3. Concept of fixed income securities:-
Fixed income securities are types of securities that gives a fixed state
interest or dividend at predetermined times or stated condition.
Typically these securities promise the investor that he/she will receive
specific cash flow at specific times in the future.
Fixed income securities are also classified as short term securities and long
term securities.
Short term securities have a maturity period of one year or less and long
term security have a maturity period of more than one year.
Types of fixed income securities may be classified as follow:
Short term securities
Treasury bills
Certificate of deposit
Commercial paper
Banker acceptance
Re-purchase
agreement
Long term securities
Government securities
Local government
security
Corporate bonds
Foreign bonds
Preferred stock
4. Money market instrument/Short term
securities:-
The money market is the market
for securities with maturities of less than one
year.
In other words short term debt securities
have a maturity period less than one year
and at the time of issue they are less
risky/return than other securities.
Some features of short term securities are as
follow:-
It matures within one year or less
than one year.
Most of money market
instrument are high quality
securities. There risk is very
low.
It is sold at discount.
It is unsecured i.e issued
without collateral.
It is highly liquid securities
Commercial paper:- Issued by both
financial and non-financial Companies.
Certificate of deposit:- In Nepal it
issued only few commercial bank.
Treasury bills:- Issued by Government.
Banker acceptance:- It is issued by
importers to secure trade credit from
exporters. In other words it is used in
financing foreign trade.
Repurchase agreement:- It is not a
specific security. It is only an
agreement/contract between two
parties where one party sell the
securities to another party and
another party agree to buy the same
securities at agreed price at future
date.
5. Capital market instrument/Long term
securities:-
Capital market is the market for
securities with maturities of more than
one year.
It is long term low liquid and high risk
securities.
Some features of long term securities
are as follow:-
Its maturity period is more
than one year
Most of capital market
instrument low liquid and
high risk securities.
Its provides high return.
Government securities:- Issued by
Government. E.g Treasury Notes,
Treasury bonds, saving bonds etc.
Local Government securities:- Issued
by local Government bodies like
Province, Municipalities to meet there
financial needs. E.x General obligation
bond, revenue bond etc.
Corporate bond:- Issued by Corporate
house. E.g Debentures, bonds etc.
Foreign bonds:- It is trading domestic
as well as foreign exchanges.
Preferred stock:- It is issued by
Companies. They have no voting right
but it has change into common stocks.
So it is called hybrid security.
6. Corporate bonds:-
Corporate bond is a negotiable,
long term debt instrument.
It pays fixed interest for a specific time
interval on specific date and repay the
principal on maturity to the bond holders.
In Nepal, normally interest is paid semi-
annually and the borrower pays back the
bondholders the bond's face value/par value
at maturity date.
Bond holders do not have any voting and
controlling right because they are only
lenders.
Essential features of bond.
Par value-Rs. 1,000
Coupon interest rate- Fixed
Maturity period- Generally bonds are
issued with finite maturity
Call provision- call provision gives the
issuer the right to call the bonds prior to
maturity
Trustee-In Nepal it is insured by Company
Act. 2063 (2006AD)
Conversion feature-Non convertible
Interest payment-semi-annually
Risk on Bond
Financial risk
Interest rate risk- Inverse
relationship between value of bond
and interest rate
Reinvestment risk
Liquidity risk
Call risk
Purchasing power risk
7. Preferred stock:-
Preference share is that share which gets a fixed rate of
dividend.
Preference share is the one of the importance sources of long term
financing.
Preference shareholders are that kind of owners of the company who
have first priority to get dividend.
If company goes in solvency the preference shareholders get capital
return after the debenture and bond holders but before the ordinary
shareholders.
But preference shareholders have no right management and controlling
the company as their investment is risk free investment.
So generally they do not have voting right.
Essential features of Preference share
Par value-Rs. 100
Dividend- Fixed
Maturity period- Generally bonds are issued with infinite maturity.
But in recent years Companies are also issued finite bond.
