Financial Institutions and Markets

Prof. Manisha Sanghvi

Examination Final Examination Mid Term Examination Presentation Attendance / Class Participation Total

Marks 60 20 10 10 100

Course Contents 
Introduction to Financial markets and Institutions  Bond Market  Money Market  Capital Market  Mutual Funds  Foreign Exchange  Investment Banking  Commercial Banking

Indian Financial System 
The economic development of a nation is reflected by the progress of

the various economic units, broadly classified into corporate sector, government and household sector. While performing their activities these units will be placed in a surplus/deficit/balanced budgetary situations.  There are areas or people with surplus funds and there are those with a deficit. A financial system or financial sector functions as an intermediary and facilitates the flow of funds from the areas of surplus to the areas of deficit. A Financial System is a composition of various institutions, markets, regulations and laws, practices, money manager, analysts, transactions and claims and liabilities.

and liabilities in the economy. practices. Indian financial system consists of financial market. The financial system is concerned about money. These are briefly discussed below . agents. The word "system". financial instruments and financial intermediation. credit and finance-the three terms are intimately related yet are somewhat different from each other. in the term "financial system". markets. implies a set of complex and closely connected or interlined institutions. Financial System. transactions. claims.

Financial Institutions  Includes institutions and mechanisms which    Affect generation of savings by the community Mobilisation of savings Effective distribution of savings  Institutions are banks.promote/mobilise savings  Individual investors. industrial and trading companies. mutual funds.borrowers . insurance companies.

etc. chit funds.) Capital markets (Long term instrument) Primary Issues Market Stock Market Bond Market       The most important distinction between the two???? .  Classification     Money market (Short term instrument) Organized (Banks) Unorganized (money lenders.Financial market  Defined as the market in which financial assets are created or transferred  These assets represent a claim to the payment of a sum of money sometime in the future and/or periodic payment in the form of interest or dividend.

In return for lending money to the borrower. Typically a borrower issues a receipt to the lender promising to pay back the capital. bonds and warrants.  . the lender will expect some compensation in the form of interest or dividends. directly between buyers and sellers etc. These receipts are securities which may be freely bought or sold.Financial markets facilitate:    The raising of capital The transfer of risk International trade They are used to match those who want capital to those who have it. The coming together of buyers and sellers to trade financial products. Financial markets could mean:  Organizations that facilitate the trade in financial products. stocks and shares are traded between buyers and sellers in a number of ways including: the use of stock exchanges. Stock exchanges facilitate the trade in stocks. i. i.e.e.

Financial Markets  OTC  Auction Market  Organized Market  Intermediation financial market .

Bond markets.Types of Financial markets  Capital markets   Stock markets. . and enable the subsequent trading thereof.    Commodity markets Money markets  which provide short term debt financing and investment. which provide financing through the issuance of shares or common stock. which provide financing through the issuance of Bonds. which provide instruments for the management of financial risk. and enable the subsequent trading thereof.    Derivatives markets  Futures Forward Options .

FIs and NBFCs purvey short. Secondary markets allow investors to sell securities that they hold or buy existing securities. medium and long-term loans to corporate and individuals. Newly formed (issued) securities are bought or sold in primary markets.  Insurance markets which facilitate the redistribution of various risks. Foreign exchange markets   which facilitate the trading of foreign exchange. Credit market   where banks. . The capital markets consist of primary markets and secondary markets.

matching is made easier  Lower search costs: Since all trading parties converge to the  Provides liquidity: investors can sell assets prior to maturity on secondary markets to satisfy their time preference for consumption and diversification needs. .Purpose of Financial Markets Purpose:  To facilitate the transfer of funds between borrowers and lenders  Trade TIME & RISK  Price discovery: Trading on secondary markets provides public information on asset prices (market price = last traded price of an asset) same location.

Net Savers  Financial Institutions -Borrowers and Savers  Government (Federal/State/Local) .Net Borrowers  Households (Individuals/Consumers).FM Participants  Firms .

Money Market  Main Function ‡To channelize savings into short term productive investments like working capital .  Instruments in Money Market ‡Call money market ‡Treasury bills market ‡Markets for commercial paper ‡Certificate of deposits ‡Bills of Exchange ‡Money market mutual funds ‡Promissory Note .

Provided resources needed by medium and large Purpose for these resources  Expansion  Capacity Expansion  Investments  Mergers and Acquisitions Deals in long term instruments and sources of funds .Capital Markets scale industries.

