Академический Документы
Профессиональный Документы
Культура Документы
FINANCIAL INSTRUMENTS
1.0 TREASURY BILLS
Treasury Bills have a maturity period of less than one year. The interest on
Treasury Bills is paid in a different manner that the bills are sold at a discount
and redeemed at par value at maturity. The amount of discount and the term of
maturity determine the yield.
To clarify this with an example, by paying Rs. 84745.76 up front, one can
obtain an one year treasury bill going at 18% with a face value of Rs. 100,000
(84745.76 x 1.18 = 100,000).
There are several advantages associated with treasury bills. The most significant
feature is that it is a "risk free" investment, which is accepted as a collateral by
any financial institution. Further, it can be endorsed and transferred in favour of
someone else, prior to maturity. In addition, it can be discounted and encashed
at any time, prior to the date of maturity.
A company uses its strength and reputation to borrow directly from the public
and other firms by issuing commercial papers on short term, at an interest rate
less than the lending rate of the commercial banks, but higher than the savings
rate. Firms use this instrument to fund trade, commercial and production
activities. The firms often use ratings obtained from a reputed Rating Agency, in
raising funds this way.
3.0 DEBENTURES
This is a fixed interest rate medium term debt security issued by the firms. The
debentures are usually secured by the assets of the company. The debenture
holder is a creditor to the company. Unlike the other debt instruments,
debentures can be traded on a stock exchange. There are two types of
debentures, which are either convertible or redeemable. Convertible debentures
yield a fixed interest rate during its life span and they are converted into equity
at maturity, on a method of conversion agreed prior to the issuance. The
redeemable debenture is converted to money and paid back to the lender, at
maturity.
1
4.0 BONDS
The most unique feature of a bond is that it usually carries a "call feature" which
allows the bond issuer to "call in" the bond and repay them at a predetermined
price, before maturity is reached. This option is often executed when the market
interest rate is significantly lower than the coupon interest rate. In other words,
when the issuer can borrow in the open market at an interest rate which is very
much less than the coupon rate. This process of retiring expensive debt and
obtaining fresh loans at a lower rate is known as "Debt Refinancing". However,
some bonds are "call protected", that they offer a guarantee to the investors that
it will not be called for a specified period of time, from the date if issuance.
However, if a bond is called, the
investor is usually paid a premium over the par value for the inconvenience.
- Coupon Yield
- Current Yield
- Yield to Maturity (YTM)
2
(b) Current yield = 80 / 800 = 10%
Types of Shares:
- Ordinary Shares
- Preference Shares
- Non-Voting Shares
- Rights Issues
- Bonus Issues
- Primary Issues (IPOs)
Ordinary Shares:
Preference Shares:
A Preference Share gives limited ownership rights to, the shareholder. However,
in the event of a liquidation the preference shares possess priority over ordinary
shares. Further, preference shareholders are entitled to receive dividends before
the ordinary shareholders.
Share holders do not have a right to vote at the Annual General Meeting.
3
Rights Issues:
Bonus Issues:
Bonus Shares are basically dividends paid on existing shares, in shares itself
rather than in cash. Funds for capitalization of bonuses come either from the
accumulated reserves or from asset revaluations.
When an unlisted company offers shares to the public with a prospectus filed
with the Registrar of Companies and with the approval of the Stock Exchange
for the shares to be listed and traded on the stock exchange, it is called either a
Primary Issue or an Initial Public Offering. This will be priced either at par
value or with a premium.
To clarify this with an example, suppose that an investor purchased 1000 shares
(with a par value of Rs. 10.00) of a company at Rs. 60.00. Exactly after one
year, the company declared a 30% dividend and offered 1right for every 2
shares (1:2) with a premium of Rs. 14.00 and a bonus of 3 for every 10 shares
(3:10), simultaneously. After all these events, the share is now trading at Rs.
50.00. Assuming that the investor took up all his rights, calculate the percentage
of total gain accrued to him.
4
Dividends received = 10,000.00x 30% =
3,000:00
Market price of shares = 1800x 50.00 = 90,000.00.
Total Gain = (90,000.00- 72,000.00)+ 3,000.00
= 21,000.00
Minimum Return On Investment = (21000/72000) x 100 = 29.16%
Risk and ROI are highly co-related. In other words, ROI is high when the
risk is high. The risks associated with stocks can be distinguished into two
categories
(a) If the two shares are perfectly negatively co-related, the portfolio risk
can be completely eliminated.
(b) If the two shares are perfectly positively co-related, the portfolio risk
cannot be changed.
Market Risk:
Beta Co-efficient:
The tendency of a stock to move with the market is reflected in its beta
coefficient. An average stock is defined as one that tends to move up and down
in line with the general market (measured by an index). An average stock has a
beta coefficient of 1.0. High beta values are associated with shares with high
company risk and low beta values are associated with shares with low company
risks.