Call provision- call provision gives the issuer the right to call the
preference share prior to maturity
Conversion feature- it may be convert into specific number of
common stock.
Voting right- No voting right
8. Price Quotation for Treasury Bill from the …………….. Journal
First column represent the maturity
period of T-bill. This treasury bill
maturing on December 13, 2021.
Column 2 (Day to mat): Day to mat
means remaining maturity period
of T-bill, here the remaining
maturity period of T-bill is 170 days.
Column 3 (Bid): The bid is the
purchase price for the dealer and
sales price for the investor. It can be
changed to bid price by using
following formula:
Bid price= FV 1 − (𝐵𝑖𝑑 𝑞𝑢𝑜𝑋
𝑡
360
)
= ……% (Change into Rupee)
Maturity Day to mat Bid Ask Change Ask yield
Dec,13/21 170 5 4.5 -0.03 4.66
Column 4 (Ask): It is sales price for the dealer
and purchase price for the investor. Ask can
be changed into ask price by using following
formila
Ask price= FV 1 − (𝐴𝑠𝑘 𝑞𝑢𝑜 𝑋
𝑡
360
)
Dealer spread= Ask price - Bid price
Column 5 (Change): Change shows the
percentage different between previous day's
bod price and trading day's bid price. If
change is positive, it indicates that current
bid price increased and change is negative, it
indicates that current bid price is decreased.
Column 6 (Ask Yield): Ask yield indicates that
the annual return from the investment on T-
bill. It can be calculate as follows:
Ask yield =
𝐹𝑉−𝐴𝑠𝑘 𝑝𝑟𝑖𝑐𝑒
𝐴𝑠𝑘 𝑝𝑟𝑖𝑐𝑒
X
360
𝑡
9. Price Quotation for Corporate Bond from the …………….. Journal
1. What does ATT mean?
2. What is the rupee amount of the
semi-annual coupon that this bond
pays?
3. What is the coupon rate and in which
year does the bond reach maturity?
4. Convert the 'Close' quote to a rupee
price.
5. If you purchased one bond, what price
would you have to pay at the closing
date?
6. How is the current yield calculated?
7. How many bonds were traded on the
day of the quotation?
8. What do you mean by the 'Net Chg' of
-
1
4
?
9. What happen to the closing price as
compared to the previous day's price?
Bonds Cur Yld Volume Close Net Chg
ATT 7𝑠 025 6.7 20 104
5
8
-
1
4
1. ATT is the brief name of the issuer
company.
2. The rupee amount of semiannual bond is
Rs.35, which is calculated as below:
Annual coupon = 7% of Rs 1,00
=Rs.70
Semiannual =
70
2
= Rs.35
3. Coupon rate of bond is 7 percent and bond
matures in 2025AD.
4. Rupee price based on close quota:
=104.625% of Rs.1,000 = Rs.1046.25
5. I would have to pay Rs.1046.25 at the
closing date.
6. The current yield of the bond has been
calculated as follow:
CY =
𝐼
𝑃𝑟𝑖𝑐𝑒
=
70
1046.25
= 6.7%
10. 7. Number of 20 bonds were traded on the day
of the Quotation.
8. The change of -
1
4
means, the closing price was
down by
1
4
from that of the previous day's
closing price.
9. Previous day's closing price can be calculated
ass below:
Previous day's price
= Current day close- Net change
= 104.625 - ( -
1
4
)
= 104.625 + 0.25
= 104.875
= 104.875% of Rs.1000
= Rs.1048.75
The closing price of the bond was decrease to
Rs.1046.25 from Rs.1048.75 as compared to
previous day price
11. Price Quotation for a Treasury Note From the …… Journal
1. When the note
maturing?
2. What is the
coupon rate of
note?
3. Explain the
difference in the
Bid and Ask
quotes.
4. What is the
dealer's spread?
5. Explain the change
of +10.
6. What does the ask
yield of 5.47
mean?