 . Provides opportunities to various class of individuals and entities.Main Activity  Functioning as an institutional mechanism to channelize funds from those who save to those who needed for productive purpose.

People who apply for these securities are: a)High networth individual b)Retail investors c)Employees d)Financial Institutions e)Mutual Fund Houses f)Banks Secondary Markets The place where such securities are traded by these investors is known as the secondary market. Equity shares are tradable through a private broker or a brokerage house.Primary Markets When companies need financial resources for its expansion. .MF·s etc One time activity by the company. Securities that are traded are traded by the retail investors. Helps in mobilising the funds for the investors in the short run. Securities like Preference Shares and Debentures cannot be traded in the secondary market. Securities issued a)Preference Shares b)Equity Shares c)Debentures Equity shares is issued by the under writers and merchant bankers on behalf of the company.FI·s. they borrow money from investors through issue of securities.

The Indian Capital Market  Market for long-term capital. financial institutions. etc. corporates.  Can be classified into:   Gilt-edged market Industrial securities market (new issues and stock market) . banks. Demand comes from the industrial. service sector and government  Supply comes from individuals.

Major Reforms in Indian Capital Market  Setting up of SEBI  Introduction of free pricing in the primary capital market and abolition of      capital control Standardization of disclosures in public issue Permission to FIIs to operate in the Indian capital market. intra-day trading limit. Modernisation of trading infrastructure ± on-line screen based electronic trading system Shift from account period settlement to (14 days) to rolling settlement (T+2) Safety and Integrity Measures ± margining system. exposure limit and setting up of trade/settlement guarantee fund Clearing of transactions through the clearing house .

 Dematerialization of securities ±Two depositories in the country  Reconstitution of Governing Boards of Stock Exchanges  Introduction of trading in equity derivative products  Indian corporate allowed to access  International capital markets through     American Depository Receipts Global Depository Receipts Foreign Currency Convertible Bonds External Commercial Borrowings .

Auditors  Market makers & dealers: Brokers. Rating agencies. Savings and Loan  Non Depository: Investment companies (mutual funds). Credit Unions. LIC housing finance. IDBI  Government Sponsored Enterprises (GSE)  Information collectors: Analysts. Specialist firms . Pension funds. They are frequently referred to as Financial Intermediaries (ie.Financial Institutions Specialize in market activities that help facilitate the  Transfer of funds between borrowers and lenders. act in the capacity as a go-between when financial markets are insufficient by themselves) Types of Financial Institutions:  Depository: Commercial Banks. Thrifts. Insurance  Finance companies: Corporations that have financial arms such as.

Bond Market Session 2 .

Let's say that you have a Rs 1.000) 60.00 Year 1 (6% interest on 1.00 . Total principal and interest (at maturity date of 5 years) 1.000) 60. you ll collect five interest payments of Rs 60 for a total of Rs 300.00 Year 2 (6% interest on 1.00 Year 5 (6% interest on 1.000) 60.00 Year 3 (6% interest on 1.00 Principal amount Rs 1000. If you hold that bond until the very end of this term (known as the maturity date).Making money: Interest and capital gains There are two ways to make money from a bond either by earning interest or capital gains.000) 60.00 Year 4 (6% interest on 1.000) 60.000 bond that pays 6% interest for five years.300.

In that case you d earn a capital gain of $100 (plus whatever interest payments you had received in the meantime). why would someone pay you $1.You could also decide to sell that bond to someone else for $1.100.100 for a bond that only cost you $1. Now.000? .

Since you bought that bond. if interest rates have gone up. . Similar companies are now only offering a 5% interest rate on their bonds. Your original rate looks pretty good to another investor. are like a see-saw when interest rates go down. interest rates have gone down. and similar companies are now offering 8%. however. ‡Interest rates and bond prices.000 bond pays 6% interest. you may have to sell your bond for less which is known as selling at a discount. then. bond prices go up (and vice versa). which is called selling for a premium. So you can sell that 6% bond at a higher cost than you paid for it.Selling bonds ‡Your $1. ‡However.

