BASIC KNOWLEDGE ABOUT DEBT
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Transcript of BASIC KNOWLEDGE ABOUT DEBT
Copyright Aditya Birla Nuvo Limited 2008 1
Birla Sunlife AMC Welcomes you…
August 2008
Confidential Copyright © Aditya Birla Group
What is Debt ?
Copyright Aditya Birla Nuvo Limited 2008 2
Debt is Borrowing…..
An amount of money borrowed and owed by one party to another.
Features Coupon Principal Tenure
Copyright Aditya Birla Nuvo Limited 2008 3
Fixed Income Security
Example of Dated Security
9.81% GOI 2013
issuerMaturity date
coupon
Copyright Aditya Birla Nuvo Limited 2008 4
Example – Coupon & Yield
Issue Price – 100 Market Price - 102 Coupon – 9 %, Rs.9 Tenure – 10 years Yield – Coupon/Market Price
- 9/102 = 8.82%
Copyright Aditya Birla Nuvo Limited 2008 5
Quiz Time
Example – If a 12.5% bond sells in the market for Rs. 104.50. What is the yield?
Copyright Aditya Birla Nuvo Limited 2008 6
Price and Yield Increase in rates reduces value of existing bonds.
Decrease in rates increases value of existing bonds
Price and yield are inversely related
The relationship between yield and tenor can be plotted as
the yield curve.
Copyright Aditya Birla Nuvo Limited 2008 7
Interest Rates & Debt Fund NAV
Copyright Aditya Birla Nuvo Limited 2008 8
Discuss: What is the present Scenario?
Copyright Aditya Birla Nuvo Limited 2008 9
Debt - Some Perceptions
Copyright Aditya Birla Nuvo Limited 2008 10
Risk in Debt
Why banks have different interest rates on FD’s of 1 year, 3 years & 5 years……
What difference it makes if you lend a person for 1 year, 3 year or 5 years……………
Copyright Aditya Birla Nuvo Limited 2008 11
Risk in Debt
• Default Risk
If you lend a person a sum of 1cr. for 1 year and to another person for 5 years,in which case default risk is higher ?
Would you charge same interest rate in both the cases or different rate…………
Copyright Aditya Birla Nuvo Limited 2008 12
There are two 5 year Corporate Debentures available in the market one of HLL & Second of XYZ Ltd.
Which one you will buy & Why?
Do you think both company’s will have the same coupon rate? If not than Why ?
Copyright Aditya Birla Nuvo Limited 2008 13
Risk in Debt
Reinvestment Risk
If you lend a person at a rate of 8 % for 5 years and in second year of the tenure market rate is 10%………………..
So tenure in an instrument and credibility of the borrower makesa lot of difference to the return on investment in a debt instrument.
Copyright Aditya Birla Nuvo Limited 2008 14
• Interest Rate Risk (Price Risk) For Example: If you have purchased a bond for Rs. 100 with coupon
rate of 8%. In case interest rate in the market goes up to 9% and you have to sell this bond at same time, at what price you will be able to sell………..
• Downgrade Risk Effect on the price of a bond in case of downgrade in the rating of the
company………….
Copyright Aditya Birla Nuvo Limited 2008 15
Duration:
To maximize returns fund managers constantly adjust the duration of the bond portfolio
• If our outlook on interest rates is “bullish” ( we expect interest rates to fall ) duration is extended i.e buy long bonds
• If the outlook is “bearish” (we expect the interest rates to rise ) the duration is reduced i.e sell long bonds and buy short bonds or come into cash.
Copyright Aditya Birla Nuvo Limited 2008 16
The Market …The debt market in India comprises basically three segments, viz.,
1. Government Securities Market, which is oldest and most dominant; 2. PSU Bonds Market, which is basically a development since late eighties;
and 3. Corporate Securities Market, which is growing fast after liberalisation,
especially in the last two years. 4. CDs
Government Securities Market is the most important …1. …the principal segment of our debt market2. … it has a role in setting benchmarks in the financial markets as a
whole. 3. … critical in bringing about an effective and reliable transmission
channel for the use of indirect instruments of monetary control.
Copyright Aditya Birla Nuvo Limited 2008 17
Importance of Money and Debt markets..
