FINANCIAL MARKETS

COURSE CODE : FMK14-4

Assignment/Project Title :

The curious case of IDBI Cal

Group Name:

GROUP 3-HONG K

Submitted on:

7/4/2015

Sl. No.
1
2
3
4
5
6

Group Members' contribution to thi

Student ID
F14001
F14009
F14028
F14038
F14041
F14109

DateOfSubmission_AssignmentName_GroupName.xlsx/docx/pptx (Date of Submission shall b

(No submission will be accepted as a proper submission, if File Naming Convention is not followed)

us case of IDBI Call/Put Option Bonds

GROUP 3-HONG KONG

mbers' contribution to this Project

Student Name
ANTON JOHN KARTHIK
R ARUN
JOSEPH SATHYAN B.
PRAVEEN KUMAR R.
RAHUL GUPTA
SHREYAS M NATAL
Total

Contribution %
0.16666
0.16666
0.16666
0.16666
0.16666
0.16666
Should be equal to 100%
100%

e of Submission shall be in YYYY-MM-DD format only)

tion is not followed)

d be equal to 100%

Answer to Question 1

IDBI issued the bonds when the interest rates in the market were hovering around 12%. Po
2001, the interest rates had come down to a level of 7%-7.5%** whereas the yields of th
high as 15.54%. Therefore it would have been logical for IDBI to call back the bonds to av
interest payments on the bonds issued. It could then issue bonds around the market rate
be substantially lower than the current interest being payed by them on their existing bond
on the interest payments

** Source
http://www.allbankingsolutions.com/Banking-Tutor/Chronology-Bank-Rate-India.shtml

tion 1

hovering around 12%. Post Marchwhereas the yields of the bonds were as
all back the bonds to avoid excess
s around the market rates which would
em on their existing bonds thus saving

k-Rate-India.shtml

Bonds Called

Information Given
Issue Date
Maturity Date
Issue Price
Maturity Price
Coupon rate
Frequency

31-Mar-92
31-Mar-17
Rs. 2,700
Rs. 100,000
0%
0

Redemption
Value
Rs. 5,700
Rs. 12,000
Rs. 25,000
Rs. 50,000

Call Date
31-Mar-97
31-Mar-02
31-Mar-07
31-Mar-12

Market Value of Bonds at 31st March 2001 is Rs 10713

Calculations
Case 1: Primary Investor (Holders of orginal issued bonds at 31st March 1992)
Amount Invested

2700

Amount Received

10713

Years Held

16.55%

Return on Investment

Case 2: Secondary Investor (Buyers of Bonds from the primary investors in the
secondary market on 31st March 2001
Amount Invested
Amount Received
Years Held

10713
100000
16

14.98%

Return on Investment
.

10713

Comments
Gains

The primary investor

because he was destined to earn a yield of
15.54% but because of the appreciation of Bond's price in the secondary market he
was able to fetch a better price of Rs 10713 as on 31st March 2001, thus getting a
return of 16.55% which is greater than YTM of 15.54%, if sold in the secondary
market

lose

The secondary investor will

if he buys the bond in the secondary market at
the price of Rs 10713 because he is buying the bond at a premium price and
thus he would be earning a return of 14.98% which is much lesser than the original
YTM of 15.54%

Int R
Issue price Face Value Pay

Information Given

Yield Calculations

Issue Date
Maturity Date
Issue Price
Maturity Price
Coupon rate
Frequency

Rs.2,700

31-Mar-92
31-Mar-17
Rs. 2,700
Rs. 100,000
0%
0
Primary Investor
YTM Calculation

Redemption
Value
Rs. 100,000

Maturity Date
31-Mar-17

Rs.1,00,000
on March 31,
2017

Secondary Inve
Yield To
Maturity
15.54%

Issue Date
Issue Price

YTC Calculation
Redemption
Value
Rs. 5,700
Rs. 12,000
Rs. 25,000
Rs. 50,000

Call Date
31-Mar-97
31-Mar-02
31-Mar-07
31-Mar-12

N.A

YTC Calculat
Yield To Call
16.12%
16.09%
15.99%
15.71%

Redemption
Value
Rs. 12,000
Rs. 25,000
Rs. 50,000

Int Rate/
price Face Value Paymt Date Details

700

Rs.1,00,000
on March 31,
2017

N.A

Call option by investor and put option by IDBI at the end of

every five year fromMarch, 1992. Maturity after 25 years on
March 31, 2017.
Option:
Rs.5,700 on 31st March 1997
Rs.12,000 on 31st March 2002
Rs.25,000 on 31st March 2007
Rs.50,000 on 31st March 2012
Rs.1,00,000 on 31st March 2017

Secondary Investor
31-Mar-01
10713
YTC Calculation
Call Date
31-Mar-02
31-Mar-07
31-Mar-12

Yield To Call
12.01%
15.17%
15.03%