• Composition between AFS and HFT at
bank’s discretion
• Profit or loss to be taken to P & L account
• Shifting from AFS to HFT with the
approval of BoD / ALCO / Investment
Committee
Available for Sale (AFS)
• MTM valuation at quarterly or more
frequent intervals
• Net depreciation to be provided for and net
appreciation to be ignored
Thank You

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Bond Analytics / Analysis

Presentation By: R.Natarajan

• Coupon payment Dates

1.Periodic coupon interest payment up to

• Coupon rate > required yield: price >par value

• Coupon rate < required yield: price< par value

• He expects to hold it for four years

• He believes that yield on comparable 16-

• What happens to the price of the bond after

– Ex: Bond A Bond B

– Risk 2: Market Risk

• Basic source of risk: Impact of interest rate change

• Reinvestment rate risk

• Price present value of expected cash flow

• Cash flow on maturity

- P =price; M= maturity value

- i= periodic interest rate (annual interest/2)

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