CLASSNOTES

MOODY’
S2WEALTHMANAGEMENT
5December2020

Cer
ti
fi
cat
eofDeposi
t
1+R)T
FV=PV*(
2
FV=100000*(
1+0.
10)
2
FV=100000*
(1.
10)
FV=10000*1.
10*
1.10=121000
COMPOUNDI
NGANNUALLY

100000*
10/
100*
1=10000–I
STYEARI
NTEREST
100000*
10/ 1=10000–2NDYEARI
100* NTEREST SI
MPLEI
NTEREST
CASE
2NDYEAR-(
100000+10000)*
10/
100*
1=11000–COMPOUNDI
NTERST
BUTI
FTHEI
NVESTMENTI
SONSI
MPLEI
NTEREST
FV=PV*(
1+R*
T)
PV=FV/(
1+R*
T)
MIN.AMOUNTFORCDISRs.
10000.I
TISI
SSUEDONDI
SCOUNTTO
THEFUTUREVALUE.
Q.I
NORDERTOGETRs.
10,
00,
000ATTHEENDOF3MONTHS,HOW
MUCHRAM HASTOI
NVESTTODAYIFTHERATEOFDI
SCOUNTI
S8%?
SOL. GI
VENFV=10,
00,
000;
R=8%;
T=3MONTHS
PV=FV/
(1+R*
T)
PV=1000000/(
1+0.
08*3/
12)
PV=1000000/(
1.02)
PV=Rs.9,
80,
392
CAPI
TALMARKET
1.PRI
MARYMARKET–I
POs–I
NITI
ALPUBLI
COFFER
2.SECONDARYMARKET–SECURI
TIESARELI
STEDONSTOCK
EXCHANGES
- WHERELI
STEDSECURI
TIESARETRADED.

Feat
uresofBonds
ABondisalong-t
erm debti
nstr
umentorsecuri
tywit
haf i
xedrat
eof
i
nter
estt
hatisof
feredtothebondholder
s.TheBondsissuedbythe
Gover
nmentareconsider
edri
skfreeandsecur
e.
TheBondsissuedbythepubl
i
csectoror
gani
sat
ionsar
esecur
e,
al
thoughnotcomplet
elyr
iskf
ree.
Themai
nfeat
uresofabondar
easf
oll
ows:
1.FaceValue:t
hisval
ueisal
socal
ledtheparv
alue.Abondi
s
gener
all
yissuedatparval
ueofRs.
100orrs.
1000andthei
nter
est
i
spaidont hefaceval
ue.
2.I
nter
estRate:
Thisrat
eisal
socal
l
edt
heCouponRat
e.TheI
nter
est
r
ateforabondisfi
xed
3.Matur
it
y:Abondisgener
all
yissuedforaspecif
icperi
odoft
ime
e.
g.5year
s,10year
sor15-yearBonds.I
tisrepaidonmatur
it
y.
4.Redempt i
onVal
ue:Thi
sist
heval
uethatabondhol
derwi
l
lgeton
mat ur
it
yisther
edempti
onormat
uri
tyval
ue.Abondmaybe
redeemed
1.AtPar
2.AtPr
emi
um
3.AtDi
scount
5.Marketvalue:AbondmaybetradedinStockexchange.Thepri
ce
atwhichitiscur
rent
lysol
dorboughtiscal
ledthemarketval
ueof
thebond.
6.YieldtoMaturi
ty(
YTM) :They i
eldtoMatur
it
yofaBondi sthat
valueoftherequi
redrateofreturn(R)
,whi
chequatesthe
discountedval
ueofthef ut
urecashf l
owst
ot hecurr
entmarket
price.YTM i
sthebond’sinter
nalrat
eofret
urn.YTM orIRRisthe
ratewhichmakesf ut
urecashf l
owsequaltothepresentval
ueof
thebond.
7.Thef
ormul
atocal
cul
atet
hepr
iceoft
hebondi
sasgi
venbel
ow:

