Bonds, James Bonds....

BONDS
Part - 1
Introduction :
A well-known phrase “Bond”… James Bond !!! the most thrilling style, name and popularity on silver screen. Yes we are following this BOND theme since decades, but apart from the character and spice on screen there is an entirely different world behind this word. Some of the education drivers intentionally kept us away from it. There is huge depth behind this word, very first thing; why is it so important to know about bonds? the answer may (vary) have different views, but simply if we are talking in terms of money and (planning of) wealth then certainly it is not comprehensive to check all the aspects of the subject.

Debt Market / Debt Papers meaning & Concept :
When we are talking about wealth there has to be an asset allocation, and with the boom of equity we also have boon of Debt market. Debt market is a world of debt papers, also called as bond papers. If we understand the concept of bond papers then it will not only shelter our wealth but also enrich it. We have learnt one elementary law of thermodynamics, “Energy can neither be created nor can be destroyed, it can only change its forms”. Here knowing more about bonds or debt market is like knowing the other form of asset and different language of money. Now let’s try to understand the new form of money and Debt Market.
Debt, word itself suggests its meaning, ie liability or obligation. Suppose A borrows from B, then three things are discussed and decided.
1. what is the amount to be borrowed,
2. For what period it will be borrowed
3. And most important thing is @ what interest will be borrowed.
With the survey of market A and B mutually decides the rate @ which B will lend the money to A. Lets study a simple example, If A borrows Rs. 100/- from B for 3 years @ 8% interest, interprets B will lend Rs.100/- to A on day one, at end of one year A will return @ 8% of principle amount which is Rs. 100/-, 8% * (100) = Rs. 8/- to B, similarly at end of second year again he will return Rs. 8/- to B and at end of third year, A will return Rs. 8/- of interest and the basic principle amount Rs. 100/-, which is 8 + 100 = Rs. 108/-.
In return of aforesaid transactions A will issue a (Bond) paper to B as a security, on which there will be declaration of all the above three conditions. Here we will further elaborate the concepts :
1. Rs. 100/- Borrowed is called - Face Value
2. 3 years period of borrowing is called - Tenure and
3. Rate at which borrowed ie 8% is called - Coupon
Table 1.
Face Value 100 rs
Tenure 3 yrs
Coupon 8%

This paper is called as Bond Paper or Debt Paper. A will borrow Rs.100/- from B, and will give a paper in return as security, also called a Debt Paper. Any one can issue bond paper, when such Bonds are issued by Government they are called as Gsec (Government Securities), and when Commercial institutions like Tata or Birla issue papers they are called as Commercial Papers and when bank issue such papers it is called as Bonds.
Meaning and Concept of Coupons : -
Alike the word debt the Coupon itself suggests the meaning of coupon. In olden days there was a practice to paste stickers on Bond Papers, in our above example A will issue a bond paper with three stickers called as coupons to B. At end of first year B will return one Sticker to A and in return he (A) will pay Rs.8/- to B, similarly at end of second year A will again pay Rs. 8/- to B and will return second sticker and so on. These stickers are called as coupon and this terminology is still in practice while dealing in Bond Papers. In present days of advance technology there is no issue of bonds in physical forms but terminology of coupon is still prevailing.
Trading of Bond Papers in Security Market:
These bond papers can be traded in Security Market, named as Debt market. In accordance with the Securities Regulation Contract act of 1956 there are various instruments which come under the definition of securities, and one of them is Bond. Bond market comes under regulation of SEBI (Securities and Exchange Board of India) where as Gov-sec or Gilt comes under regulation of RBI (Reserve Bank of India).
Case Study – Present Value of Future Cash Flow : -
Further in our above example, with survey of market A agrees to issue bond paper with face value of Rs. 100/- for tenure of 3 years @ coupon of 8% and B agrees to invest in that paper by lending Rs.100 to A. At a latter date interest rates of market for lending and borrowing may fluctuate and when such fluctuation takes place it affects the transaction of A and B both. This is the most crucial part for trading in Bonds, We will further elaborate the aforesaid example to understand the effects such fluctuations.
To understand this mathematics of Bond it is essential to understand the definition of Bond in terms of the sum of the present value of future cash flows. And if we understand this definition then it will be simple for us to understand meaning of Bond Market. It is widely said that in finance many times the words explains better than actions. Here we will study an example to understand the above definition of bond from right hand side to left hand side.
Table 2.
From right to left
<--------<-------------<------------ <----------------<---------------<--------
Years 0 1 2 3
-100
PV1 7.41 8 FV1
PV2 6.86 8 FV2
PV3 85.73 108 FV3

