INVESTMENT ANALYSIS &

PORTFOLIO MANAGEMENT

Fixed Income Market in India and Bond Analysis

Submitted to:
Prof. Monika Chopra

Submitted by:
Shubham Agarawal
126/2015
Section C

What are bonds?

Bond is a debt security, in which the authorized issuer owes the holders a debt and,
depending on the terms of the bond, is obliged to pay interest (the coupon) to use and/or to
repay the principal at a later date, termed maturity. A bond is a formal contract to repay
borrowed money with interest at fixed intervals (ex semiannual, annual, sometimes monthly).
Bonds provide the borrower with external funds to finance long-term investments, or, in the
case of government bonds, to finance current expenditure. Bonds and stocks are both
securities, but the major difference between the two is that (capital) stockholders have an
equity stake in the company (i.e., they are owners), whereas bondholders have a creditor
stake in the company (i.e., they are lenders). Another difference is that bonds usually have a
defined term, or maturity, after which the bond is redeemed, whereas stocks may be
outstanding indefinitely.
Types of Bonds
Government Bonds
In general, fixed-income securities are classified according to the length of time before
maturity. These are the three main categories:
Bills - debt securities maturing in less than one year.
Notes - debt securities maturing in one to 10 years.
Bonds - debt securities maturing in more than 10 years
Municipal Bonds
Municipal bonds are the next progression in terms of risk. The major advantage to
munis is that the returns are free from federal tax.
Furthermore, local governments will sometimes make their debt non-taxable for residents,
thus making some municipal bonds completely tax free. Because of these tax savings, the
yield on a muni is usually lower than that of a taxable bond. Depending on your personal
situation, a muni can be a great investment on an after-tax basis.
Corporate Bonds
Corporate bonds are characterized by higher yields because there is a higher risk of a
company defaulting than a government. The upside is that they can also be the most

rewarding fixed-income investments because of the risk the investor must take on. The
company's credit quality is very important: the higher the quality, the lower the interest
rate the investor receives.
Zero-Coupon Bonds
This is a type of bond that makes no coupon payments but instead is issued at a
considerable discount to par value.

Indian Bond Market

Abstract
The Bond Market in India with the liberalization has been transformed completely. The
opening up of the financial market at present has influenced several foreign investors holding
upto 30% of the financial in form of fixed income to invest in the bond market in India.
The bond market in India has diversified to a large extent and that is a huge contributor to the
stable growth of the economy. The bond market has immense potential in raising funds to
support the infrastructural development undertaken by the government and expansion plans
of the companies.
Sometimes the unavailability of funds become one of the major problems for the large
organization. The bond market in India plays an important role in fund raising for
developmental ventures. Bonds are issued and sold to the public for funds.
Bonds are interest bearing debt certificates. Bonds under the bond market in India may be
issued by the large private organizations and government company. The bond market in India
has huge opportunities for the market is still quite shallow. The equity market is more
popular than the bond market in India. At present the bond market has emerged into an
important financial sector.

The major reforms in the bond market in India

The system of auction introduced to sell the government securities.

The introduction of delivery versus payment (DvP) system by the Reserve Bank of India to
nullify the risk of settlement in securities and assure the smooth functioning of the securities
delivery and payment.

The computerization of the SGL.

The launch of innovative products such as capital indexed bonds and zero coupon bonds to
attract more and more investors from the wider spectrum of the populace.

Sophistication of the markets for bonds such as inflation indexed bonds.

The development of the more and more primary dealers as creators of the Government of
India bonds market.

The establishment of the a powerful regulatory system called the trade for trade system by
the Reserve Bank of India which stated that all deals are to be settled with bonds and funds.

A new segment called the Wholesale Debt Market (WDM) was established at the NSE to
report the trading volume of the Government of India bonds market.

Issue of ad hoc treasury bills by the Government of India as a funding instrument was
abolished with the introduction of the Ways And Means agreement.
In 2014-15, the government and the corporate sector collectively mobilized ` 14,244 billion
(US $ 233 billion) from the primary debt market, an increase of 18 percent as compared to a
decline of 2 percent in the preceding year. The year also saw decline in the share of
government borrowings in the total borrowings. About 69 percent of the resources were
raised by the government (the central and the state governments), while the balance was
mobilized by the corporate sector through public and private placement issues.
Types of bonds in India

Corporate Bond Market

Municipal Bond Market
Government and Agency Bond Market
Funding Bond Market
Mortgage Backed and Collateral Debt Obligation Bond Market

YIELD STRUCTURE
India vs. US market

Figure 1 India vs US Yields (Bloomberg)

Y-axis: Yields, X-axis: Tenor of maturity.

Indian Sovereign Yield curve: The Indian sovereign yield curve appears to be flatter as against the
US treasury yields.
Flat Yield Curve
The flat yield curve is a yield curve in which there is little difference between short-term and longterm rates for bonds of the same credit quality. This type of yield curve is often seen during
transitions between normal and inverted curves. The difference between a flat yield curve and a
normal yield curve is a normal yield curve slopes upward.
Reason of Flattening Curve
A flattening yield curve may be a result from long-term interest rates falling more than short-term
interest rates or short-term rates increasing more than long-term rates. A flat yield curve is typically
an indication investors and traders are worried about the macroeconomic outlook. One reason the
yield curve may flatten is market participants may be expecting inflation to decrease or the Federal
Reserve to raise the federal funds rate in the near term.

