It is always nice

to see you all with

lot of POSITIVITY
AND ENERGY!
Let’s start with some pieces
of wisdom from Stock
Market.
Wall Street people learn nothing and forget everything.
---Benjamin Graham

“Don’t try to buy at the bottom and sell at the top. It can’t be
done except by liars.”
-Bernard Baruch
Let’s move to next item of
our agenda!

But, first something

about negative working
capital!
How do you react to the negative Working Capital of
these companies?
Please remember that there
is no such thing as

IDEAL RATIO!
Let me discuss something
interesting for a student
of Investment Analysis and
Portfolio management!
The Stock
market fell
on August 2,
2023
What is its impact
on the bond
market and
Foreign Exchange
Market?
Couple of things before we
move ahead…
 The Bid Price
 The bid price is the price that an investor is willing to pay for the security.
 It represents the highest price that someone is willing to pay to buy a stock.

 The Ask Price

 The ask price is the price that an investor is willing to sell the security for.
 It is the lowest price at which someone is willing to sell the stock for.
Calculation of Impact cost – Source NSE
What NEXT?

Time to finish unfinished

agenda of the previous
class.
 Meet this man…

He has bought 100 share of

Ultratech Cement Limited on Jan
23, 2023 @ Rs. 7,100 per share. He lost Rs.
25,310 in a day!
What’s going in his mind?

Guess?

I would not have bought them and would

not pay to my broker. Why should I bear
the huge loss?
 Think…

 What will be the problem in the stock market if this person does

not pay money to his broker and consequently, the broker does

not pay to the exchange?

Who should
It results into Counterparty credit bear this
Risk (CCR) - A risk that the risk?
counterparty to a transaction could
default before the final settlement
of the transaction's cash flows.
What’s the way out?
 Margins
The Exchange charges margins from the brokers and the
brokers in turn take margins from the client. On every
buy and sell transaction, the broker has to deposit the
margin money with the exchange.
What is Margin?

 Margin money is collected as a collateral which the trader has to

deposit with the exchange.

 Margin money shows commitment of the trader and partially

covers the risk in the trade being open for the day.

 Buyer or seller both have to deposit a token payment to broker

and broker will deposit this money to exchange. This token
money is called margin.
Why should
there be
margins?
Margin money has to be
paid by the buyer and
seller.
Margin payments ensure that each
player in the market is serious
about buying or selling shares.
Cash Market Margins

 Margins in the cash market segment comprise of

the following three types:

▪ Initial Margin
Value at Risk (VaR) margin
Extreme loss margin

▪ Mark to Market Margin

Value at Risk (VaR) margin

 VaR is a technique used to estimate the probability of loss

of value of a security, based on the statistical analysis.

 A VaR statistic has three components:

▪ Time period

▪ Confidence level

▪ Loss amount (or loss percentage)

Value at Risk (VaR) margin

 For example,

 VaR1,99 = 1,000

▪ There is only 1% chance, loss of this security will exceed

1,000 in 1 Day.

 VaR10,95 = 10,000

▪ There is only 5% chance, loss on this security will exceed

10,000 in 10 Day.
 Value at Risk (VaR) margin

 VaR margins are different for different groups of companies. Three groups
of companies are made:
▪ Group 1
 Regularly traded (more than 80% of the trading days in the previous six months)
 High liquidity (Impact cost less than 1% )
▪ Group 2
 Regularly traded (more than 80% of the trading days in the previous six months)
 Moderate liquidity (Impact cost more than 1%)
▪ Group 3
 All other shares
Calculation of Extreme Loss Margin

 The extreme loss margin aims at covering the losses that could
occur outside the coverage of VaR margins.

 The Extreme loss margin for any stock is higher of 1.5 times the
standard deviation of daily LN returns of the stock price in the last
six months or 5% of the value of the position.
 Calculation Mark-to-Market (MTM) margin

 In securities trading, Each security price is recorded based on the current

market value rather than book value.

 This is done most often in futures accounts to ensure that margin

requirements are being met.