Bond Issuers  Government Bonds  Municipal Bonds  Corporate Bonds  International Bonds    Eurobond Foreign bonds Global Bonds .

face value.  It is also known as the principal.U. federal agency or other entity known as the issuer.  It is important to remember that bonds are not always sold at par value.O.  . you are lending money to a government.  Par Value  It is the value stated on the face of the bond.  Par value will vary depending on the type of bond. or par value. sometimes it can be Rs 1000.  It represents the amount the firm borrows and promises to repay at the time of the maturity. the bond will have to be sold below par value (at a "discount").Bonds terminology  Issuer A bond is a debt security. the price will be higher. If interest rates are higher than the coupon rate on a bond. corporation. If interest rates have fallen. municipality. Most corporate bonds have a Rs 100 face value. When you purchase a bond. similar to an I. a bond's price fluctuates with interest rates. In the secondary market.

 . It is also called term-to-maturity. Medium-term notes/bonds: maturities of five to 12 years. Short-term notes: maturities of up to 4 years. the issuer is no longer obligated to make interest payments. Shorter term bonds are more stable and. There are some circumstances where a bond will be "called" before maturity. bonds with long-term maturities will be more sensitive to changes in interest rates. because you are more likely to hold it to maturity. The bonds of different maturities will behave somewhat differently. are more predictable. Long-term bonds: maturities of 12 or more years. Maturities range significantly. Maturity    Maturity is the length of time before the principal is returned on a bond. For example. At the time of maturity. from 1 year to 40+ years for some corporate bonds.

The coupon is set when the bond is issued and is usually expressed as an annual percentage of the par value of the bond. . these are called zero-coupon bonds . For example. If there is a 5% coupon on a Rs 1000 face value bond. Coupon       The coupon rate is the interest rate that is paid out to the bond holder. If two bonds with equal maturities and face values pay out different coupons. There are some bonds that do not pay out any coupons. Payments usually occur every six months. but this can vary. the prices of these bonds will behave differently in the secondary market. in which bond holders would need to send in coupons in order to receive payment. The name derives from the old system of payment. the bond with a lower coupon rate will be less expensive because the bondholder is going to be getting more of his/her return from the return of principal at maturity than will the holder of a bond with a higher coupon. the bondholder will receive Rs 50 every year.

Caa Ca. economic and debt characteristics. C Standard and Poor's AAA AA A BBB BB B. Credit Ratings Credit Risk Prime Excellent Upper Medium Lower Medium Speculative Very Speculative efault Moody's Aaa Aa A Baa Ba B. CCC. CC. CCC. . . C .CREDIT RATINGS  Each of the agencies assigns its ratings based on an in-depth analysis of the issuer's financial condition and management. and the specific revenue sources securing the bond. CC Fitch AAA AA A BBB BB B.

The issue price of Zero Coupon Bonds is inversely related to their maturity period. No interest (coupon) is paid to the holders and hence.e. The difference between issue price (discounted price) and redeemable price (face value) itself acts as interest to holders. Classification on the basis of Variability of Coupon  Zero Coupon Bonds   Zero Coupon Bonds are issued at a discount to their face value and at the time of maturity. i.Types of Bonds I. the principal/face value is repaid to the holders. . longer the maturity period lesser would be the issue price and vice-versa. These types of bonds are also known as Deep Discount Bonds. there are no cash inflows in zero coupon bonds.

Instead. This means that if the benchmark rate was set at ³X´ %. Such types of bonds are referred to as Floating Rate Bonds. The coupon for this bond used to be reset half-yearly on a 50 basis point mark-up. .Floating Rate Bonds  In some bonds. The maturity period of this floating rate bond from IDBI was 5 years. For better understanding let us consider an example of one such bond from IDBI in 1997. the coupon rate keeps fluctuating from time to time.50)´ %. with reference to the 10 year yield on Central Government securities (as the benchmark). fixed coupon rate to be provided to the holders is not specified. with reference to a benchmark rate. then coupon for IDBI¶s floating rate bond was set at ³(X + 0.

For example. a cap (or a ceiling) feature signifies the maximum coupon that the bonds issuer will pay (irrespective of the benchmark rate). These bonds are also known as Range Notes.50% (which ensured that bond holders received a minimum of 13. Coupon rates of some bonds may even move in an opposite direction to benchmark rates. this feature was present in the same case of IDBI¶s floating rate bond wherein there was a floor of 13. More frequently used in the housing loan markets where coupon rates are reset at longer time intervals (after one year or more).50% irrespective of the benchmark rate). these are well known as Variable Rate Bonds and Adjustable Rate Bonds. On the other hand.  Coupon rate in some of these bonds also have floors and caps. These bonds are known as Inverse Floaters and are common in .