Flat yield curve implies that yields on short- and long-term securities are nearly identical i.e. no
maturity premium for investors.
In the Indian scenario the Yield curve is flattening due to the third case when the market participants
are expecting that Interest rates will be raised in near term.

US Treasury Yield curve: The US treasury yield curve shows a normal upward sloping curve i.e.
higher yields for longer tenor bonds.
When the yield curve is normal, investors expect interest rates in the future to be higher. The higher
interest rates would be a result economic growth and higher inflation in the future. It can be inferred
that investors anticipate higher growth and inflation in US market in future.
Spread between US India Yields
The lower graph in Fig 1 indicates the spread between US Treasury yields and Indian Sovereign
yields which currently is around 540 bps for 10-year maturity bonds. The spread indicates the
riskiness investors associate with India.

MRF

Madras Rubber Factory Limited, commonly known by the abbreviation MRF, is an Indian
multinational and the largest manufacturer of tires in India. It is headquartered in Chennai,
India. The company manufactures rubber products including tires, treads, tubes and conveyor
belts, paints and toys. MRF also runs the MRF Pace Foundation, Chennai and MRF
Challenge in motorsport.
MRF originally started as a humble shack manufacturing toy balloons. It was set up by KM
Mammen Mappillai in 1946. The history of MRF Tyres is really amazing, what started with
an initial investment of Rs. 14000, is currently a multi-billion rupee legacy.
The company is a renowned and prominent brand of our country. In the year 1952, it changed
its course to tread rubber manufacturing and today it is one of the leading tyre manufacturers
in India.
In the year 1956, the tyre maker led the tread rubber industry in India by having more than
50% of the share in the market. In the early 1960's, MRF Tyres started exporting superior
quality tyres to many dealers abroad and today, it is supplying to more than sixty-five
countries with a network of 3000 outlets.

BOND ANALYSIS

Figure 2:Bond Description (Bloomberg)

Name of the Issuer: MRF Limited

Madras Rubber Factory Limited, commonly known by the abbreviation MRF, is an Indian
multinational and the largest manufacturer of tyres in India. It is headquartered in Chennai,
India. The company manufactures rubber products including tyres, treads, tubes and
conveyor belts, paints and toys also runs the MRF Pace Foundation, Chennai and MRF
Challenge in motorsport.
Industry: Auto Parts Manufacturing
Type of Bond: Corporate Bond-Bullet Bond.
Domestic market issue, announced on 05/24/2011 and will mature on 05/23/2021.
Bullet Bond:-The entire principal value is paid all at once on the maturity date, as opposed to
amortizing the bond over its lifetime. Bullet bonds cannot be redeemed early by an issuer,
which means they are non-callable.

The coupon payment date has been fixed at 27th of May every year from 2011 to 2021 when
the bond will mature. Also since the coupon frequency is Annual, bondholders will receive
coupons only once in a year.
Ranking:
The bond in consideration has been ranked as 1st Lien which means the highest priority debt
in the case of default. If a property or other type of collateral is used to back a debt, first lien
debt holders are paid before all other debt holders. This type of debt holds less risk than
a second lien debt.
Ratings:
CARE: AAA
Instruments with this rating are considered to have the highest degree of
safety regarding timely service of financial obligations. Therefore it has
the lowest credit risk. Instruments with this rating are considered to have
the highest degree of safety regarding timely service of financial
obligations. Therefore it has the lowest credit risk. Investing in such kinds
of bonds are favourable in nature and at the same time they are a bit
pricey also as they assure safety.

Figure 3: Yield & Spread (Bloomberg)

As a whole, the spread is high for the given bond i.e. 102.68 basis Overall, we can say
that the liquidity is relatively low.
Current price of the bond is Rs.107.081
The True Yield of bond is 8.198% which is reflected by the increase in price of the
bond.
The current yield which is a bond's annual return based on its annual coupon
payments and current price is 9.423% because of its increased current price in the
market.
The modified duration is 3.781 whereas the convexity is 0.178. While a lower figure
is appreciated in terms of duration, the convexity figure is also very low, implying
high sensitivity to interest rate changes.

 G-Spread for the bond is 102, which means that a govt. Bond of similar maturity
period will have a yield of 1.02% less.
OAS of the bond is 101.1 basis points which is lesser than normal spread which means
option would help in increasing liquidity of the bond. This takes the dollar difference
between the fair price and the market price and converts it into a yield measure. The
OAS helps reconcile the value to market price by finding a spread that will equate the
two.
The constant spread that will make the price of a security equal to the present value of
its cash flows when added to the yield at each point on the spot rate Treasury curve
where a cash flow is received . In other words, each cash flow is discounted at the
appropriate Treasury spot rate plus the Z-spread. Z spread of the bond is 161.0 basis
points which is on the higher side.
Below graph of Z-Spread curve the z-spread has increased over the period, which is
not a good sign as higher values for z-spread leads to wrong valuation of the bond.
But recently the value is falling which is a good sign.

Figure 4: Graph of Z-Spread (Bloomberg)

Z-SCORE ANALYSIS
Z-Score is a simple linear, multi-factor model that measures the financial health and
economic stability of a company. The score is used to predict probability of a firm going into
bankruptcy within next 24 months or two fiscal years from the day stated on the accounting
statements used to calculate it. The model uses five fundamental business ratios that are
weighted according to algorithm of Professor Edward Altman who developed it in late 1960s
at New York University.

MRF LIMITED has a Z-score of 4.43 which implies that it is in good health. Thus there is no
risk in investing in this particular bond.