bond capital (1)

8/8/2019 Bond Capital (1)

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BOND CAPITALPresented by-:

Nishan

Palli pallavi

Dillip patel


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BOND


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A Bond is a debt instrument issued for a period of more than one year withthe purpose of raising capital by borrowing .

The Federal government, states, cities, corporations, and many othertypes of institutions sell bonds.

A bond is generally a promise to repay the principal along with

interest on a specified date.

A bond is like a loan -the issuer is the borrower (debtor), the holderis thelender (creditor), and the coupon is the interest.


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Bonds provide the borrower with external funds to financelong-term investments, or, in the case of government bonds,to finance current expenditure.

Certificates of deposit (CDs) or commercial paper areconsidered to be money market instruments and not bonds.

Bonds must be repaid at fixed intervals over a period of time.


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ISSUING BONDS Bonds are issued by public authorities, credit institutions, companies

and supranational institutions in the primary markets.

The most common process of issuing bonds is through underwriting. Inunderwriting, one or more securities firms or banks, forming a syndicatebuy an entire issue of bonds from an issuer and re-sell them to investors.

The security firm takes the risk of being unable to sell on the issue to endinvestors.

Primary issuance is arranged by book runners who arrange the bondissue, have the direct contact with investors and act as advisors to the

bond issuer in terms of timing and price of the bond issue.

In the case of Government Bonds, these are usually issued by auctions,where both members of the public and banks may bid for bond.

the coupon is fixed, but the price is not, the % return is a function both of


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Types of Bonds

High-Yield Bonds: High-yield bonds are usually priced at a nominal yieldspread to a specific on-the-run U.S. Treasury bond. However, sometimeswhen the credit rating and outlook of a high-yield bond deteriorates, thebond will start to trade at an actual dollar price.

Corporate Bonds:A corporate bond is usually priced at a nominal yieldspread to a specific on-the-run U.S. Treasury bond that matches its

maturity Fixed rate bonds: have a coupon that remains constant throughout the life

of the bond.

Zero-coupon bonds: pay no regular interest. They are issued at asubstantial discount to par value, so that the interest is effectively rolled up

to maturity (and usually taxed as such). The bondholder receives the fullprincipal amount on the redemption date.


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Inflation linked bonds: in which the principal amount and the interestpayments are indexed to inflation. The interest rate is normally lower thanfor fixed rate bonds with a comparable maturity . However, as the principal

amount grows, the payments increase with inflation.

Perpetual bonds: are also often called perpetuities or Perps'. They haveno maturity date. The most famous of these are the UK Consols, which arealso known as Treasury Annuities or Undated Treasuries. Some of these

were issued back in 1888 and still trade today, although the amounts arenow insignificant.

Bearer bond: is an official certificate issued without a named holder. Inother words, the person who has the paper certificate can claim the valueof the bond. Often they are registered by a number to preventcounterfeiting, but may be traded like cash. Bearer bonds are very riskybecause they can be lost or stolen.


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Registered bond :is a bond whose ownership (and any subsequentpurchaser) is recorded by the issuer, or by a transfer agent. It is thealternative to a Bearer bond. Interest payments, and the principal upon

maturity, are sent to the registered owner.

Municipal bond: is a bond issued by a state, U.S. Territory, city, localgovernment, or their agencies. Interest income received by holders ofmunicipal bonds is often exempt from the federal income tax and from the

income tax of the state in which they are issued, although municipal bondsissued for certain purposes may not be tax exempt.

Lottery bond :is a bond issued by a state, usually a European state. Interestis paid like a traditional fixed rate bond, but the issuer will redeem randomly

selected individual bonds within the issue according to a schedule. Some ofthese redemptions will be for a higher value than the face value of thebond.


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War bond: is a bond issued by a country to fund a war.

Serial bond: is a bond that matures in installments over aperiod of time. In effect, a $100,000, 5-year serial bond wouldmature in a $20,000 annuity over a 5-year interval.

Revenue bond: is a special type of municipal bonddistinguished by its guarantee of repayment solely fromrevenues generated by a specified revenue-generating entityassociated with the purpose of the bonds. Revenue bonds aretypically "non-recourse," meaning that in the event of default,

the bond holder has no recourse to other governmental assetsor revenues.


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SOMEMAJOR BONDS INVESTED Government and Federal Agency Bond Investing market

Municipal Bond Investing market Corporate Bond Investing market

Mortgage Backed, and Asset Backed Bond Investing market as well asmarkets for the Collateralized Bond Obligations (or CBOs)

Funding Bond Investing market


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INFRASTRUCTURE BONDS TO INVEST IN INDIAFOR 2010

During the financial year 2010-2011, Investors will take tax benefits by

investing in the long term infrastructure bonds. Infrastructure bonds came as the relief to the person taxpayers in context of

expenses as well as saving.

It is available via issues of ICICI Bank and IDBI, and carried out in thename of ICICI Safety Bonds and Flexi bonds.

To take the benefits of tax savings, investor must invest up to 20,000 ininfrastructure bonds. These tax-saving benefits provides under Section 88of the Income Tax Act, 1961.

Infrastructure bonds are one of the fresh tax reliefs in the 2010 budget. Theannouncement of the tax free Infrastructure Bonds not only surprised thecommon man but also the industry observers.


