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Investment
Management
Session 4

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Bond Valuation
• Terms
– Par Value (Face value)
– Coupon rate
– Maturity Date

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Bond Types
• Types
– Government Bonds
– Corporate Bonds
• Straight Bonds
• Zero Coupon Bonds (Deep Discount Bonds)
• Floating Rate Bonds
• Bonds with Embedded Options
– Convertible Bonds
– Callable Bonds
– Puttable Bonds
• Commodity Linked Bonds

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Bond Pricing
• Price of a bond
• Current Yield

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Bond Pricing
• Yield to Maturity
– Ideal Way is to solve for ‘r’
– Short cut approximation:
• Holding Period Return

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Risks in Bonds
• Interest Rate Risk
• Inflation Risk
• Real Interest Rate Risk
• Default Risk
• Call Risk
• Liquidity Risk
• Reinvestment Risk
• Foreign Exchange Risk

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Duration & Immunisation
• Duration - Weighted Average life of bond
which considers the size and timing of each
cash flow.
• Immunisation – Matching Price risk &
Reinvestment risk
– Match the investment period with the duration

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Mutual Funds
• Organisation Structure
– Sponsor
– Mutual Fund Trust
– Trustee
– AMC
– Custodian
– Registrars & Transfer Agents

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Scheme Types
Equity
 Diversified
 Index
 Sectoral
 Tax Planning
Debt
 Gilt
 Mixed Debt
 Floating Rate
 Cash
Hybrid
 Equity Oriented
 Debt Oriented
 Variable Asset Allocation

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Types
• Open Ended
• Closed Ended
– Exchange traded
• Real Estate Investment Trusts (REIT)
• Regulations

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Calculating NAV
• NAV = (Market value of investment +
Receivables + Accrued Income – Liabilities –
Accrued Expenses) / Number of units
outstanding

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Derivatives – Forwards & Futures
• An Agreement to buy or sell at a predetermined
price at a future date.
• Forward Vs Future
• Futures
– Clearing House
– Margins
– Mark-to-market
– Price limits

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Futures
• Equity
• Index
• Interest rate
• Foreign Exchange
• Commodities

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Derivatives – Options
Right to buy or sell something without the obligation.
Call (option to buy) or Put (option to sell)
Exercise Price or Strike price or Striking price
Expiration or Maturity Date
European Option and American Option
Exchange traded or Over-The-Counter

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• State of the Option
– In the money
– At the money
– Out of the money
• Intrinsic Value = (Value of the option if it were to
expire immediately)
• Time Value of the Option = (Market price of the
option [premium] – Intrinsic value)

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