Rate Maturity Bid Asked Change Ask Yield
7 July,023n 109:03 109:05 +10 5.47
1 The note maturing in July, 2023.
2. The coupon rate of note is 7%
3. The bid is the price that the note could be sold for OTC
market for 109
03
32
percent of par value(i.e Rs.1000), which is
equivalent to Rs.1090.9375 and ask is the purchase price
from the OTC market for 109
05
32
percent of par value, which
is equivalent to Rs.1091.5625.
4. Dealer's spread = Ask price - Bid price
= 1091.5625 - 1090.9375
= Rs.0.625
5. The change of +10 represents the change in the previous
day's bid price and it also reflects the increase in price.
6. The effective yield to maturity at the time based on the
asked price was approximately 5.47 percent per year. Ask
yield is an annualized yield rather than day to mat.
14. Q.no 8.1
Maturity period of treasury bill (t) = 180 days
Selling price (Po)= Rs.96,000
Face value (FV) = Rs.1,00,000
a. Calculate the 180 days discount rate
Dis rate=
𝐹𝑉−𝑃𝑜
𝐹𝑉
=
1,00,000−96,000
1,00,000
= 4%
b. Calculate the annual discount rate
Annual Dis rate=
𝐹𝑉−𝑃𝑜
𝐹𝑉
X
360
𝑡
= 4 X
360
180
= 8%
c. Calculate the HPR for 180 days.
𝐹𝑉−𝑃𝑜
𝑃𝑜
=
1,00,000−96,000
96,000
= 4.1667%
d. Again calculate the annual equivalent yield
=
𝐹𝑉−𝑃𝑜
𝑃𝑜
X
365
𝑡
= 4.1667 X
365
180
= 8.45%
15. Q.no.8.2
Face value of T-bill (FV) = Rs.25,000
Maturity period (t) = 91 days
Bank discount yield = 6%
a. Calculate the price of the bill(Po)
BDY =
25,000−𝑃𝑜
25,000
X
360
91
= Rs.24,620.83
b. HPR for 91 days.
=
𝐹𝑉−𝑃𝑜
𝑃𝑜
=
25,000−24620.83
24620.83
= 0.154%
c. Calculate the bond equivalent yield
=
𝐹𝑉−𝑃𝑜
𝑃𝑜
X
365
𝑡
=
25,000−24620.83
24620.83
X
365
91
= 6.177%
d. EAY = ( 1+ Periodic HPR)𝑚
− 1
= ( 1+ 0.06177)
365
91 − 1
= 6.65%
16.
17.
18.
19. Q.no.8.8
Corporate bond
Coupon rate before tax= 9%
Tax rate (T) = 30%
Yield after tax = Yield before tax(1- tax rate)
= 9(1-0.3)
= 6.3%
Municipal bond
Yield before tax = 6%
Tax rate (T) = 0%
Yield after tax = Yield before tax = 6%
Meera should select the corporate bond
because it has higher yield/return than
municipal bond.
Q.no.8.9
Yield for treasury bond= 5%
Yield for municipal bond= 4%
Federal tax rate = 33%
Taxable equivalent yield=
𝑌𝑖𝑒𝑙𝑑 𝑜𝑛 𝑚𝑢𝑛𝑖𝑐𝑖𝑝𝑎𝑙 𝑏𝑜𝑛𝑑
1 − 𝐹𝑒𝑑𝑒𝑟𝑎𝑙 𝑡𝑎𝑥 𝑟𝑎𝑡𝑒
=
4
1−0.33
= 5.97
Municipal bond provide higher taxable
equivalent yield.
20.
21.
22.
23. Q.no.8.13
Convertible bond
Beginning investment amount = Rs.850.
Current trading price of bond = Rs.850
Conversion ratio (CR) = 30
Ending price of stock = Rs.35
Interest amount = Rs.50
Conversion value after one year=30 X 35
= Rs.1050
Rupees return = 1050-850 + 50 = Rs.250
Rate of return =
250
850
= 29.41%
Common stock
Beginning price of stock = Rs.25
Ending price of stock = Rs.35
Rate of return=
𝑃1−𝑃𝑜+𝐷
𝑃𝑜
=
35−25+0
25
= 40%
Q.no.8.14
New conversion ratio (CR) = 1.8
Mkt price of stock = Rs.40
Mkt price of convertible preferred stock=
Rs.90
Conversion premium=?
