WELCOME Back after the

Break …

… A GREAT DAY OF
LEARNING!
A message for us…
Then, imagine how will you react to
it?

Please do not do
that. Love
opening books!
Let’s Start our session…

… with something interesting!

Now, something which people may
not believe…
 Is it possible that …

You take a loan from a bank and …

… instead of paying interest to the bank

you are getting interest from the bank!
This family
got the
mortgage
from a bank
and the bank
is paying
interest to
the family.
Theoretically, it is not possible to have NEGATIVE
INTEREST RATES!
This is all because of the fact that some economies in
the World are having negative interest rates.
But, the basic issue is …WHY PEOPLE invest to get
negative yield?
Main countries in which we have negative
interest rates…
• Switzerland 10 Y
Country Government Date
• Germany Bond Yield
• Netherlands Switzerland -0.406% 12-Aug-21
• Denmark Germany -0.458% 12-Aug-21
Netherlands -0.335% 12-Aug-21
• Austria Denmark -0.130% 12-Aug-21
• Belgium Austria -0.233% 12-Aug-21
• France Belgium -0.139% 12-Aug-21
France -0.125% 12-Aug-21
• Ireland Ireland -0.076% 12-Aug-21
https://countryeconomy.com/bonds
No. of countries with Negative
Yields in the World is reduced.
ET-02-08-2019
Negative Yielding Securities start rising.
What NEXT?
Let’s have a quick view of what we
have discussed in the previous
class…
We said that Bonds are evaluated in terms of
Risk and Return.

• We started discussing about return.

RETURNS ON BONDS HAVE
DIFFERENT MEANINGS...
• Returns may be …
– REALIZED OR EX-POST RETURN
– EXPECTED OR EX-ANTE RETURN
– HOLDING PERIOD RETURN
– YIELD TO MATURITY
– SIMPLE YIELD TO MATURITY
– YIELD TO CALL
– CURRENT YIELD
– AFTER TAX OR BEFORE TAX RETURN
– NOMINAL OR REAL (INFLATION ADJUSTED) RETURN
Return on a bond is
understood in the
sense of YIELD TO
MATURITY ...
YIELD TO MATURITY ...
• Return on a security (YTM) is that
discount rate which makes the present
value of future cash inflows from a bond
equal to the present price of a bond over
its maturity period.
c1 c2 c n  RV
P    ... 
(1  r )1 (1  r )2 (1  r )n
where
P price of bond
ci coupon of ith period
RV redemption value
r discount rate or YTM
Remember that…

• YTM is similar to INTERNAL RATE OF

RETURN (IRR) and therefore, is based

on the assumption that reinvestment

rate will be same throughout and will

be equal to YTM itself.

• Yield on a T-Bill is calculated as –

Par Value - Market Price 365

Yield-to-Maturity on T-Bills = 
Market Price Actual Days
What goes into the making of YTM?
C
A
P
I
T

EN
A
CO L

STM
G

E
A

OM
UP

N VE
T
I

INC
N
ON

R EI
S
Once we know how much
YTM is to be earned on a
bond, then next question
arises is - “what price one
should pay for it?”
How to value a bond?
• Why does a person pay for bond?
• Because it gives future stream of
cashflows.

• Therefore, the value of a bond should be equal

to present
c1 value ofcfuture cashflows.
c n  RV
P   2
 ... 
(1  r )1 (1  r )2 (1  r )n
where
P price of bond
ci coupon of ith period
RV redemption value
r discount rate or YTM
We can calculate PRICE of a bond
using the following formula …

C 1  1
PRICE  1  n
 FV  n
Y  (1  Y)  (1  Y)
• It shows that the price of a bond is
nothing but the weighted average of
C/Y and FV where the weighted are
1/(1+Y)n and (1+Y)n.
Looking forward to JUMP
into …?
Now, we try to learn ‘Real Life’
practices in the bond market.
Learning some concepts

and practices prevailing in

the Indian Bond Market!