Sum 100.00

B invests Rs. 100/- in bond paper issued by A. In simple language B lends Rs. 100/- to A,
In aforesaid table 2
Row 1 : indicates number of years
PV1 : Present value at the end of 1st year
PV2 : Present value at the end of 2nd year
PV3 : Present value at the end of 3rd year
FV1 : Future cash flow at the end of 1st Year
FV2 : Future cash flow at the end of 2nd year
FV3 : Future cash flow at the end of 3rd year

When B lends money to A it is -100 shown in column 2, row 2. On day one, year is 0, at end of first year B will get Rs. 8/- ie is in column 3 row 3 which is the future value B will get denoted as FV1 Future cash flow after 1 year. Similarly after 2nd year B will get again Rs. 8/- FV2 Future cash flow after 2nd year and Rs. 108/- FV3 Future cash flow of after 3rd year.(0,1,2,3 are the number of years, 8, 8 and 108 are the future cash flows and 7.41,6.86 and 85.73 are the present values of respective future cash flows and 100 is the sum).
Further, if 8% is the interest in market, to get Rs.8/- at this rate for one year we need to invest Rs. 7.41. So that interest on Rs7.41 @ 8% we will get Rs. 0.59 which gives us total of Rs. 8/-. That means Rs. 7.41 is the present value of Rs.8 (after one year) @ 8%, which is 1st year cash flow. Similarly to get Rs.8 after 2 years, we need to invest Rs.6.86 @8% for two years, which shows Rs.6.86 is the present value of Rs.8 @ 8% ie 2nd year cash flow. Similarly Rs.85.73 is the present value of third future cash flow @ 8%. Adding all the present values, 7.41 + 6.86 + 85.73 = Rs.100/- this is how we calculated the current price of bond. The price of bond paper which is with B is Rs.100. It means on day zero neither borrower nor lender is in profit or loss.
Case Study where there is fluctuation in Interest on Higher side: -

Now, if the market rate of interest fluctuates then there are only two possibilities, either market rates will be higher than coupon or lower than coupon. Take a case if market rates are higher than the coupon. For example B lends Rs. 100 to A @ 8% and if interest rate goes up, B would not have opportunity to encash the higher cash flows, as his money is already blocked with A. He could have lent the same amount to other person with higher interest rate and get higher future cash flows. To understand this concept better, consider that market rates rises to 9%.
Table 3.

Face Value 100
Tenure 3
Coupon 8%
Market Rate 9%

Years 0 1 2 3
-100
PV1 7.34 8 FV1
PV2 6.73 8 FV2
PV3 83.40 108 FV3

Sum 97.47

In the above table, considering the same example of Bond paper issued by A of face value Rs. 100/- @ 8% for three years, where B will get the future cash flows of 8, 8 and 108 in three years respectively. If interest rates increases to 9%, then we can see that the present values of respective cash flows are reduced, resulting in the reduction of the sum of bond price. This means with increase in Market rate the Bond prices decreases.
Logically, when market rate and coupon was same, to get cash flow of Rs.8/- after one year we need to invest only 7.41 (Table 2) today. In above Table 3 we need to invest Rs. 7.34 today to achieve Rs. 8 in one year @9%.
Mathematically: In school, we learnt formula of Compound interest FV = PV (1+R) * N, where FV is future value, PV is present value, R is rate of interest, and N is Number of years. To find PV we can adjust formula as PV = FV / (1+R)*N. In the above formula R is inversely related to PV, if value of R is increased then the value of total ratio decreases. In above example the value of R is increased from 8% to 9% resulting in the decrease of total value of ratio from 7.41 to 7.34.
Sentimental: As B has already blocked the amount Rs. 100/- @ 8%. and market rates goes to 9% then emotionally he is negative on his investments, with the result no one will wish to buy that bond paper from B. This will Shrink the demand of bond price due to sentimental price of bond paper.
If market rates are falling then same three reasons will act in opposite way resulting in the increase of bond price.
So, we can state that bond prices are inversely proportional to the market rates, if market interest rates are rising, bond price will fall and vice versa This is called inverse relation between bond price and market interest rates.


