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Title: Investment Notes
Description: Functions of Financial Market, BOND UNDERWRITING,CREDIT RATING , SECURITIZATION, Efficient Market Hypothesis, Capital Asset Pricing model, OPTIONS
Description: Functions of Financial Market, BOND UNDERWRITING,CREDIT RATING , SECURITIZATION, Efficient Market Hypothesis, Capital Asset Pricing model, OPTIONS
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NOTES
Price=Coupon/(1+i)n+ FV/(1+i)n
• Coupon rate is NOT discount rate
...
ANNUITY – Fixed amount, periodically and specified time period
PVA = CF* [ 1/r - 1/r(1+r)t]
2
...
DISCOUNT RATE
PV = CF * Discounted flow
Discounted flow= 1/(1+r)t
Discount factor
DF = 1/(1+r)
BUILD IN FORMULA (EXCEL)
PV= (RATE, NUMBER OF PERIOD, PAYMENT, FACE VALUE, TYPE)
NET PRESENT VALUE
In case of annuity i
...
periodic fixed amount cashflows
NPV= - INVESTMENT+ PVA OF INFLOWS
Worth of asset = CF [1/r – 1/r(1+r)t - time remaining
In case of different cashflows annually
NPV = - INVESTMENT + [CF1/(1+r)1 + CF2/ (1+r)2 + CFt/ (1+r)t]
Functions of Financial Market
Facilitate transfer of economic resources from lenders to ultimate borrowers
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Allow lenders to earn interest or dividend
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Facilitate credit creation
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Promote economic efficiency
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Financial Intermediaries
Financial intermediary is a financial institution that connects surplus and deficit agents
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• Depository Institutions
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• Contractual Savings Institutions
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o Casualty insurance companies
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• Investment intermediaries
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o Mutual funds
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BOND UNDERWRITING
Underwriting refers to the process where one or more banks or securities firms, forming a
syndicate, buy the entire issue of bonds from the issuer and re-sell them to investors
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• For smaller issues a private bond placement is common
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• An alternative process for bond issuance is on a “best efforts basis”, where no
underwriting takes place and the volume and price is determined by demand
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It usually takes place in the primary market
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•
STOCK Vs
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Whereas, Bondholders lend money to the company (by buying a part of company’s
debt)
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•
•
•
•
Bonds do not have a centralized place for trading, they are mainly sold over the counter
(OTC)
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e
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The stockholders are exposed to higher risks than the bondholders
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The bonds are susceptible to risk such as inflation and interest rate
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Bonds usually have a definite maturity period after which the bonds are redeemed
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Exception- irredeemable
bonds
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Credit ratings ARE opinions about relative credit risk
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• Ratings are not intended as guarantees of credit quality or as exact measures of the probability
that a particular issuer or debt issue will default
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Changes in credit rating, because•
Can be related to overall shifts:
– in the economy or
– business environment or
– specific industry or
– entity, or individual debt issue
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RA analyses the creditworthiness of a company which may lead to upgrade or downgrade in ratings
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• Portfolio of assets "pooled" and transferred => Special Purpose Vehicle (SPV)/the issuer
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• The issuer SPV issues securities to buy the assets from the originator
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Structured securitizationORIGINATOR(providers of loan) sells their loans to special purpose vehicles and the SPVs pay the
banks by the funds provided by the investors
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•
•
•
•
If originator(bank) goes bankrupt, the creditor (SPV) will not get the benefits of the assets
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e
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THE BONDS ARE BASICALLY PARTS OF ASSETS WHICH ARE SOLD TO THE INVESTORS
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THE AMOUNT IS TO BE
RETURNED BY THE SPV
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CREDIT STRUCTURING- Credit enhancement required for sufficient credit quality, ways to enhance– Internal credit enhancement
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• Overcollateralization (assets > notes)
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• Excess spread
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• Letter of credit, swap
Securitization REPAYMENT
Title: Investment Notes
Description: Functions of Financial Market, BOND UNDERWRITING,CREDIT RATING , SECURITIZATION, Efficient Market Hypothesis, Capital Asset Pricing model, OPTIONS
Description: Functions of Financial Market, BOND UNDERWRITING,CREDIT RATING , SECURITIZATION, Efficient Market Hypothesis, Capital Asset Pricing model, OPTIONS