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RETURNON BONDS

It reacts to the movement in the interest rates Interest rate moves up, value of bond moves down

Interest rates moves down, value of the bond moves up

Coupon rate termed as the return on the bonds invested


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A Bond's Expected Return

Yield is the measure used most frequently to estimate or determine a

bond's expected return. Yield is also used as a relative value measurebetween bonds. There are two primary yield measures that must beunderstood to understand how different bond market pricing conventionswork: yield to maturity and spot rates.

A yield-to-maturity calculation is made by determining the interest rate(discount rate) that will make the sum of a bond's cash flows, plus accruedinterest, equal to the current price of the bond. This calculation has acouple important assumptions: First, that the bond will be held untilmaturity, and second that the bond's cash flows can be re-invested at theyield to maturity.


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A spot rate calculation is made by determining the interest rate (discountrate) that makes the present value of a zero-coupon bond equal to itsprice. A series of spot rates must be calculated to price a coupon payingbond - each cash flow must be discounted using the appropriate spot ratesuch that the sum of the present values of each cash flow equals theprice. As we discuss later, spot rates are most often used as a buildingblock in relative value comparisons for certain types of bonds.


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What Determines the Price of a Bond in the

Open Market? Bonds can be traded in the open market after they are issued. When listed

on the open market, a bonds price and yield determine its value.Obviously, a bond must have a price at which it can be bought and sold(see Understanding Bond Market Prices below for more). A bonds yield isthe actual annual return an investor can expect if the bond is held tomaturity. Yield is therefore based on the purchase price of the bond as well

as the coupon.


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A bonds price always moves in the opposite direction of its yield, asillustrated above. The key to understanding this critical feature of the bondmarket is to recognize that a bonds price reflects the value of the incomethat it provides through its regular coupon interest payments.

When prevailing interest rates fallnotably rates on government bondsolder bonds of all types become more valuable because they were sold ina higher interest-rate environment and therefore have higher coupons.

Investors holding older bonds can charge a premium to sell them in theopen market. On the other hand, if interest rates rise, older bonds maybecome less valuable because their coupons are relatively low, and olderbonds therefore trade at a discount.


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TAX IMPLICATION The tax implication of each investment has been dealt with under the

following categories:-

(i) Tax implication at the time of making the contribution

(ii) Tax implication of any accretion of the investment

(iii) Tax implication at the time of withdrawal.

We will discuss the tax implications of the following instruments available inthe debt market.

1. Bonds issued by the Central and State governments

These bonds are issued by the Central or the State governments. Theseare basically suitable for people who want a guaranteed coupon rate.

2. Capital gains bonds:

a. Sec. 54EC of the IT Act: any individual who has capital gains can lookat section 54EC bonds for saving the capital gain tax. While investing inSec. 54EC bonds, one can claim exemption from long term capital gains


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Arising out of the sale of any capital asset (except shares and equityoriented units). According to section 54EC, any person (individuals, HUFs,partnership firms, companies etc.) can avail exemption in respect of longterms of the bond with term capital gains (arising from the sale of long term

capital asset other than equity shares and securities), by investing Capitalgains bonds.

b. Issuers: The following institutions can issue these bonds:

I. NABARD

II. REC

III. NHAI

IV. SIDBI

V. NHB

c. Tax benefits available:

I. At the time of contribution: The amount invested in these bonds will bereduced from the long term capital gains, this results in a reduction in yourtaxable income and will further reduce your tax liability.

II. Interest accrued: Interest amount accrued is fully taxable


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d. Other restrictions:

I. The investment is to be made within a period of 6 months from the date ofsale/transfer of the asset.

II. These bonds are subject to a lock-in-period of three years. It means thatif the bonds are sold or transferred within a period of 3 years from the date

of acquisition, the capital gains which were earlier exempt are taxable in theyear of sale or transfer of the bonds.

e. Suitability: I. For saving long term capital gains tax.

II. For people who can lock their funds for 3/5 years.

III. For people who believe in capital preservation with

a guaranteed coupon rate


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3. Infrastructure bonds

These bonds are issued by banks like ICICI, IDBI, IFCI etc.

Such bonds come with a lock in period of 3 years. The tax

implications of such bonds are:

A. The contribution towards these bonds will be eligible for a deductionunder section 80C. The maximum amount of investment that is eligible for adeduction will be Rs.1,00,000.

B. Interest accretion will be fully taxable. C. These bonds are subject to a lock-in of 3 years.


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REGULATORY FRAMEWORK OF BONDS The fundamental parts of the legal framework supporting an efficient

domestic government securities market usually include an explicitempowerment of the government to borrow, budgetary rules for the issuanceof government securities, rules for the organization of the primary market,role of central bank as agent for the government, the debt-managementframework, rules governing issuance of government securities, and rules

pertaining to the secondary market.

Some of the more important areas

where the legal framework will affect the development of governmentsecurities markets include (i) defining the exact parameters under which

fiscal budgeting processes will be linked to government securities issuance,(ii) limiting issuance, via debt ceilings or other devices such as sinking funds,and (iii) defining the legal properties of government securities and their useas collateral in transactions such as repos


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At another level, the legal framework must define the rights and obligations

of parties to debt contracts in the primary and secondary markets forissuers, investors, and intermediaries. This definition should include

(i) minimum guidelines for disclosure of material information, (ii) liability for entities involved in distributing securities and for entities

handling third-party investment accounts, and

(iii) vehicles to allow proper legal recourse against mutual funds, pensionfunds, and even the government as an issuer. Investment regulations need

to permit sufficient flexibility for investors, yet create adequate safeguardsfor prudent operations and for the safeguarding of fiduciary obligations, asin the case of pensions.


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THANK YOU

bond capital (1)

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