Case study of Long Term & Short term Bond Papers

Just knowing relation is not enough, knowing implementation of it is also important…
Now, we have understood the relation between market interest rates and bond price. Let us try to understand what happens with long term bond paper. If B invest in bond paper issued by A for three years and invests same with C for five years @ 8% coupon. If interest rate falls,…?
According to the inverse relation, with fall in market interest rates, there will be rise in bond price. In above case the bond price of A and B, will rise. Now at what rate this increment happens is questioning If market interest rate becomes 7%.
Table 4.

Three years Five years
FV 100 FV 100
Tenure 3 Tenor 5
Coupon 8% Coupon 8%
Market Rate 7% Market Rate 7%

Years 0 1 2 3 Years 0 1 2 3 4 5
-100 -100
PV1 7.476636 8 PV1 7.476635514 8
PV2 6.98751 8 PV2 6.987509826 8
PV3 88.16017 108 PV3 6.530383015 8
102.6243 PV4 6.103161696 8
PV5 77.00250738 108
104.1001974


From the above two tables we can conclude that if B invest in A for three years, B will get the investment back after three years which if B reinvests he will get cash flows @ 7% instead of 8%. Where if B invests with C for five years then for five cash flows B will get higher rates than that of market.(where market interest rate has fallen.) so we can say as market interest rates are falling five years bond rate is rising more than three years bonds. And vice versa if market interest rates are rising then the five year bond will fall more than three year bond. To summarize we can make new statement here that “Long term bonds are more sensitive to market interest rates”.
For Bonds we saw two important relations, First one is “Bond prices are inversely proportionate to market price” and second one is “Long term bonds are more sensitive to the market interest rates”. The knowledge without implementation is of no use.
In day to day life all of us are fighting with inflation, RBI hiked interest rates consecutively for 13 times. Rupee is all time low at Rs.54 against US dollars. IIP numbers are minus for the quarter, growth rate is hard to achieve. We know to make it steady and ease the pressure RBI may lose some bps (basis points, 100 basis point = 1%) in near future. And if interest rates falls then bond price will rise, and according to the second relation long term bond paper will be more aggressive in raising its price. In last decade we have seen that one time one asset performs, and this is the time for long terms bond papers or GILT funds, in last 1 month these gilt funds have delivered ~ 4% returns, means annually almost 40% returns. Getting 40% returns may look unrealistic but the time when we are getting slaughtered in equity, there is a bull in bonds, all set for the run, ready with freshness, and still we are side lining. It is our tendency now a day, when crowd makes noise, we take the chance but this is the time where the silence is speaking louder than anything and welcoming us for the new rally.
So, when equity is in trouble and if we can understand this form of asset, then we can change the type of our investment and still make some handsome returns on it.
This is why knowing BONDS is important. Just make your doubts clear, Study regularly, track your investments, love your money clear your doubts and do not listen to so called Market Guru. Let us study regularly, read Financial paper, track RBI’s movements and decide the investment strategy. Just remember the law of thermodynamics and enjoy the gains. Till then rock the study’s and rule the investments.

Shivani Dani
Financial Consultant Stock Analyst & Columnist
Beta Money Management Services
+91-98601-33860
+91-95793-22224