At first calculate the conversion value
=price of common stock X CR
= 40 X 1.8
= Rs.72
Conversion premium
=
𝑀𝑘𝑡 𝑝𝑟𝑖𝑐𝑒 𝑜𝑓 𝑐𝑜𝑛𝑣𝑒𝑟𝑡𝑖𝑏𝑙𝑒−𝑐𝑜𝑛𝑣𝑒𝑟𝑠𝑖𝑜𝑛 𝑣𝑎𝑙𝑢𝑒
𝑐𝑜𝑛𝑣𝑒𝑟𝑠𝑖𝑜𝑛 𝑣𝑎𝑙𝑢𝑒
=
90−72
72
= 25%
Con premium(Rs) Mkt price - Con value
= 90 - 72 = Rs.18
Conversion parity price =
𝑀𝑘𝑡 𝑝𝑟𝑖𝑐𝑒 𝑜𝑓 𝑐𝑜𝑛𝑣𝑒𝑟𝑡𝑖𝑏𝑙𝑒
𝐶𝑅
=
90
1.8
= 𝑅𝑠. 50
24. Q.no.8.15
Conversion ratio (CR) = 20
Coupon rate (C) = 6%
Maturity period = 20 years
Price of bond = Rs.800
Market price of common stock = Rs.35
Dividend per share = Rs.0.75
a. Conversion price =
𝑃𝑎𝑟 𝑣𝑎𝑙𝑢𝑒 𝑜𝑓 𝑐𝑜𝑛𝑣𝑒𝑟𝑡𝑖𝑏𝑙𝑒
𝐶𝑅
=
1000
20
= Rs.50
b. Conversion ratio is 20 times, which is
given
c. Conversion value = Mkt price X CR
= 35 X 20 = Rs.700
d. Conversion premium in rupee
= Mkt price of convertible -conversion value
= 800-700
= Rs.100
Conversion premium in percentage=
𝐶𝑜𝑛𝑣𝑒𝑟𝑠𝑖𝑜𝑛 𝑝𝑟𝑒𝑚𝑖𝑢𝑚
𝐶𝑜𝑛𝑣𝑒𝑟𝑠𝑖𝑜𝑛 𝑣𝑎𝑙𝑢𝑒
=
100
700
= 14.29%
e. PBP =
𝐶𝑜𝑛𝑣𝑒𝑟𝑠𝑖𝑜𝑛 𝑝𝑟𝑒𝑚𝑖𝑢𝑚 𝑖𝑛 𝑟𝑢𝑝𝑒𝑒
𝑇𝑜𝑡𝑎𝑙 𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡−𝑇𝑜𝑡𝑎𝑙 𝑑𝑖𝑣𝑖𝑑𝑒𝑛𝑑
=
100
6% 𝑜𝑓 𝑅𝑠1,000 −0.75 𝑋 20
=
100
60−15
= 2.22 years
f. If yield for convertible bond is 8%
Calculate the investment value of
convertible(𝑉0).
𝑉0= I x PVIFA,K%,𝑛𝑝𝑒𝑟+MVxPVIF,K%,𝑛𝑝𝑒𝑟
=
60xPVIFA,8%,20𝑝𝑒𝑟+1000xPVIF,8%,20𝑝𝑒𝑟
= 60 X 9.8181 + 1000 X 0.2145
= 803.59
25. Q.no 8.16
Market price of convertible bond = Rs.1,200
Coupon rate (C) = 7.5% ie 7.5% 0f rs.1,000 = Rs.75
Maturity period (n) = 15 years
Conversion ratio (CR) = 24
Current market price of stock = Rs.50
Bond yield (K) = 9%
Bond investment value (Vo) = ?
Sol/ same as above.
