Preetis Dilemmas Preeti could gather a fair idea of the Indian bond markets and

# Preetis dilemmas preeti could gather a fair idea of

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Preeti’s Dilemmas Preeti could gather a fair idea of the Indian bond markets and the current status after going through the information provided by Reena. However, as she endeavored to invest in bond markets, most of the terminology like face value, coupon rate, current yield, yield to maturity, bond pricing theorems sounded Greek and Latin for her. The analyst’s reports also stated that the yield curve is inverted. Preeti was clueless about how to analyse that statement. She came across two bonds namely, Bond X and Bond Y. Bond Maturity Face Market Annual Annual Value Value Price Coupon payment payment Bond X 3 years ` 1000 900 ` 100 Bond Y 20 years ` 1000 1100 ` 50 The maturity values were 3 years and 20 years respectively. She could see that face values of both the bonds were ` 1000. Currently the bonds were selling at a price of ` 900 for Bond X and ` 1100 for Bond Y. It was also indicated that the annual coupon payments were ` 100 and ` 50 respectively. Reena had intimated her that by calculating various yields and using bond price theorems, she would be able to take the right decision. However, Preeti was still contemplating how to use the concepts to choose the better option. Assignment Questions I. What do you understand by Bonds? What are the differences between bonds and stocks? II. What is a Bond’s price? How do you value a bond? III. What are the various types of yields? How do you analyse the yield curve? IV. What would be your suggestion to Preeti to make an appropriate investment decision? Mandatory Reading M. Y. Khan and P. K. Jain, “Valuation of Bonds and Shares”, Financial Management , 6 th Edition, McGraw Hill Education (India), 2013 '2127&23<
• Spring '14

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