ऋण नीती २०१०-११ भाग २

ऋण नीती मध्ये कोणते चार सुत्र येतात अणि ज्याच्या साहायाने आर.बी.आय देशाचं आर्थकारण चालवते ते बघितलं.सी आर आर,रेपो रेट,रेव्हर्स रेपो रेट आणि एस एल आर ह्या चार दोर्यांवर चालतो अर्थकारणाचा खेळ.ह्या चारही सुत्रांचे थोडक्यात विश्लेषण आपण गेल्या लेखात बघण्याचा प्रयत्नं केला,मोनीटरी पोलिसी ही सरकारची तसेच सेन्ट्रल bank ची एक पद्धत असते की ज्याच्या मदतीने देशात काही महत्वाच्या गोष्टींवर कंट्रोल करायला वापरलं जातं,१]अर्थव्यवस्थेत पैशाचा पुरवठा ,२]अर्थव्यवस्थे पैशाची उपलब्धता,३)पैशाची किंमत अथवा अर्थव्यवस्थेच्या प्रगती साठी आणि आर्थिक उलाढालीत स्थैर्य आणण्यासाठी मिळणारं व्याजाचं दर.
ही नीती एक तर EXPANSIOANRY POLICY शकते,किंवा CONTRACTIONARY policy होऊ शकते.जर का तुमची नीती EXPANSIOANRY POLICY असेल तर ही अर्थव्यव्स्थेत पैशाचा पुरवठा वाढवते,ही नीती बेरोजगारी शी लढण्यासाठी रीसेशन च्या काळात व्याजाचे दर कमी करुन आमलात आणतात आणि विरोधात CONTRACTIONARY policy पैशाचा पुअरवठा कमी करुन महागाईशी लढते. आता २०१० -११ ची परिस्थिती बघता,महागाईचे वाढते रेकोर्ड्स बघता.येणार्या ऋण नीती मध्ये काय होणार ह्याकडे सगळ्यांचे डोळे लागले आहेत.बर्याच मोठ्या मोठ्या अर्थतध्न्यांनी ह्यावरील त्यांची भाकितं मांडली आहेत.आणि संपुर्ण देश आणि जाणकार त्याकडेच लक्ष देऊन आहेत.मुळात आर.बी.आय काय करेल ह्यकडे लक्ष तर द्यायलाच हवं,पण काय केल्याने काय होऊ शकतं आणि काय टळु शकतं हे पण तितकच महत्वाचं.कुठला व्याज दर किती वाढवला तर अर्थव्यवस्थेत काय होईल,bank मध्ये काय होईल?लोन च व्याज दर वाढतील की कमी होतील?महागाईचं काय होईल आणि सोबतच शेअर बाजर कुठल्या दिशेनी कोलांटी उडी घेतं हे देखिल बघणं तितकच गरजेचं आहे.
येत्या २० एप्रिल ला ऋण नीती २०१०-११ जाहिर होतेय,त्या मध्ये वरिल चार सुत्रांपैकी कोणात बदल अपेक्षीत आहे,कीती बदल अपेक्षीत आहे आणि त्याचे उमटनारे पडसाद.आपण बघण्याचा प्रयत्नं करु.
सद्य परिस्थिती मध्ये वरिल चार सुत्रांचे रेट हे खालील प्रमाणे आहेत,
सी आर आर (cash reserve ratio):-5.75%
रेपो रेट:-5%
रीव्हर्स रेपो रेट:-3.50%
एस एल आर:-25%
खाद्य पदार्थांवरच्या वाढत्या महागाई दराला बघता आणि विरोधकांचे होणारे उग्र रुप बघता महागाई आटोक्यात आणण्यासाठी आर.बी.आय काहीतरी ठोस पावलं उचलेल हे नक्की.पण मग आर.बी.आय काय करु शकेल.आधी सांगीतल्या प्रमाणे आर.बी.आय च्या काय पावलांचे काय पडसाद उमटतात ते आधी बघु.

