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Analysis of fixed and Floating Rates

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Madhusudan Partani

The document analyzes fixed and floating interest rates for the Power Grid Corporation of India Limited (PGCIL) as part of a summer internship project. It includes financial statement analysis, the debt raising process through bonds, and characteristics of different interest rates. The findings highlight the trends in interest rates, bond pricing, and provide insights into PGCIL's financial performance over the years.

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Analysis of Fixed and Floating Interest Rates FOR POWER GRID CORPORATION OF INDIA LTD SUMMER INTERNSHIP Under Guidance of: Prof. Nalin Jain and Mr. K.C.Pant By: Madhusudan Partani PGDM-18 FORE School of Management
Flow of Presentation  Objectives, Scope, Data  Financial Statement Analysis  Process of Debt Raising  Yield, Duration and Convexity of Bonds  Floating and Fixed Interest Rates  Findings and Recommendations
Introduction of Company  Power Grid Corporation of India Limited ( PGCIL) was incorporated on 23rd October, 1989 as National Power Transmission Corporation Limited.. Renamed on 23rd Oct, 1992  Sole CTU( Central transmission Unit) in the country  From Power Transmission, diversified into Telecom and Consultancy.
Bond Market  Fixed Income Instruments  Major Players  Government ( Central, State and Municipal Bodies)  PSUs  Corporate  Banks Usually Tradable ( NSE-WDM Segment) Different Maturities ( 180 Days to 15 years)
Objectives  Financial Statement Analysis of PGCIL  Procedure of Debt raising through Bonds  Characteristics of Bonds  Analysis of Fixed and Floating Interest Rates
Scope  Study of Bonds  For FSA, the results of last 8 years and FY 2008-09 is considered  For Understanding the procedural aspects, PG XXX issue is studied  Only 5 Bonds are considered for Analysis under fixed and floating rates.  FRBs of other issuers and also Gsec and few PSU Bonds are also studied
Data  Primary  Working manuals of Company  Approval letters, Files, Workings,  Data pertaining to Bonds issue  Discussion with merchant Banker and Internal staff of the co.  Secondary  FIMMDA and Reuters  Balance Sheets of last 8 years  IndiaStat.com and also NSE WDM Segment
Objectives  Financial Statement Analysis of PGCIL  Procedure of Debt raising through Bonds  Characteristics of Bonds  Analysis of Fixed and Floating Interest Rates
Financial Statement Analysis  Capital Composition  Sources and Applications of Funds  Ratios  Cash Flow Analysis  To understand the financial performance and position of the company
Capital Composition Capital Compostion 100% 9.72% 14.62% 14.34% 11.69% 90% 17.82% 22.06% 27.69% 80% 24.56% 35.31% 25.53% 26.50% 26.28% 70% 23.78% 22.08% 18.54% 60% 16.03% 50% 58.38% 13.33% 23.45% 27.17% 32.14% 40% 36.55% 41.64% 48.73% 30% 20% 30.32% 28.68% 26.25% 10% 35.33% 22.55% 18.49% 13.08% 7.34% 0% 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Unsecured Loans Secured Loans Reserves Total Share Capital
Sources of Funds- 2008-09 Term Loans (Institutions) 1% Term Loans (Banks) Total Current Liabilities 1% 19% Unsecured Loans Non Convertible 6% Debentures 28% Secured Loans 47% Deferred Credit Reserves and Surplus 17% 20% Share Capital Reserves and Surplus Unsecured Loans Total Current Liabilities Non Convertible Debentures Term Loans (Institutions) Term Loans (Banks) Deferred Credit Share Capital 8%
