FMI

Debt Markets and Valuation of Debt

Securities
Dr. Avinash Ghalke, CFA
What is a debt security?
 Fixed Income Security
 Financial obligation for the Issuer
 Interest Payment
 Principal Repayment
 Security carries covenants
 Positive covenant
 Negative covenant

Dr Avinash Ghalke, CFA © 2022

Debt security terminology
 Par Value
 Maturity Period
 Coupon
 Yield
 Zero Coupon instruments

Dr Avinash Ghalke, CFA © 2022

Modes of repayment of debt security
 Bullet repayment
 Interest payment as per schedule
 Principal repayment at maturity
 Amortizing Securities
 Principal payment gradually over the security life

Dr Avinash Ghalke, CFA © 2022

Yield of a debt security
 What is debt security yield?
 Anticipated return on debt security investment
 Expressed as %
 Current yield
 Annual interest / Security Price * 100
 Yield to maturity (YTM)
 Anticipated return if security held till maturity

Dr Avinash Ghalke, CFA © 2022

Classification of Debt

Government, Public debt

Based on
borrower Corporate debt, Private debt

Short term
Based on tenure
based Long term

Floating
Based on
interest rate Fixed
Based on Open ended
availability for
transaction Close ended
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Money Markets
 Markets that trade debt securities or instruments with
maturities of less than one year
 Characteristics of money market instruments
 Generally sold in large denominations
 Low default risk
 Original maturity of one year or less

Dr Avinash Ghalke, CFA © 2022 7

Money Market instruments
 Treasury Bills
 Commercial Paper
 Certificate of Deposit
 Repurchase agreements
 Call Money

Dr Avinash Ghalke, CFA © 2022 8

Bond Market
 Bonds are long-term debt obligations issued by
corporations and government units
 Bond markets are traditionally classified into three
types:
 Treasury notes and bonds
 Municipal bonds
 Corporate bonds

Dr Avinash Ghalke, CFA © 2022 9

Bond Characteristics
 Bearer bonds
 Bonds on which coupons are attached. Coupons need to be
presented for coupon payment
 Registered bonds
 Issuer pays the coupon to the registered owner
 Term bonds
 Entire issue matures on a single date
 Serial bonds
 Bonds that mature on a series of dates, with a portion of the
issue paid off on each.
 Mortgage bonds
 Issued to finance specific projects that are pledged as collateral
for the bond issue

Dr Avinash Ghalke, CFA © 2022 10

Bond Characteristics
 Debentures
 Bonds backed solely by the general credit of the issuing firm and
unsecured by specific assets or collateral.
 Subordinated debentures
 Unsecured debentures, junior in their rights to mortgage bonds
and regular debentures
 Convertible bonds
 Bonds holder has the choice to exchange the bond for another
security, usually Equity
 Stock warrants
 Bond holder an opportunity to purchase common stock at a
specified price up to a specified date.
 Callable bonds
 Issuer can buy back the bonds from the holder at specific price,
usually above the par value (at the call price)

Dr Avinash Ghalke, CFA © 2022 11