 Payable at Maturity  Receive no payments until maturity and at that time you receive principal plus the total interest earned compounded semi-annually at the initial interest rate. Fixed  Stays same until maturity. . ie: buy a Rs 1000 bond with 8% fixed interest rate and you will receive Rs 80 every year until maturity and at maturity you will receive the Rs 1000 back.

These options are present in the bond from the time of original bond issue and are known as embedded options. The issuer may redeem a bond fully or partly before the actual maturity date. and when the interest rates are rising it is helpful for the holders.II. This embedded option helps issuer to reduce the costs when interest rates are falling. Classification on the Basis of Variability of Maturity  Callable Bonds   The issuer of a callable bond has the right (but not the obligation) to change the tenor of a bond (call option). .

an increase in the interest rates poses additional risk to the issuer of bonds with put option (which are redeemed at par) as he will have to lower the re-issue price of the bond to attract investors. In riding interest rate scenario. Puttable Bonds    The holder of a puttable bond has the right (but not an obligation) to seek redemption (sell) from the issuer at any time before the maturity date. Therefore. Consequently. . the bond holder may sell a bond with low coupon rate and switch over to a bond that offers higher coupon rate. the issuer will have to resell these bonds at lower prices to investors.

 Convertible Bonds   

The holder of a convertible bond has the option to convert the bond into equity (in the same value as of the bond) of the issuing firm (borrowing firm) on pre-specified terms. This results in an automatic redemption of the bond before the maturity date. The conversion ratio (number of equity of shares in lieu of a convertible bond) and the conversion price (determined at the time of conversion) are pre-specified at the time of bonds issue. Convertible bonds may be fully or partly convertible. For the part of the convertible bond which is redeemed, the investor receives equity shares and the non-converted part remains as a bond.

III. Classification on the basis of Principal Repayment 
Amortizing Bonds  

Amortizing Bonds are those types of bonds in which the borrower (issuer) repays the principal along with the coupon over the life of the bond. The amortizing schedule (repayment of principal) is prepared in such a manner that whole of the principle is repaid by the maturity date of the bond and the last payment is done on the maturity date. For example - auto loans, home loans, consumer loans, etc.

Debt Instruments
Type Central Government Securities Typical Features Medium long term bonds issued by RBI on behalf of GOI. Coupon payment are semi annually Medium long term bonds issued by RBI on behalf of state govt. Coupon payment are semi annually Medium long term bonds issued by govt agencies and guaranteed by central or state govt. Coupon payment are semi annually State Government Securities

Government Guaranteed Bonds

PSU Corporate

Medium long term bonds issued by PSU. 51% govt equity stake Short - Medium term bonds issued by private companies. Coupon payment are semi annually

Risk Associated with Investing in Bonds 
Interest Rate Risk  The price of the bond will change in the opposite direction from the change in interest rate. As interst rate rises the bond price decreases and vice versa.  If an investor has to sell a bond prior to the maturity date, it means the realisation of capital loss.  This risk depends on the type of the bond; callable puttable etc????  Reinvestment Income or Reinvestment Risk  The additional income from such reinvestment called interest on interest, depends on the prevailing interest rate levels at the time of reinvestment.

capital appreciation will reduce.  Yield = market yield + risk associated with credit risk . interest rate drop. Call Risk  The issuer usually retains this right in order to have flexibility to refinance the bond in the future is market interest rate drops below the coupon rate  Disadvantage for investors for callable bond: cash flow pattern not known with certainty.  Credit Risk  If the issuer of a bond will fail to satisfy the terms of the obligation with respect to the timely payment of interest and repayment of the amount borrowed.

 Inflation Risk   Purchasing power risk arises because of the variation in the value of cash flow from the security due to inflation. Eg: US treasury bond  Exchange Rate Risk  . Eg: ??? Risk associated with the currency value for nonrupee denominated bonds.

 For investors keeping till maturity.  Avoid securities in which knowledge is less.  Volatility Risk  Value of bond will increase when expected interest rate volatility increases.  Market to market should be calculated portfolio value. this is uminportant. . Liquidity Risk  Its depends on the size of the spread between bid and ask price quoted.  Risk Risk  Natural uncertainty. Wider the spread is risky.

Time value of Money  Present value of money PV = Pn 1 (1+r)n .

PV = 1 1A (1+r)n r .Present value of an Ordinary Annuity  When the same amount of rupees is received each year or paid each year is referred to as an annuity.  When the first payment is received one period from now is called as an ordinary annuity.