2 3
P=CF1/(
1+R)+CF2/(
1+R)+CF3/
(1+R)+…+CFn/
(1+R)n
CF=CASHFLOW
R =REQUI
REDRATEOFI
NTEREST

Exampl
e:Whatwi
l
lbet
hepr
iceofabond,
whosef
acev
aluei
s
 Rs.100,couponr
ateis11.
5%andi
smat
uri
ngi
n3y
ear
sift
he
requi
redrateofr
etur
nis9%?
Sol
.Gi
ven FaceVal
ue=Rs.
100
CR= 11.
5%
N =3
R=9%
CF1=FaceVal
ue*CR=100*11.
5/100=100*0.
115=11.
5
CF2=11.
5
CF3=11.
5+100=111.
50

2 3
P=11.
5/(
1+0.
09)+11.
5/(
1+0.
09)+111.
5/(
1+0.
09)
2 3
P=11.
5/(
1.09)+11.
5/(
1.09)+111.
5/(
1.09)
P=10.
55+9.
74+86.
04
P=106.
32

Q.Whatist
hepri
ceofabondwhosefaceval
ueisRs.
100,matur
ingi
n2
year
s,t
hecouponrat
eis8.
5%,
ift
herequir
edrat
eofret
urnis10%.
Sol
.P=(
8.5/
1.1)+(
108.
5/1.
21)
P=7.
72+89.
67=97.
40
Yiel
dofaBond:Theact
ual
rat
eofr
etur
near
nedonani
nvest
menti
s
call
edyi
eld.
Cur
rentYi
eld=(
CouponRat
e*100)/Mar
ketPr
ice
Q.Fi
ndthecurr
entyi
eldofabondwhosecouponr
atei
s7.
5%and
marketr
atei
sRs.105.
Sol
.Yi
eld=(
7.5*
100)
/105=7.
14%
Rel
ati
onshi
pbet
weenPr
iceandYi
eldofaBond:
Pri
ceandYi
eldar
einver
sel
yrel
ated.Whentheyi
eldi
shigherthant
he
CouponRat
ethepri
ceofBonddecreases,
butwhentheYiel
disLower
t
hant
heCouponRat
ethepr
iceoft
hebondi
ncr
eases.
Thebondscanbet
radedi
nthemar
ketei
theratadi
scountorata
premi
um.
1.Thebondwill
conti
nuet
ocommandahi gherpr
icebecauseof
l
owerYTM.Whent hemarketpr
iceoft
hebondi shi
gherthant
he
facev
alue,
thebondist
radedatpremi
um.
2.Whenthemarketpr
icei
slowert
hant
hef
acev
alue,
thebondi
s
t
radedatadi
scount
.

Checky
ourunder
standi
ng.
Q.
1.Whati st
hecurr
entyi
eldofabondwi
thacouponr
ateof8%ata
marketpr
iceofRs.
120?
Q.
2.FindtheCurr
enty i
eldofabondwi
thacouponr
ateof7%anda
Marketpr
iceofRs.106.
Q.3.AbondofRs.
100wit
hacouponrat
eof10%ismatur
ingi
n3y
ear
s.
Thecurr
enti
nter
estr
atei
s6%.Fi
ndthepri
ceoft
hebond.
Q.
4.AbondofRs.
100wit
hcouponr
ateof8%ismaturi
ngin2y
ear
s.The
r
equi
redr
ateofr
etur
nis10%.Fi
ndt
hepri
ceofthebond.

Pur
eDi
scountBonds:
Pur
edi
scountbondsal
socal
l
eddeepdi
scountbondsorZer
o-coupon
bonds.TheseBondsdonotcar
ryanexpl
i
citi
nter
estr
ate.
Exampl
e: Whatwi
l
lbethei
mpli
citi
nter
estr
atei
fabondofafaceval
ue
ofRs.
1,00,
000wassol
dforRs.
2700withamaturi
tyof25y
ears?
Sol
. PV=FV/
(1+R)T
25
2700=100000/(
1+R)
25
2700*(
1+R) =100000
25
(
1+R) =100000/
2700
1+R=( 2700)(1/25)
100000/
R=[
( 2700)(1/25)–1]
100000/
R=15.
54%