Financial Markets

Assignment On Bond

Done By

1. Ajay Kumar – DF21002

2. Darshan – DF21004
3. Kamalesh Prakash – DF21005
4. Vigneshwar. R – DF21014

Department: EDFM- 2021-22

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 Index

S.No Topic Pg. No

1 Bonds 3

2 Rural Electrification corporation Limited 3

3 Primary Market 4

4 Credit rating 5

5 Lead Manager and Registrar 5

6 Current Yield and Yield to Maturity 5

7 Prospectus 6

8 Secondary Market 7

9 Current Yield 7

10 Relationship Between Market Price of the Bond and Yield 7

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What is Bond:
Bond is a capital market instrument that is used to raise long-term capital and they
represent the debt capital. Investors are creditors of the company. These investors are promised
a fixed coupon which will pay periodically basis and, on maturity, investors get back the
capital.

The bond market is larger than the stock market for various reasons whereas only corporations
issue stocks and both governments and corporations can issue fixed income securities. The
Treasury is the largest issuer of bonds worldwide. Because Treasury bonds are backed by the
full faith and credit of the government, investors perceive them as risk-free and these bonds are
thereby in steady demand at all times.

The Issuers of Bonds:

Governments (at all levels) and corporations commonly use bonds in order to borrow money.
Governments need to fund roads, schools, dams, or other infrastructure. The sudden expense
of war may also demand the need to raise funds.

Similarly, corporations will often borrow to grow their business, to buy property and
equipment, to undertake profitable projects, for research and development, or to hire
employees. The problem that large organizations run into is that they typically need far more
money than the average bank can provide.

Bonds provide a solution by allowing many individual investors to assume the role of the
lender. Indeed, public debt markets let thousands of investors each lend a portion of the capital
needed. Moreover, markets allow lenders to sell their bonds to other investors or to buy
bonds from other individuals—long after the original issuing organization raised capital

Based on the duration bonds are classified as

• Short term bond = up to 5years
• Medium-term bond = 5 to 15years
• Long term bond = more than 15years

RURAL ELECTRIFICATION CORPORATION LIMITED

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 REC Limited, formerly Rural Electrification Corporation Limited, is a public
Infrastructure Finance Company in India’s power sector. REC is a Navratna Company
functioning under the purview of the Ministry of Power. Business operations in India are
supported by a network of 13 Project Offices and 5 Zonal Offices, headquartered in New Delhi.

The company is a Public Sector Undertaking and finances and promotes power projects across
India. The company provides loans to Central/State Sector Power Utilities in the country, State
Electricity Boards, Rural Electric Cooperatives, NGOs, and Private Power Developers.

The company is primarily engaged in providing finance for rural electrification projects across
India and provides loans to Central/ State Sector Power Utilities, State Electricity Boards, Rural
Electric Cooperatives, NGOs, and Private Power Developers. The company sanctions a loan
as a sole lender or co-lender or in consortium with or without the status of lead financer. It also
provides consultancy, project monitoring, and financial/ technical appraisal support for
projects, also in the role of nodal agency for Government of India schemes or projects.

Primary Market:

Rural Electrification Corporation has issued tax-free secured

redeemable non-convertible bonds of the face value of ₹1000 bond on 25th of February 2013
with the coupon rate for a retail investor is 6.88%. The Bonds are secured by way of mortgage
and/or hypothecation of immovable and/or movable properties of the Company as agreed
between the Trustee and the Company.

Column1 Details
RURAL ELECTRIFICATION
CORPORATION LIMITED SR-1 6.88 BD
Instrument Description: 25MR23 FVRS1000
ISIN INE020B07GY2
Instrument Type Bonds

6.88% secured tax free redeemable non-

convertible bonds. tranche 2 series 1. date of
maturity 25/03/2023
Instrument Description (long):
Secured or Unsecured Secured
Guaranteed or Partially Guaranteed Not Guaranteed
Tax-Free: Under Section 10(15)(iv)(h)
Face Value: ₹ 1,000.00
Coupon Basis Fixed Interest

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 Coupon Rate 6.88%
Day Count Convention: Actual/Actual
Type of Issuer based on Ownership: Public Sector Undertaking (PSU)
Scheduled Opening date: 25 February 2013
Scheduled Closing date: 15 March 2013
Actual Closing date: 18 March 2013
Issue Price: ₹ 1,024.01
Issue Size: ₹ 62.2183 Crore
Date of allotment: 25 March 2013

1st interest payment will be on 01/12/2013

and thereafter in 1st December each year and
on maturity
Interest Payment:
Redemption Date: 25 March 2023
Coupon Type: Simple

Credit Rating:

SL. No Credit Rating Agency Rating Date Status

1. CRISILRATINGS LIMITED CRISIL AA/Negative 08-Feb-2021 Verified
BRICKWORK RATINGS INDIA BWR AA+/Negative 30-Jun-2020 Verified
2. PRIVATE LIMITED

Lead manager and Registrar:

EDELWEISS FINANCIAL SERVICES LTD, EQUIRUS CAPITAL (P)

LTD are the lead manager to the issue of REC bond. Registrar to the issue is Link Intime India
Private Limited, Mumbai.

Current Yield and Yield to Maturity (YTM):

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The Issue price of the REC bond is ₹ 1024.01. The coupon rate for the REC bond is 6.88%.
The yield to maturity of the REC bond is 6.545% and the current yield of the bond is 6.719%.

Prospectus:

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Secondary Market:

Current Yield:

Rural Electrification Corporation 10years bond current market price of the

bond in secondary market is ₹1689.99 at the coupon rate of 6.88%. Yield refers to the rate of
return which changes inversely with price of the bond. Current yield of the REC bond is
4.071%.

Relationship Between Market Price of the Bond and Yield:

Yield is calculated as the coupon divided by the market price, multiplied by 100.
The current yield of the bond has reduced to 4.0710%.

Case 1 - If the Coupon is ₹ 68.80 and the Market Price is ₹ 1024.1. The Yield will be ₹ 68.80
divided by ₹1000 multiplied by 100 which will result in 6.719%.
Case 2 - If the Coupon is ₹ 68.80 and the Market Price is ₹1000. The Yield will be ₹ 68.80
divided by ₹1000 multiplied by 100 which is equal to 6.880%.

Case 3 - If the Coupon is ₹ 68.80 and the Market Price is ₹1689.99. The Yield will be calculated
as ₹ 68.80 divided by ₹1689.99 multiplied by 100 which is equal to 4.071%.

In all three scenarios, in case the price of the bond goes down, the yield goes up. That’s because
the coupon of a bond is always paid on the principal amount that the bond was issued in the
market irrespective of its current trading price. So, ideally, in Scenario 2, the investor is
purchasing a bond worth ₹1024.1 for only 1000 but continues to receive the coupon amount of
₹ 68.80. This means the total earning is equal to ₹92.9 (₹24.1+₹68.8) as against Scenario 3 in
which the total earnings are a loss of $665.89. Hence, we can now establish that yield is
inversely proportional to the price of the bond.

When the interest rate goes up, the price of the security goes down. As a result, the yield on
the security goes up which leads to a bearish market. Conversely, if the interest rate goes
down, the price goes up, the yield goes down and the resultant market is bullish.