Money & Debt Markets fulfill the basic needs of borrowing and lending of the market participants
Borrowers… who are in need of cash Lenders… who have surplus cash
The objective is to lend liquidity into the markets and help in smooth functioning of the markets and the overall financial system of the country
Copyright Aditya Birla Nuvo Limited 2008 18
Borrowers …
Who are the major borrowers? The Government of India is the largest borrower in
the market Corporates
Why does the Central Government Borrow? Financing of gross fiscal deficit Capital expenditure Repayment of external borrowing Servicing of outstanding borrowings
Copyright Aditya Birla Nuvo Limited 2008 19
Who are the Investors?
Banks,
Mutual funds and
Insurance Companies
Why do they invest ?
Surplus money for a certain period/s
Investors…
Copyright Aditya Birla Nuvo Limited 2008 20
Debt Market
Long Term DebtShort Term Debt(One Year or Less)
Dated Government Securities (1 – 30 years) Corporate Bonds/debentures – floating /fixed rate (1 month to 20 years)
(More than one year) Call/Notice Money (1-14 days)
Term Money – FDs (upto 1 year)
Repo (1-14 days)
CBLO (Collateralized Borrowing and Lending Obligations) This is parallel to Call Money Market (1 day to 3 months)
Treasury Bills (91 day and 365 day)
Certificates of Deposits (upto 1 year)
Commercial Paper (upto 1 year)
Copyright Aditya Birla Nuvo Limited 2008 21
Money Market Instruments
Money Market is the financial market where short-term (one year or less)
debt securities are issued and traded.
Typical Money Market instruments available to the investor include treasury
bills (TB's), certificates of deposit (CD's), Commercial Papers,
These debt obligations are much like cash because they are highly liquid.
The Money Market provides financial institutions and large corporations with
quick cash for short-term needs.
Copyright Aditya Birla Nuvo Limited 2008 22
Call Money, Notice Money Dealers Call Money is essentially a money market instrument
wherein funds are borrowed / lent for a tenor of one
day/overnight (excluding Sundays/holidays).
Notice Money is an instrument where the tenor is more than 3
days and less than 15 days.
Interest is calculated on a actual / 365 - day basis.
Participants are banks and Primary (PDs)
Copyright Aditya Birla Nuvo Limited 2008 23
Central Government Securities-Treasury Bills
Short Term Debt Instruments Issued on behalf of Government by RBI. 2 Types 91-day and 364 day. Sold thorough an Auction process according to a Fixed
Auction Calendar.Auctions every Wednesday. Banks and Primary Dealers are major bidders. Non-Competitive bids allowed, allotted at weighted
average yield.
Copyright Aditya Birla Nuvo Limited 2008 24
Commercial Paper
Commercial Papers are unsecured short-term borrowings by
Corporates, FIs etc. having a maturity of 15 days to one year.
They are issued subject to minimum of Rs 5 lakhs and in multiples of Rs.
5 lakh thereafter.
Commercial paper is not usually backed by any form of collateral, so only
firms with high-quality debt ratings will easily find buyers without having to
offer a substantial discount (higher cost) for the debt issue.
Interest is calculated on actual number of days / 365 day year basis.
Copyright Aditya Birla Nuvo Limited 2008 25
Certificate of Deposits
Involve Creation of Paper Predominantly issued by Banks Maturity Minimum Amount Loan Yield driven by Demand and Supply conditions.
Copyright Aditya Birla Nuvo Limited 2008 26
Repo & Reverse Repo
Repo is used by Central Banks with the objective of injecting/withdrawing liquidity into and from the market and also to reduce volatility in short term in particular in call money rates.
For institutions and corporate entities, repos provide a source of inexpensive finance
An active repo market would lead to an increase in
turnover in the money market, thereby improving liquidity and depth of the market.
Copyright Aditya Birla Nuvo Limited 2008 27
PTCs
Pass through certificates (PTCs) pre-dominantly issued by NBFCs at high yields
Underlying loan assets usually represent vehicle loans and home loans
Better cash and yield flow structure Credit enhancement and rating to make the product
attractive Low level of secondary market liquidity
Copyright Aditya Birla Nuvo Limited 2008 28
CBLO
Secured paper created by CCIL based on SGL balances
Available only to NDS participants Overnight to 14 day tenor Rates close to call rates, though participant profile is
different
Mutual funds are large lenders Used by mutual funds for purposes of short term
parking, not for yield Yield driven by liquidity conditions
Copyright Aditya Birla Nuvo Limited 2008 29
How does the government / corporate borrow..
