Investment management

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Investment Management

Session 4


Bond Valuation

• Terms– Par Value (Face value)– Coupon rate– Maturity Date


Bond Types

• Types– Government Bonds– Corporate Bonds

• Straight Bonds• Zero Coupon Bonds (Deep Discount Bonds)• Floating Rate Bonds• Bonds with Embedded Options

– Convertible Bonds– Callable Bonds– Puttable Bonds

• Commodity Linked Bonds


Bond Pricing

• Price of a bond

• Current Yield


Bond Pricing

• Yield to Maturity– Ideal Way is to solve for ‘r’– Short cut approximation:

• Holding Period Return


Risks in Bonds

• Interest Rate Risk• Inflation Risk• Real Interest Rate Risk• Default Risk• Call Risk• Liquidity Risk• Reinvestment Risk• Foreign Exchange Risk


Duration & Immunisation

• Duration - Weighted Average life of bond which considers the size and timing of each cash flow.

• Immunisation – Matching Price risk & Reinvestment risk– Match the investment period with the duration


Mutual Funds

• Organisation Structure– Sponsor– Mutual Fund Trust– Trustee– AMC– Custodian– Registrars & Transfer Agents


Scheme TypesEquity

Diversified IndexSectoralTax Planning

DebtGiltMixed DebtFloating RateCash

HybridEquity OrientedDebt OrientedVariable Asset Allocation


Types

• Open Ended• Closed Ended– Exchange traded

• Real Estate Investment Trusts (REIT)

• Regulations


Calculating NAV

• NAV = (Market value of investment + Receivables + Accrued Income – Liabilities – Accrued Expenses) / Number of units outstanding


Derivatives – Forwards & Futures

• An Agreement to buy or sell at a predetermined price at a future date.

• Forward Vs Future

• Futures– Clearing House– Margins– Mark-to-market– Price limits


Futures

• Equity• Index• Interest rate• Foreign Exchange• Commodities


Derivatives – Options Right to buy or sell something without the obligation.

Call (option to buy) or Put (option to sell)

Exercise Price or Strike price or Striking price

Expiration or Maturity Date

European Option and American Option

Exchange traded or Over-The-Counter


• State of the Option– In the money– At the money– Out of the money

• Intrinsic Value = (Value of the option if it were to expire immediately)

• Time Value of the Option = (Market price of the option [premium] – Intrinsic value)

Investment management

Economy & Finance

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