सी आर आर(cash reserve ratio):-
Bank नी आर.बी.आय कडे ठेवायचा जो कंपलसरी अमाउंट असतो त्याला सी आर आर म्हणतात.जो सद्ध्या ५.७५ % वर आहे.की bank नी ५.७५ % किमान रक्कम ही आर.बी.आय कडे ठेवावी.आर्थव्यवस्थेत पैशाचा ओघ बघता जर आर.बी.आय ने ही टक्केवरी इथुन २५ अथवा ५० बेसेस पोइंट (१% चा १/१०० भाग ) जरी वढवली तरी ती टक्केवारी ६% अथवा ६.२५% वर येईल.आणि ज्यामुळे bank ची liquidty मध्ये मोठ्या प्रमाणात घट होईल.bank कमी पैसा अर्थव्यवस्थेत ओतु शकेल आणि अनुक्रमे लोकांकडे कमी पैसा असेल खर्च करायला जेणे करुन महागाई वर नियंत्रण ठेवण्यास मदत होईल.ह्यालाच जोडुन जर का शेअर बाजारावर नजर टाकली तर bank ना येणार्या तिमाहीत कमी फ़ायदा होईल,आणि सोबतच शेअर गणिक उपार्जन कमी झाल्यास शेअर चा भाव कमी दराने वाढेल,आणि अगदिच कठोर परिस्थीती उद्भवल्यास शेअर चा भाव आहे त्या किमती वरुन कमी पण होऊ शकतो.तेव्हा ह्या विधानाला सल्ला मानण्याची सरळ गफ़लत करु नका,त्यासाठीही आधी अभ्यास करा....
आता हेच जर का अगदी विरुद्ध झालं तर अर्थव्यवस्थेत पैशाचा ओघ वाढेल आणि जे महागाई आटोक्यात आणण्याला पुरक ठरणार नाही.
रेपो रेट:-
Bank ज्या दरानी आर.बी.आय कडुन थोड्या अवधी साठी ऋण घेतं तो रेपो रेट.call money(ज्या दरानी bank आपापसात देवाणघेवाण करतं) चा रेट बघता जो सद्ध्या ३.६% च्या जवळपास आहे असं लक्षात येतं की बाजारात मुबलक liquidity आहे.त्यामुळे आधी सी आर आर वाढवल्यास मग रेपो रेट सुद्धा वाढवुन आर्थव्यवस्थेत एकसोबत पैशाचा ओघ अर्थव्यवस्थेतुन कमी करु शकतात.सद्ध्या रेपो रेट हा ५ % च्या सुमारास आहे आणि हा पण जर का २५ किंवा ५० बेसेस पोईंट नी वाढलं तर तो दर ५.२५ % किंवा ५.५% च्या सुमारास होईल.आणि ह्या करवी सुद्धा bank ना जास्तं दर द्यावा लागला तर bank ची liquidity कमी होईल.अनुक्रमे अर्थव्यवस्थेत कमी पैसा फ़िरेल.आणि महागाई आटोक्यात आणण्यास मदत होईल.ह्याने लोन रेट वाढण्याची शक्यता सुद्धा उद्भवते,ज्याकडे लक्ष देणं गरजेचं.
आणि हेच जर का विरोधात झालं तर तर ह्याने पण अर्थव्यवस्थेत पैशाचा ओघ वाढेल आणि लोन रेट्स मात्रं कमी होतील.

रिव्हर्स रेपो आणि एस एल आर:-
रेव्हर्स रेपो रेट हा तो दर ज्या दरानी bank आपला पैसा आर.बी.आय कडे ठेवते.जो सद्ध्या ३.५ % आहे.हा रेट सुद्धा वाढवुन आर.बी.आय बाजारातुन पैशाचा ओघ कमी करु शकतो.जर bank ना आर.बी.आय कडुन चांगला व्याज दर मिळत असेल तर पैसा ते तिथे ठेऊ शकतात.आणि आच जर कमी झाला तर bank आर.बी.आय कडे पैसा न ठेवता तो अर्थव्यवस्थेतच फ़िरवतील....आणि एस एल आर जो सद्ध्या २५% आहे तो जर का वाढवला तर मोठ्या प्रमाणात महागाई वर नियंत्रण आणु शकतात.आर.बी.आय ने काही दिवसांपुर्वीच हा दर कमी केला असल्यामुळे तो पुन्हा वाढेल अशी शक्यता जाणकार कमी वर्तवतात.आणि रिव्हर्स रेपो रेट कडे सुद्ध्या ह्यावेळी आर.बी.आय लक्ष देऊ शकते असं वाटतं.
खाद्य पदार्थांवरचा महागाईचा वाढता दर लक्षात घेता,कदाचीत सरकार आणि आर.बी.आय २० एप्रील पर्यंत वाट न बघता आधीच आपला एखादा निर्णय जाहीर करतील.हा लेख प्रकाशित होई पर्यंत हा एखादा निर्णय झालेला पण असेल.पण येत्या २० तारखेला ह्या ऋण नीती मध्ये असे काही बदल झालेत तर त्याचे असे पडसाद पडु शकतात.
वरील सर्वं बाबींचा लोन रेट्स, शेअर बाजार आणि फ़िस्कल डेफ़ीसीट वर परिणाम अनुक्रमे होईल,ह्याकडे मात्र्ं तुम्ही सर्वांनी स्वतः लक्ष द्यायला हवं,पण त्यासाठी लागेल अभ्यास.पैसा बनवायचा तर तो तुम्ही स्वतः बनवा,म्हणजे बनेल तर तो तुमच्या अभ्यासाच्याअ जोरावर.कारण सांगीतलं नं तुमच्या पैशावर तुअम्च्या पेक्षा कोणीच जास्तं प्रेम करत नाही...तेव्हा अभ्यास करा,अभ्यासात कुठे अडलाच तर आमची मदत घ्या.तोवर बिन्दास्त गुंतवणुक करा फ़क्तं जरा जपुन.