Applications of Funds- 2008-09 Total Current Assets 15% Investments 3% Net Block Capital Work in Progress Capital Work in Progress Investments 25% Net Block 57% Total Current Assets
30000 Multi-Step Analysis of Incomes 25000 20000 Sales 15000 PBIDT PBIT PBDT 10000 Sales PBT PAT PBIDT 5000 PBIT PBDT PBT 0 PAT 2003 2004 2005 2006 2007 2008 2009
Cash Flow Analysis 200903Change 200803 Cash and Cash Equivalents at Beginning of the year 1865.59 1196.82 Net Cash from Operating Activities 6641.09 122% 2990.83 Net Cash Used in Investing Activities -9156.75 71% -5343.31 Net Cash Used in Financing Activities 3078.95 2% 3021.25 Net Inc/(Dec) in Cash and Cash Equivalent 563.29 -16% 668.77 Cash and Cash Equivalents at End of the year 2428.88 30% 1865.59 *Detailed Break-up is available on request
Ratios  Debt Equity Ratios  Interest Coverage ratio  Other ratios are available on request
Debt-Equity Ratio 1.95 1.75 1.55 1.35 1.15 0.95 0.75 2008-09 2007-08 2006-07 2005-06 2004-05 Debt-Equity Ratio 1.77 1.69 1.64 1.5 1.47
Interest Cover Ratio 2.5 2.25 2 1.75 1.5 2008-09 2007-08 2006-07 2005-06 2004-05 Interest Cover Ratio 1.88 2.29 2.3 2.23 2.11
Procedural Aspects of Debt raising (Bonds)  Issue Process  Dematerialization  Listing Agreement  Debt Servicing
Procedure of Issuing Bonds Board Shortlist of Quotes' for Appointment of Approval arrangers Arrangers fees Arrangers Letters to and Letter of In Principal Draft Disclosure From Commitments with Approval from Document Trustee, Banker Bids NSE CRA Allotment, Letters Book Building to Arrangers and Investors
Dematerialization Process Tri-Partite Agreement between Depository, Issuer and RTA Letter to NSDL and CDSL along with Application form, Master File and Disclosures Confirmation from NSDL and CDSL and Details of Demat Allotment
Debt Servicing  Record date  BO Position  Registrar and Transfer Agents ( RTA)  Demat and Physical Holding  DP s  PAN  Master File  List o Beneficiaries sent to Bank  Single Investor
Characteristics of Bonds  Yield  Current  YTM  Duration  Macaulay's  Modified  Convexity
Yield  Current Yield  Yield to Maturity  Annualised yield  Yield to Call/ Yield to Put
Duration and Convexity  Macaulay’s Duration = Average time to receive back the investment ( considering the YTM)  Modified Duration= Sensitivity of bond's price to changes in the yield to maturity  Convexity is a measure of the curvature or 2nd derivative of how the price of a bond varies with interest rate, i.e. how the duration of a bond changes as the interest rate changes
Analysis  All PGCIL Bonds and two each of PFC and GOI.  Tenure/ Maturity  Average Tenure  Coupon Rate  STRPP
Yield Curve -PGXXX 3 2.5 2 Price 1.5 1 0.5 PRICE 0 0.00% 5.00% 10.00% 15.00% 20.00% 25.00% 30.00% 35.00% 40.00% Yield Yield Curve- GSec 8.20% 200 150 Price 100 50 Price 0 0.000% 5.000% 10.000% 15.000% 20.000% 25.000% Yield Yield Curve - PFC Bond 57 200 150 Price 100 50 Price 0 0% 3% 6% 9% 12% 15% 18% 21% 24% 27% 30% 33% 36% 39% Yield
Characteristics of Duration Duration- Yield 8 7.5 7 Duration 6.5 6 5.5 Macaulay's Duration 5 4.5 Modified Duration 4 7.000% 8.000% 9.000% 10.000% Yield Duration- Maturity 7 6 5 Maturity 4 3 Macaulay's Duration 2 Modified Duration 1 0 0 2 4 6 8 10 12 14 16 Duration
Characteristics of Convexity Coupon Rate- Convexity-Maturity 10.20% 10.00% Coupon Rate 9.80% 9.60% 9.40% 9.20% 9.00% 8.80% 8.60% 0.46000 0.46500 0.47000 0.47500 0.48000 0.48500 0.49000 0.49500 0.50000 0.50500 Convexity Coupon Rate-Convexity-Duration 9.00% 8.50% Coupon Rate 8.00% 7.50% 7.00% 6.50% 6.00% 0.20000 0.25000 0.30000 0.35000 0.40000 0.45000 0.50000 0.55000 Convexity
