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Sem 5 Prep
← Money & BankingBonds and the Indian bond market

Formulas for this chapter

Current yield

Current yield = Annual coupon payment / Current market price x 100

When you want the cash return at today's price. It ignores the pull back to par, so it is not comparable across premium and discount bonds.

Annual coupon payment
Coupon rate x par value, in rupees
Current market price
Traded price, which may be above or below par

Premium, par and discount rule

YTM > Coupon rate -> discount (price < par) YTM = Coupon rate -> par YTM < Coupon rate -> premium (price > par)

To place a bond without doing any present-value arithmetic. Works in both directions: from price to yield, or from yield to price.

YTM
Yield to maturity, the market's required return
Coupon rate
Contractual rate on par value

Clean and dirty price

Dirty (invoice) price = Clean price + Accrued interest Clean price = Dirty price - Accrued interest

Any trade between coupon dates. Quotes are clean; the money that changes hands is dirty.

Accrued interest
Coupon earned by the seller since the last coupon date but not yet paid

Capital indexed bond

Indexed principal = Par x (1 + index rate)^n Coupon paid = Fixed coupon rate x Indexed principal

Prof. Panda's sixth bond type. The rate is fixed, the principal moves, so both the coupon and the redemption amount rise with inflation.

index rate
Annual movement of the inflation index
n
Number of years the principal has been indexed
Step 3 of 25
The real wordsTheory

The claim he says is wrong

One sentence on his slide is set up to be quoted back at you.

"Generally, stocks are risky, but bonds are not. This is not correct. Bonds too carry risks, but the nature and types of risks may be different."

Prof. Panda's note sharpens the point with a definition: risk is uncertainty, and the risk of a financial asset is mainly a function of the uncertainty of the cash flow available from it. Even a GOI bond that never defaults has an uncertain real cash inflow, because inflation fluctuates.

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