48 . PV = 1 1100 (1.09)8 0.Question  Suppose that an investor expects to receive Rs 100 at the end of each year for the next eight year. Interest rate 9%  When the first payment is received one period from now is called as an ordinary annuity.09 100 [5.534811] = Rs 533.

or at Par . Discount.Bond Pricing  Reason ±   Indicate the yield received Should the bond be purchased  Priced at ± Premium.

ordinary annuity n = number of payments i = interest rate.Calculating Bond Price  Sum of the present values of all expected coupon payments plus the present value of the par value at maturity. or required yield M = value at maturity. C = coupon payment. or par value .


Session 3 Yield YTM Duration .

Lets suppose the yield on this bond is 11%. . The cash flows for this bond are as follows:   40 semi anually coupon payment of Rs 50 Rs 1000 to be received 40 six month period from now.Question 1  Calculate the Bond price for a 20 year 10% coupon bond with a par value of Rs 1000.

055)40  Rs 50 1.31 + 117.77 Rs 100 8.055 1000 + + (1.46 = Rs 919.0.055 = Rs 802.Solution 50 1- 1 (1.117463 0.055)40 0.51332 .

8%. The cash flows for this bond are as follows:   40 semi anually coupon payment of Rs 50 Rs 1000 to be received 40 six month period from now. . Lets suppose the yield on this bond is 6.Question 2  Calculate the Bond price for a 20 year 10% coupon bond with a par value of Rs 1000.

51 + 262.04 .034 1000 + (1.034)40 = Rs 1084.347.53 = Rs 1.Solution 50 1- 1 (1.034)40 0.

 Calculate the Bond price for a 20 year 10% coupon bond with a par value of Rs 1000. Ans Rs 1000  . The cash flows for this bond are as follows: 40 semi anually coupon payment of Rs 50  Rs 1000 to be received 40 six month period from now. Lets suppose the yield on this bond is 10%.

 When yield decreases ??????  This is how bond price falls below its par value. the resulting lack of demand would cause the price to fall.Price Yield Relationship  When yield increases. investor would not buy the issue because it offers a below market yield.  When bond sells below its par value. it is said to be selling at a discount .

 Coupon rate is less than the required yield Price is less than the par ( Discount Bond)  Coupon rate is equal to the required yield Price is equal to the par  Coupon rate is more than the required yield Price is more than the par ( premium Bond) .

the present value of cash flow increases.  As the required yield decreases. hence the price decreases. A fundamental property of a bond is that its price changes in the opposite direction from the change in the required yield  As the required yield increases. the present value of cash flow decreases. hence the price .

price yield .

Premium and Discount Bonds .

?   Determine the Number of Periods Determine the Yield .. has a par value of $1.000 and required yield of 6%... Because of this. the present value of annuity formula is unnecessary.Pricing Zero-Coupon Bonds  No coupon payment until maturity.  Calculate the price of a zero-coupon bond that is maturing in 5 years.

Determining Interest Accrued  Accrued interest is the fraction of coupon payment that the bond seller earns for holding the bond for a period of time between bond payments   The amount that the buyer pays the seller is the agreed upon the price plus accrued interest. This is referred as a Dirty bond prices The price of a bond without accrued interest is called the Clean bond prices .

What is the interest accrued on the bond? .000 and 7% coupon paid semi-annually. 2003. X is selling a corporate bond with a face value of $1. is expected on June 30. 2003.Eg: On March 1. The next coupon payment after March 1. 2003.

Bond Basics  Two basic yield measures for a bond are its coupon rate and its current yield. ou on rate ! nnual cou on ar alue nnual c pon pric urr nt i l ! 10-64 .

Yield  Yield is the return you actually earn on the bond--based on the price you paid and the interest payment you receive  Two Types of Yields:   Current Yield: annual return on the dollar amount paid for the bond and is derived by dividing the bond's interest payment by its purchase price Yield To Maturity: total return you will receive by holding the bond until it matures or is called. .

Current yield: Annual coupon receipts/ Market price of the bond It does not consider:    Time value of money Complete series of future cash flow  It compares a pre-specified coupon with the current market price. . it is called as current yield.Yield 1.

40 Current yield = Rs 70 Rs769.40 = 9.Example  The current yield for a 15 years 7% coupon bond with a par value of Rs 1000. selling for Rs 769.10% .

the YTM of a bond is that rate which equates the discounted value of the future cash flows to the present price of the bond.Yield to Maturity  Given a pre-specified set of cash flows and a price. .

