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“Many different maturities of bond prices tend to appreciate in value with falling rates, but the largest

gainers are longer dated bonds, those with more than five years' maturity.”

Statement

APresentation

on

Contents

BONDS The indebted entity (issuer) issues a bond that states the interest rate (coupon) that will be paid and when the loaned funds (bond principal) are to be returned (maturity date).

Interest on bonds is usually paid every six months (semi-annually) or annually.

Type of Bonds

Corporate Bonds Convertible Bonds Callable Bonds Term Bonds Amortized Bonds Adjustment Bonds Junk Bonds Angel Bonds

There are many types of bond available in the market, they all are tradable and non-tradable in secondary market. These are:

Who issue BONDS

BONDS issues byBONDS

issues by

Treasury

Corporate

State Govt

Local GovtLocal Govt

Foreign

Key Factors Of Bonds

INTEREST RATE V/S PRICE Interest rates have adverse effect on prices if the interest rates rise than the prices fall, but if the interest rates fall than the prices rise.

Decrease in value with Raising Rates

Financial Term Today One Year Later ↑

Market Interest Rate 3% 4%

Coupon Rate (semi-annual payments)

3% 3%

Face Value 1,000 1,000

Maturity 10 years 9 years remaining

Price 1,000 925

Yield to Maturity 3% 4%

Higher market interest rates Lower fixed-rate bond prices Higher fixed-rate bond yield

Appreciate in value with falling Rates

Financial Term Today One Year Later ↓

Market Interest Rate 3% 2%

Coupon Rate (semi-annual payments)

3% 3%

Face Value 1,000 1,000

Maturity 10 years 9 years remaining

Price 1,000 1,082

Yield to Maturity 3% 2%

Lower market interest rates Higher fixed-rate bond prices Lower fixed-rate bond yields

Maturity of Bonds

In finance, maturity or maturity date refers to the final paymentdate of a loan or other financial instrument, at which pointthe principal (and all remaining interest) is due to be paid.

Different Maturity bond Appreciate in Bond Value

Illusion :

For two bonds X and Y having Face value of Rs. 1,000, coupon rate of 10% each, years to maturity is 3 and 6 years respectively. If the market rate decrease to 8%.

At 10% coupon Rate :Present Value of bond X (for 3 years maturity) : Rs. 1,000Present Value of bond Y (for 6 years maturity) : Rs. 1,000

At 8% coupon Rate(market) :Present Value of bond X (for 3 years maturity) : Rs. 1,051.55Present Value of bond Y (for 6 years maturity) : Rs. 1,092.47

(This figure is calculated by Present value {PVIF} and Present Value Annuity{PVIFA})

Present Economic Situation

The present macroeconomic situation has tilted the scales in their favour as interest rates appear all set to dip.

In September 2014, the consumer price inflation (CPI) came in at a softer 6.46%, down from 7.7% in the preceding month. RBI decrease the SLR from 22% to 21.5%.

The RBI has shifted its inflation-monitoring benchmark to the CPI, with a target of 6% by January 2016 for this indicator. Signs of lower inflation levels should see a cut in the interest rate sooner or later.

Recommendation in the present environment, investors would do well to add duration to their bond fund holdings. Duration is in essence the exposure of bond funds to longer maturity fixed-income instruments. Lengthening the duration of their holdings in a bond fund improves the prospects of a bond fund, and positions such holdings to benefit from falling rates. So be Patience

Conclusion

Interest rates have adverse effect on prices if the interest rates rise than the prices fall, but if the interest rates fall than the prices rise so when the interest rate fall at their maximum, we can earn extra profit by selling those bonds. Because that time your bond rate are higher than the current rate so they looks very attractive.

We can earn in both short term and long term maturity bond but more in long term.

Biblography

www.sec.gov/investor

www.pimco.com

www.investopedia.com

news.morningstar.com

www.tradingeconomics.com/india

www.aaii.com/investing

The Economic Times ArticleBY : Mr. Nimesh Shah(Managing Director & CEO of ICICI Prudential Mutual Fund)Tags : long-term debt funds|ET Wealthhttp://articles.economictimes.indiatimes.com/2014-11-03/news/55720196_1_interest-rates-yields-policy-rates#

Book which referred :

ACCOUNTING FINANCE FOR BANKARS (2nd EDITION)Macmillan Publishers India ltd. (S.K.Datta, P.S.R. Prasad and S.D. Bargir)

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Thank You

Submitted by : Shilendra Kumar Bhanot