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Bond Valuation
• Terms– Par Value (Face value)– Coupon rate– Maturity Date
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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
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Bond Pricing
• Price of a bond
• Current Yield
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Bond Pricing
• Yield to Maturity– Ideal Way is to solve for ‘r’– Short cut approximation:
• Holding Period Return
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Risks in Bonds
• Interest Rate Risk• Inflation Risk• Real Interest Rate Risk• Default Risk• Call Risk• Liquidity Risk• Reinvestment Risk• Foreign Exchange Risk
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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
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Mutual Funds
• Organisation Structure– Sponsor– Mutual Fund Trust– Trustee– AMC– Custodian– Registrars & Transfer Agents
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Scheme TypesEquity
Diversified IndexSectoralTax Planning
DebtGiltMixed DebtFloating RateCash
HybridEquity OrientedDebt OrientedVariable Asset Allocation
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Types
• Open Ended• Closed Ended– Exchange traded
• Real Estate Investment Trusts (REIT)
• Regulations
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Calculating NAV
• NAV = (Market value of investment + Receivables + Accrued Income – Liabilities – Accrued Expenses) / Number of units outstanding
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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
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Futures
• Equity• Index• Interest rate• Foreign Exchange• Commodities
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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
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• 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)
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