The yield to maturity is the discount rate estimated mathematically that equals the cash flow of payment of interest and principal received with the purchasing price of the bond. . It is the most accurate measure of interest rates. This term is also referred to as internal rate of return or as the expected rate of return of the bond and it is the yield in which most bond investors are interested in. The yield to maturity is the annual return annual rate (discounted) earned over a bond kept until maturity.YTM  Yield to maturity (YTM) is the interest rate (i) that equates the     present value of cash flow payments received from a debt instrument with its value today.

of years left to maturity M = Maturity value Y = yield to maturity .YTM P= n C t=1 + M (1+y)n (1+y)n P= Price of the bond C = coupon payment N = No.

The bond matures in 30 months and pays a semi-annual coupon of 5%.Yield of Bond Eg: You hold a bond whose par value is $100 but has a current yield of 5.92. .21% because the bond is priced at $95.

 To compute the YTM requires a trial and error method . the cash flows are those that the investor would realized by holding the bond till maturity.  YTM is calculated same way as IRR. The yield is the interest rate that will make the present value of cash flow equals to the bond price.

. Lets suppose the bond price is Rs 769.Example  Calculate the YTM for a 15 years 7% coupon bond with a par value of Rs 1000.42. The cash flows for this bond are as follows:   30 semi anually coupon payment of Rs 35 Rs 1000 to be received 30 six month period from now.

42 = Rs 35 1 130 (1+y) y 1000 + 1 30 (1+y) .769.

 Trial and error method Annual Interest rate 9% 9.5% 10% 11.45 200.49 709.24 769.38 215.04 508.32 .71 538.68 PV of Rs 1000 30 periods from now 267 248.5 % 11 % PV of 30 payments of Rs 35 570.64 PV of cash flows 837.42 738.11 802.11 553.53 231.04 532.

10% semiannual coupon bond.Would you prefer to buy a 10-year. so you would prefer the semiannual bond.25% > 10% (the annual bond¶s effective rate).25% mº 2 º ª ª 10. all else equal? The semiannual bond¶s effective rate is: ¨ 0. 10% annual coupon bond or a 10-year. m 2 .10¸ ¨ iNom ¸ EFF%! ©1  ¹ 1 ! ©1  ¹ 1 ! 10.

and the yield for puttable bonds is referred to as yield-to-put.Calculating Yield for Callable and Puttable Bonds  A callable bond's valuations must account for the issuer's ability to call the bond on the call date  The puttable bond's valuation must include the buyer's ability to sell the bond at the pre-specified put date. .  The yield for callable bonds is referred to as yield-to-call.

 Yield to call is the rate that would make the bond's present value equal to the full price of the bond.Yield to Call (YTC)  Yield to call (YTC) is the interest rate that investors would receive if they held the bond until the call date. Essentially. its calculation requires two simple modifications to the yield-to-maturity formula: . The period until the first call is referred to as the call protection period.

.  The price at which bond may be called is referred to as the call price.YTC  When the bond may be called and at what price are specified at the time the bond is issued.

Example  Consider an 18 years 11% coupon bond payable semi annually with a maturity value of Rs 1000 selling at Rs 1169. suppose that the first call date is 8 years from now and that the call price is Rs 1055.  Call price = 1055  N = 8*2 = 16 m  C = 1000*11%/2 = 55  Bond price = 1169 .

54% is the yield to first call .Solution 1169 = Rs 55 1- 1 16 (1+y) y 1055 + 1 16 (1+y)  8.

the same modified equation for yield to call is used except the bond put price replaces the bond call value and the time until put date replaces the time until call date. . M = put price n = number of periods until assumed put date. Yield to put (YTP) is the interest rate that investors would receive if they held the bond until its put date. To calculate yield to put.Yield to Put (YTP)  This mean that the bond holder can force the issuer     to buy the issue at a specified price.

assume that issue is putable at par (Rs 1000) in five years.  Put price = 1000  N = 5*2 = 10 m  C = 1000*11%/2 = 55 .Example of YTP  Consider an 18 years 11% coupon bond payable semi annually issue selling Rs 1169.

Solution 1169 = Rs 55 1- 1 10 (1+y) y 1000 + 1 10 (1+y)  6.94% § 7% is the yield to put .

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