1. RISK AND RETURN ANALYSIS
RISK: DICTIONARY MEANING OF RISK IS THE
POSSIBILITY OF LOSS OR INJURY, THE DEGREE
AND PROBABILITY OF SUCH LOSS.
1. SYSTEMATIC RISKS- UNAVOIDABLE
RISKS LIKE POLITICAL UNCERTAINTY,
GLOBAL DEPRESSION, WAR, EARTHQUAKE
(WHICH AFFECTS THE WHOLE MARKET)
2. UNSYSTEMATIC RISKS- RELATED TO
SOME FIRM OR INDUSTRY
UNSYSTEMATIC RISK CAN BE CATEGORISED
INTO BUSINESS RISKS AND FINANCIAL RISKS.

2. BUSINESS R ISK
A. MANAGERIAL INEFFICIENCY
B. TECHNOLOGICAL CHANGE IN
PRODUCTION PROCESS
C. AVAILABILITY OF RAW MATERIALS
D. CHANGE IN CONSUMER PREFERENCE
E.LABOUR PROBLEMS
FINANCIAL RISK
A. DEBT EQUITY MIX

3. RISK MEASUREMENT
IT IS THE EXPRESSION OF RISK IN
QUANTITATIVE TERMS
1. STANDARD DEVIATION METHOD-
EXAMPLE
2. CHARACTERISTIC REGRESSION LINE-
EXAMPLE
3. CORRELATION METHOD-EXAMPLE

4. BOND VALUATION
A BOND IS A CONTRACT THAT REQUIRES THE
BORROWER TO PAY the INTEREST INCOME TO
THE LENDER. IT RESEMBLES THE PROMISSORY
NOTE AND ISSUED BY GOVERNMENT AND
COROPORATE.
THE PAR VALUE OF THE BOND INDICATES THE
FACE VALUE OF BOND I.E THE VALUE STATED
ON THE BOND PAPER.
GENERALLY THE FACE VALUE OF THE BOND IS
IN RS 1000,2000,5000 ETC.
MOST OF THE BONDS MAKE FIXED INTEREST
PAYMENT TILL MATURITY PERIOD.
THE SPECIFIC RATE OF INTEEREST IS KNOWN AS
COUPON RATE.

5. IN USA, BONDS ARE SECURED BY TANGIBLE
PHYSICAL ASSETS OF THE COMPANY AND
DEBENTURES ARE SECURED ONLY BY
CREDITWORTHINESS OF THE COMPANY.
BUT IN INDIA AND UK NO SUCH DISCUSSION IS
MADE AND THEY ARE USED
INTERCHANGEABLY.
TYPES OF DEBENTURES AND BONDS
1. SIMPLE, NAKED OR UNSECURED
DEBENTURES
THESE DEBENTURES ARE NOT GIVEN ANY
SECURITY ON ASSETS. THEY HAVE TO NO
PRIORITY AS COMPARED TO OTHER
CREDITORS. THEY ARE TREATED ALONG

6. WITH UNSECURED CREDITORS AT THE TIME
OF WINDING UP OF COMPANY
2. SECURED OR MORTGAGED
DEBENTURES
THESE DEBENTURTES ARE GIVEN SECURITY
ON ASSETS OF THE COMPANY
3. BEARER DEBENTURES:
THESE DEBENTURES ARE EASILY
TRANSFERABLE. THEY ARE JUST LIKE
NEGOTIABLE INSTRUMENTS.
4. REGISTERED DEBENTURES:
REQUIREMENT OF FOLLOW UP OF
PROCEDURE FOR TRANSFER
5. REDEEMABLE DEBENTURES

7. 6. IRREDEEMABLE DEBENTURES
7. CONVERTIBLE DEBENTURES
8. ZERO INTEREST BONDS/DEBENTURES:
RECENTLY INTRODUCED
CONVERTIBLE DEBENTURE WHICH
YIELDS NO INTEREST.
THE INVESTOR IN A ZERO INTEREST
BOND IS COMPENSATED FOR THE LOSS
OF INTEREST THROUGH CONVERSION
OF SUCH BOND INTO EQUITY SHARES.
9. DEEP DISCOUNT BONDS:
THESE BONDS DOESN’T CARRY ANY
INTEREST BUT IT IS SOLD BY THE ISSUER
COMPANY AT A DEEP DISCOUNT FROM ITS
EVENTUAL MATURITY VALUE.

8. FEATURES:
FIXED RATE OF INTEREST
FIXED MATURITY
INCOME CERTAINTY
LOW RISK OF CAPITAL
CLAIMS ON INCOME
CONTROL
CALL OPTION( WHEN MARKET RATE
IS LOWER THAN INTEREST ON
DEBENTURE)
BOND RISKS
INTEREST RATE RISK:
VARIABILITY IN THE RETURN FROM THE DEBT
INSTRUMENTS TO INVESTORS IS CAUSED BY
THE CHANGES IN THE MARKET INTEREST RATE.