The government /Corporate borrows by issuing Fixed income securities
Copyright Aditya Birla Nuvo Limited 2008 30
Fixed Income Security
Example of Dated Security
9.81% GOI 2013
issuerMaturity date
coupon
Copyright Aditya Birla Nuvo Limited 2008 31
Birla Sun Life Debt Products
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ProductsTime Horizon Short Term(Less than one year) Long Term(More than one year)
Definition Investment is into money market instruments.
Investment is into Govt. Securities, Corporate Bonds etc.
Liquid Short Term Income Gilt
Products Cash Manager
Cash Plus
Liquid Plus
Short Term Fund
FMP’s, FRF’s
Income Plus
Income Fund
Dynamic Bond Fund
Gilt Plus
Objective Short Term Parking of Funds
Short Term Parking of Funds
To generate income and capital appreciation
To generate income and capital appreciation
Time Horizon Very High Liquidity(1-15days)
15 days – 1 year 1Year + 1year +
Taxation DDT – 28.325% DDT – 14.163% DDT – 14.163%, Short Term & Long Term
DDT – 14.163%, Short Term & Long Term
NAV Previous Day Same Day on realization of funds
Same Day Same Day
Copyright Aditya Birla Nuvo Limited 2008 33
Liquid funds
Liquid Plus
Short Term Debt
Gilt Funds
Focused Debt Fund
Diversified Debt Funds
Risk
Return
Risk and Return
Copyright Aditya Birla Nuvo Limited 2008 34
Taxation Taxation Individual Corporate
Dividend Tax Free Tax Free
DDT(Debt)
DDT(Liquid)
12.5%+10%(sur)+ 3% cess = 14.163
25% + 10% + 3% = 28.325%
20% + 10%(sur) + 3% cess = 22.66%
25% + 10% + 3% = 28.325%
Short Term
Capital Gain
30% + 10% + 3%
=33.99%
30% + 10% + 3%
=33.99%
Long Term
Capital Gain
10% without indexation
Or 20% with indexation
Whichever is lower
10% without indexation
Or 20% with indexation
Whichever is lower
Copyright Aditya Birla Nuvo Limited 2008 35
Calculating Capital Gain Tax - An Example
Mr. H Invests Rs.2 lacs in MF units during FY 97-98
• After 2 years, he sells units and gets Rs.2.4 lacs
• His tax liability will be:
CII 99-00 : 389, CII 97-98 : 331 , Ratio : 389/331=1.18
• Indexed Cost (2,00,000 x 1.18) = Rs.2,36,000
• Capital Gains – Rs.4,000
• Long Term Capital Gain tax of Mr. H:
Rs.4,000* 20%=Rs.800 or 10% of Rs. 40,000/- i.e. Rs. 4,000/-
Obviously he will select the option of paying Rs. 800/-
Copyright Aditya Birla Nuvo Limited 2008 36
With Single Indexation
Without Indexation
Individuals Corporates
A Purchase Price 100,000 100,000 100,000 100,000 100,000 B Post Expense Indicative Yield 10.20% 10.20% 10.20% 10.20% 11.00%C Repurchase Price 110,347 110,347 110,347 110,347 111,159D Gain = C-A 10,347 10,347 10,347 10,347 11,159 E Indexed Cost @ 105,709 0 - - -
FLong Term Capital Gain/(Loss) = C-E 4,637 10,347 - - 11,159
G Tax Rate 22.66% 11.33% 14.16% 22.66% 33.99%H Tax 1,051 1,172 1,283 1,911 3,793 I Post Tax Gains = D-H 9,296 9,174 9,063 8,435 7,366
JPost Tax Annualised Returns = (I/A) * no. of years 9.16% 9.05% 8.94% 8.32% 7.26%
BSLFTP Series BI - Growth Option
Illustrative Calculation and Comparison of returns generated by Birla Sun Life Fixed Term Plan Series BI (370 days)
BSLFTP Series BI - Dividend Option
Fixed Deposit
@ Indexation rate has been assumed to be 5.63% based on the cost inflation index numbers for the last 1 FY