Learning about Days
Conventions used in the
Bond Market
Concept of Broken Period…

• In case of a transaction in bonds occurring

between two interest payment dates, then
the period between last interest payment
date to settlement date is considered as
Broken Period.
Day count convention…1

• In Bond/Capital market, the day count

convention followed is 30/360, which means
that irrespective of the actual number of
days in a month, the number of days in a
month is taken as 30 and the number of
days in a year is taken as 360.
Day count convention…2
• In Money market, the day count convention
followed is actual/365, which means that the
actual number of days in a month is taken for
number of days (numerator) whereas the number
of days in a year is taken as 365 days. Hence, in
the case of T-Bills, which are essentially money
market instruments, money market convention is
followed.
Day Count Convention and EXCEL
…
• EXCEL has the following two in-built functions:
– DAYS(end_date, start_date)
– DAYS360(start_date, end_date, method)
• Method may be US(NASD) when false or 0 or omitted; and may be
European when true or 1.
• US(NASD) method. when the start date is the last day of the month, it
is set to the 30th day of the same month. When the end date is the last
day of the month (31), and the start date < 30, the end date is set to
the 1st of the next month, otherwise the end date is set to the 30th of
the same month.

TRUE - European method. Starting dates and ending dates equal to the
31st of a month are set to the 30th of the same month.
 Time to
practice our
Learning
Practice Question#1
• A person purchased a bond from the bond
market on March 15, 2024. The bond has a
face value of Rs. 1,000, a Coupon 10% paid
half-yearly and has a maturity of 10 years.
Coupons are paid on January 1 and July 1 of
each year.

Calculate the interest (accrued interest)

that the buyer has to pay to the seller for the
broken period.
Practice Question#2
• A person purchased a bond from the bond
market on August 6, 2024. The bond has a
face value of Rs. 1,000, a Coupon 8.50%
paid annually and has a maturity of 8 years.
Coupons are paid on January 1 each year.

Calculate the interest (accrued interest)

that the buyer has to pay to the seller for the
broken period.
Learning about Price
Conventions used in the
Bond Market
Price Convention…
• Clean Price: it is the price of the Bond
excluding Accrued interest.
– The trading in the Wholesale Debt market takes
place at this price.

• Dirty Price: it is the price of the bond

including Accrued interest.
– The trading in the Retail Debt Segment takes
place at this price and it keeps on fluctuating
during the day.
RBI Kaya Kahta hai.(RBI कया कहता
है!)
Learning about Types of
Debt Segments used in
the Bond Market
Debt Market in India
• Both – BSE and NSE have debt segments.

• One for retail – RDM – Retail Debt Market

• Another for wholesale – WDM – Wholesale

Debt market

• Normally, corporate bonds are traded in

RDM while G-Sec in WDM.
What do regulations say about
Clean and Dirty Prices?
Time to apply our learning…
Let’s take an example of a bond…
Your comment on the highlighted
bond

How do we calculate
yield in such a case?
Details of the bond of Jana Small
Finance Bank Limited

Goto
EXCEL
Let’s take another example…

Why bond is trading at par? Interest

payment on it is Quarterly.
Let’s take another example…

How can we calculate YTM of the

highlighted bond?
Goto
EXCEL
Details
Calculation of YTM on a T. Bill
As per the RBI, we calculate yield
on T-Bills as -

Go to
EXCEL
Any question before we go
ahead?
VALUATION OF BOND …
(continued…)

• From the equation given,

we can say that

P = f (C, r, n).
Having understood
Having understood the
the basics,
basics, we
we have
have
learn and
learn and appreciate
appreciate the
the Dynamics
Dynamics of
of
Bonds!!!!
Bonds!!!!
 MALKIEL’S BOND
THEOREMS
Whatever, we discussed can be summarized largely in
terms of …
FUNDAMENTAL THEOREMS OF BOND
PRICES
[MALKIEL’S BOND THEOREMS]

• Theorem #1: Bonds prices move inversely to

bonds YTM.

• Theorem #2: If all other factors are held

constant, a bond’s interest rate risk increases
with the length of time remaining until it
matures.

• Theorem #3: A bond’s interest rate risk

increases at a diminishing rate as the time
remaining until its maturity increases.
FUNDAMENTAL THEOREMS OF BOND
PRICES
[MALKIEL’S BOND THEOREMS] (continued)

• Theorem #4: The price change that

results from an equal-sized increase or
decrease in a bond’s YTM is asymmetrical.
More specifically, for any given maturity,
a decrease in yields causes a price rise
that is larger than the price loss that
results from an equal increase in yields.

• Theorem #5: A bond’s interest risk varies

inversely with its coupon rate.
 That’s all we want to
discuss today.
Any Question before we
proceed further?
THANK YOU