9. PRICE OF BOND IS INVERSLY PROPORTIONAL TO
MARKET INTEREST RATE.
E.G FOR A 14.5% BOND, IF THE MARKET
INTEREST RATE FALLS FROM 14 % TO 13%,
BOND VALUE WILL BE HIGHER.
DEFAULT RISK:
THE FAILURE TO PAY THE AGREED VALUE
OF THE DEBT INSTRUMENTS BY THE ISSUER
IN FULL OR ON TIME.
MARKETABILITY RISK:
VARIABILITY IN RETURN CAUSED BY DIFFICULTY
IN SELLING THE BONDS QUICKLY WITHOUT
MAKING ANY SUBSTANTIAL PRICE
CONCESSIONS. THE MARKETABILITY OR

10. LIQUIDITY OF THE PARTICULAR BOND DEPENDS
ON THE CORPORATE WHO ISSUES THE BOND.
CALLABILITY RISK:
THE UNCERTAINTY CREATED IN THE INVESTORS
RETURN BY THE ISSUERS ABILITY TO CALL THE
BOND. IF CALL OPTION IS THERE.
BOND RETURN
HOLDING PERIOD RETURN:
AN INVETSOR BUYS A BOND AND SELLS IT
AFTER HOLDING FOR A PERIOD. THE RATE OF
RETURN IN THAT HOLDING PERIOD IS:
HPR= PRICE GAIN/LOSS DURING HOLDING
PERIOD+COUPON INT RATE IF ANY(PAYMENT)/PRICE AT
THE BEGINNING OF THE HOLDING PERIOD

11. CALLED AS ONE PERIOD RATE OF RETURN
IF THE FALL IN THE BOND PRICE IS GREATER THAN
COUPON PAYMENT, HPR WILL BE NEGATIVE.
EXAMPLE
CURRENT YIELD:
IT IS THE COUPON PAYMENT AS A PERCENTAGE
OF CURRENT MARKET PRICE
CURRENT YIELD=ANNUAL COUPON
PAYMENT/CURRENT MARKET PRICE
BY THIS MEASURE INVESTORS CAN FIND OUT
THE RATE OF CASH FLOW WHICH THEY ARE
GETTING BECAUSE OF INCREASE/DECREASE IN
MARKET PRICE.
DIFFERENT FROM COUPON RATE
COUPON RATE IS BASED ON FACE VALUE
CY IS BASED ON MARKET PRICE

12. YIELD TO MATURITY(YTM)
MOST WIDELY TOOL IN BOND INVESTMENT
MANAGEMENT
YTM IS THE SINGLE DISCOUNT FACTOR
THAT MAKES PRESENT VALUE OF FUTURE
CASH FLOWS FROM A BOND IS EQUAL TO
THE CURRENT PRICE OF THE BOND
BASICALLY YTM IS THE RATE OF RETURN
WHICH AN INVESTOR CAN EXPECT TO EARN
IF THE BOND IS HELD TILL MATURITY.
BASED ON PRESENT VALUE CONCEPT
EXAMPLES
ASSUMPTIONS:
1. THERE SHOULD NOT BE ANY DEFAULT
COUPON AND PRINCIPAL AMOUNT SHOULD
BE PAID AS PER SCHEDULE
2. THE INVESTOR HAS TO HOLD THE BOND
TILL MATURITY

13. 3. ALL THE COUPON PAYMENTS SHOULD
BE REINVESTED IMMEDIATELY AT THE
SAME INTEREST RATE AT THE SAME YIELD
TO MATURITY OF THE BOND
BOND VALUE THEORMS
VALUE OF BONS DEPENDS UPON THREE
FACTORS NAMELY:
1. COUPON RATE
2. YEARS TO MATURITY
3. EXPECTED YIELD TO MATURITY
ON THE BASIS OF THIS CERTAIN THEORMS
HAVE BEEN PROPOUNDED:
THEOREM 1
IF THE MARKET PRICE OR SELLING PRICE OF THE
BOND INCREASES, THE YIELD WOULD DECLINE
AND VICE VERSA
EXAMPLE

14. THEOREM 2
IF THE BOND YIELD REMAINS THE SAME OVER
ITS LIFE, THE DISCOUNT OR PREMIUM
DEPENDS UPON MATURITY PERIOD
EXAMPLE
THEOREM 3
BOND PRICE IS INVERSLY PROPORTIONAL TO
YIELD. THIS RELATION IS NOT LINEAR ALSO.
A RAISE IN THE BOND’S PRICE FOR A DECLINE
IN BOND’S YIELD IS GREATER THAN THE FALL IN
THE BOND’S PRICE FOR A RAISE IN YIELD
EXAMPLE
THEOREM 4

15. THE CHANGE IN PRICE WILL BE LESSER FOR A
PERCENTAGE CHANGE IN BOND’S YIELD IF ITS
COUPON RATE IS HIGHER.