शिवानी दाणी
९८६०१३३८६०,dpatrakar@gmail.com

RICOVERY IS V SHAPED OR W????

upcoming article

RICOVERY IS V SHAPED OR W waiting for you?

New RIde of Indian Stocak markets Roller coaster

Hello, Investors......

How you doing on the roller coaster of the Indian Stock market????Now are you jealous of those who have made approx up to 90-100% certain profit in last 12 months of period??

Whatever happened in last 12 months with them was either their wisdom or their luck...but there is nothing to get upset by thinking that you lost the ride. Here new Brand rides again for those who have missed the rally and for those who want touch new highs....

As we told many times that stock market is not gambling....its all about the supply and demand of the asset class in the system....so if you really want to make money and achieve your goals then have patience for min 18 months to 24 months and if your luck is very strong then you may get it in 12 months only......But you have to decide it whether you have to be dependent on luck or you can build your destiny by your own palm...if you go with second option then believe us luck gonna follow you by all means....so by taking wise decisions and ethical steps you can reach upto your destination of money, and for that we present some case studies and some ethical and predictions about the stock market.....

After the 18 months of heavy recession fall, Indian Market is enjoying the liquidity roaming in system and started new journey to achieve new highs. As India is very rich in population and government is introducing many new policies regarding the education and new employments of the public which gonna take many small business and transactions in swing. And these transactions will participate in GDP of the country. So after the periods of say 24 to 36 months and onwards BANKING SECTOR will flourish like anything. And believe us that will be one of the outstanding and most profitable ride for you for life time.

Since Dec 08 State Bank Of India shown rise of around 110 % and in last week it shown lil corrections, after touching the level of 2500 it came to now again around 2300,though its lil expensive but for long term gain script with PE 16.38 had sales of around 17,473 crors in June 09 where in Oct 09 it is to be raised by few percent.SBI is one of the biggest group in India for Banking sector and as we see the increment in development and rise in GDP this figure will pay you in terms of gem. The average return on equity it given is 15 % per anum on an average. So to get proper dividends and returns on equity SBI can be good for you.

Also IDBI ,PNB can also give you good returns for long term.

Start adding gem stocks in your portfolio which will pay you definite returns on year on year bassis and also always invest 30 % in long term stock in your portfolio.and for todays sceanario BANKING SECTOR be a very good option..

Start your journey with patience and proper palning victory will be yours..till then have a happy trading but just be safe.

Shivani Dani

Stock analyst and Financial consultant.

9860133860

BLOG IS UNDER CONSTRUCTION>>>>>>>>>>>>>>>WE WILL BE BACK WITH NEW UPDATTES SOON......................

TILL THEN HAVE A HAPPY TRADING>>>>>>>>>>>>>>

D Shivani

Stock Analyst

n FINANCIAL CONSULTANT.....

Forcast & Quick BItes

Do you know,What we are doing now is building a base for the next big bull market. Have you noticed that the pricing is moving up and down in a relatively large channel and that channel has an upward slope.

If you look at the difference from the absolute bottom in October, we are up about 20%. And in some cases we are up more than 50-60% in some of the markets around the world. So you might say if you define a bull market as being over 20% increase we are already in a bull market in some places but for the true long-term bull market, we will have to wait a little longer but the base is being built right now.

The current situation is part of this base building process that I mentioned. I think the worst getting over.

And if you will ask perticulerly about comming week then I will say,

"Many global markets will come back to trade in full form and  trend only on Monday But The Indian markets do look strong and how they open and trade Monday onward remains to be seen".

lets think for better and safe........

have a happy treading.enjoy fully but just be lil careful.