 MTM is the Profit/Loss calculated at the end of the day on all open positions.
Amount required to deposit w.r.t MTM is called as MTM margin.
 Let’s calculate margin money…

 NSE has calculator through which we can estimate the

amount of margin money.

 The link is -
https://www1.nseindia.com/live_market/dynaContent/live_w
atch/margincalc/CMInputMargincalc.jsp
Any question before we
proceed further?
 TAKE YOU TO
THE WORLD OF
BONDS!
Are Bonds safe for investing?
What’s a bond?
BOND ………..???

 Bond is a financial instrument through which a

firm/Government/person raises funds and promised to pay a
rate of interest and is having a promised date of repayment.

 A BOND is an agreement in which an issuer is required to pay

the investor the amount borrowed plus interest over a period of
time. A bond is in effect an IOU which can be bought and sold.
 EVERY BOND SHOULD CARRY ...

a coupon rate and its schedule of payment (if a

bond is not carry any coupon, then it is called a ZERO-COUPON
BOND)

a face value; and

a maturity period. (some bonds are perpetual bonds.)
Please note that all bonds
are evaluated in terms of
return and risk.
First, let’s discuss
return on a bond.
Return on a bond is understood in
the sense of YIELD TO MATURITY ...
 YIELD TO MATURITY ...

 Return on a security (YTM) is that discount rate which makes

the present value of future cash inflows from a bond equal to the
present price of a bond over its maturity period.
c1 c2 c + RV
P = + + ... + n
(1 + r )1
(1 + r ) 2
(1 + r )n
where
P = price of bond
ci = coupon of ith period
RV = redemption value
r = discount rate or YTM
An Example…

 Suppose that a bond with face value of Rs. 1,000

has a maturity of 8 years, and coupon of 10%. If it
is presently trading at Rs. 1,055.35, then
determine the YTM of the bond.

100 100 100 + 1,000

Rs.1,055.35 = 1
+ 2
+ ... +
(1 + Y ) (1 + Y ) (1 + Y )8
Calculating YTM using EXCEL
YEAR CASH FLOWS
0 (Rs.1,055.35)

1 Rs.100.00

2 Rs.100.00

3 Rs.100.00

4 Rs.100.00

5 Rs.100.00

6 Rs.100.00

7 Rs.100.00

8 Rs.1,100.00

YTM = 9.00%
Another Example…

 Suppose that a bond with face value of Rs. 1,000

has a maturity of 4 years, and coupon of 8.5%
payable half-yearly. If it is presently trading at Rs.
985.75, then determine the YTM of the bond.

42.50 42.50 42.50 + 1,000

Rs.985.75 = 1
+ 2
+ ... +
(1 + Y ) (1 + Y ) (1 + Y )8
Calculating YTM using EXCEL
Using EXCEL to calculate YTM…
 Using EXCEL to calculate YTM…

we can use IRR function to

 Alternatively,
calculate YTM
 Do we calculate yield on T-Bills (Treasury Bills) in
the same manner as YTM?
Please note that Treasury bills or T-bills, which are money market instruments,
are short term debt instruments issued by the Government of India and are
presently issued in three tenors, namely, 91 day, 182 day and 364 day. Treasury
bills are zero coupon securities and pay no interest. Instead, they are issued
at a discount and redeemed at the face value at maturity.
The answer is NO!

 Yield on a T-Bill is calculated as –

Par Value - Market Price 365

Yield-to-Maturity on T-Bills = 
Market Price Actual Days
 What goes into the making of YTM?

Coupon
The following 3 elements:
▪ Coupon income
Reinvestme Yield-to-
▪ Reinvestment income on nt Income Maturity

coupon received
Capital
▪ Capital gains and losses. Gains and
Losses
Once we know how much YTM is to be
earned on a bond, then next question
arises is - “what price one should pay
for it?”
How to value a bond?

 Why does a person pay for bond?

 Because it gives future stream of cashflows.
 Therefore, the value of a bond should be equal to present value of
future cashflows.
c1 c2 c n + RV
P = + + ... +
(1 + r )1 (1 + r )2 (1 + r )n
where
P = price of bond
ci = coupon of ith period
RV = redemption value
r = discount rate or YTM
An Example…

 Suppose that a bond with face value of Rs. 1,000 has a

maturity of 8 years, and coupon of 10%. If YTM is 9%, then
determine the price of bond.

100 100 100 + 1,000

P= + + ... +
(1 + 9%)1 (1 + 9%) 2 (1 + 9%) 8
= Rs. 1,055.35
Calculating Bond Price using EXCEL

DISCOUNT PV OF CASH
YEAR CASH FLOWS
FACTOR FLOWS
1 Rs.100.00 0.917431193 Rs.91.74

2 Rs.100.00 0.841679993 Rs.84.17

3 Rs.100.00 0.77218348 Rs.77.22

4 Rs.100.00 0.708425211 Rs.70.84

5 Rs.100.00 0.649931386 Rs.64.99

6 Rs.100.00 0.596267327 Rs.59.63

7 Rs.100.00 0.547034245 Rs.54.70

8 Rs.1,100.00 0.50186628 Rs.552.05

PRICE = Rs.1,055.35
Another Example…

 Supposethat a bond with face value of Rs. 1,000

has a maturity of 6 years, and coupon of 9%. If
YTM is 10.25%, then determine the price of bond.

90 90 90 + 1, 000
P= + + ... +
(1 + 10.25%)1 (1 + 10.25%) 2 (1 + 10.25%)6
Calculating Bond Price using EXCEL

DISCOUNT PV OF CASH
YEAR CASH FLOWS
FACTOR FLOWS
1 Rs.90.00 0.907029478 Rs.81.63
2 Rs.90.00 0.822702475 Rs.74.04
3 Rs.90.00 0.746215397 Rs.67.16
4 Rs.90.00 0.676839362 Rs.60.92
5 Rs.90.00 0.613913254 Rs.55.25
6 Rs.1,090.00 0.556837418 Rs.606.95
PRICE = Rs.945.96
Using EXCEL to calculate Price of a bond…
It’s time to appreciate some relationship
with regard to bonds

 We should study the relationships between the

components of a bond and bond price.
RELATION BETWEEN BOND PRICES AND COUPON

❑ For a given maturity period and given YTM, we observe the

following relation between bond price and coupon rate:

As coupon increases, the price of bond increases but

LINEARLY.
RELATION BETWEEN BOND PRICES AND YTM

❑ For a given maturity period, we observe the following

relation between bond price and YTM:

HIGHER THE YTM, LOWER THE BOND PRICE and

vice-versa.
RELATION BETWEEN BOND PRICES AND YTM (continued…)

 For a given maturity period, we observe the following

relation between bond price and YTM:

▪ If YTM is greater than coupon rate, then the bond is sold at a

discount.

▪ If YTM is less than coupon rate, then the bond is sold at a

premium.

▪ If YTM is equal to coupon rate, then the bond is sold at par.

RELATION BETWEEN BOND PRICES AND TIME
TO MATURITY
❑ Price of a bond changes with time!!!
❑ In this regard, we observe the following:
As a bond approaches to its maturity, its price approaches to
its terminal value.

It means that if a bond is being sold at premium at present,

its price will decrease over time; if it is being sold at a
discount, then its price will increase over a period of time; and
if it is being sold at par, then its price will remain at par over
a period of time.
RELATION BETWEEN BOND PRICES AND
DIFFERENT MATURITY PERIODS (continued…)

❑ For a given coupon rate and a given YTM, the different maturity
periods bonds have mixed impact on the prices of bonds.

 If the coupon is more than the YTM, then the bond with higher
maturity periods will have HIGHER PRICES.

 If the coupon is less than the YTM, then the bond with higher
maturity periods will have LOWER PRICES.

 If the coupon is equal to the YTM, then the bond prices remain
same AT PAR irrespective of maturity period.
Any question regarding bonds?
What next?
Nothing more in
this session!
ENJOY AND
HAVE FUN!

Have a
BREAK!