Analysis of Fixed and Floating Rate  Fixed rates  Floating rates  FRBs  Computation of Floating Rates
Fixed vs Floating  Rate Determination  Fixed: Book Building for Coupon Rate  Floating: Book Building for Spread  Effect of Interest Rates Movements
Indian issuers going for FRBs  GOI  GOI FLOATING RATE +0.13% 2011  GOI FLOATING RATE +0.50% 2015  Indian Railway Finance Corporation Limited (IRFCL)  Power Finance Corporation Limited,  ICICI Bank  EXIm Bank
Analysis  All PGCIL Bonds and two each of PFC and GOI.  Tenure/ Maturity  Average Tenure  Coupon Rate  STRPP
Observations Coupon Rate Vs Avg Gsec Yield 13.00% 12.00% 11.00% 10.00% 9.00% 8.00% 7.00% 6.00% 5.00% Rate P.A. Avg Yield of GS
Coupon Rate Vs Gsec Rate 14.00% 13.00% 12.00% 11.00% 10.00% 9.00% 8.00% 7.00% 6.00% 5.00% 4.00% 3.00% 2.00% 1.00% 0.00% Coupon Rate- PG Bonds Interest on Govt Securtiy
Bonds for Analysis Bond Date of Loan Coupon Redemption Maturity Intrest Loan Repayment Descriptio Drawn Rate Date (Yrs.) Payment Amount Structure n (Rs. Crs) Bonds VIII 27-04-2000 10.35% 4/2014 14 Half-Yrly 20.00 5 Yr.Moratorium Issue + 10 Eq Ann.Inst Bonds IX 22-08-2000 12.25% 8/2012 12 Half-Yrly 576.50 3 Yr.Moratorium Issue + 10 Eq Ann.Inst Bonds X 21-06-2001 10.90% 6/2015 14 Annual 761.52 3 Yr.Moratorium Issue + 12 Eq Ann.Inst Bonds XIII- 31-07-2002 7.85% 07/2008 6 Annual 250.50 1 Yr.Moratorium Issue + 6 Eq Ann.Inst Bonds 17-07-2003 6.10% 07/2015 12 Annual 699.00 1 Yr.Moratorium XIV-Issue + 12 Eq Ann.Inst
Floating Rate  Assumptions  Reference Rates  Average Monthly yield of 10 Year GSec preceding the reset month  Average Yield of 10 year GSec for 12 months preceding the reset month. Average Yield of 10 year GSec for 6 months preceding the reset month ( for Semi Annual Intrest Payment)  Average of 1 Year GSec for the past 3 days preceding the reset date.
14.000% 1 Yr Gsec Yield Vs PG Bonds 12.000% 10.000% 8.000% 6.000% 4.000% 2.000% 0.000% IN1YT=RR PG Rate
Floating Rate under Reference Rate of Average yield of 1 Year Gsec –PG VIII  Date of Issue: 27th April, 2000  Intrest Payment: Semi Annually  Coupon Rate: 10.35%  Loan Amount: Rs. 20 Crores  Repayment: 5 years Moratorium and 10 equal Instalments  Maturity: 27th April, 2014
Determination of Spread Date Yield-1yr GSec Average yield Coupon Rate Spread 26-04- 2000 9.291 25-04- 2000 9.306 9.3140% 10.35% 1.03600% 24-04- 2000 9.345 931.40%
Computation of Floating Rate Average Yield of 1 years GSec ( 3 days preceding Intrest rate) Intrest Payment Reference Period Average Govt yield Spread Floating rate Fixed rate 1.036 27-Oct-00 Oct- 23, 24, 25 10.39233% % 11.428% 10.35% 1.036 Apr-01 Apr- 23, 24, 26 8.88833% % 9.924% 10.35% 1.036 Oct-01 Oct- 23, 24, 25 6.89533% % 7.931% 10.35% 1.036 Apr-02 Apr- 23, 24, 26 6.17367% % 7.210% 10.35% 1.036 Oct-02 Oct- 23, 24, 25 5.64967% % 6.686% 10.35% 1.036 Apr-03 Apr- 23, 24, 25 5.12000% % 6.156% 10.35% 1.036 Oct-09 Oct- 22, 23, 26 4.47700% % 5.513% 10.35% 1.036 Apr-10 Apr- 22, 23, 26 4.92367% % 5.960% 10.35%
Fixed and Floating Rates Intrest Payment-Fixed Intrest Payment-Floating Opening Opening Year Balance Redemption Interest Year Balance Redemption Interest Oct-00 20 0 1.035 Oct-00 20 0 1.142833 Apr-01 20 0 1.035 Apr-01 20 0 0.992433 Apr-08 14 2 0.7245 Apr-08 14 2 0.62202 Oct-08 12 0 0.621 Oct-08 12 0 0.50484 Apr-09 12 2 0.621 Apr-09 12 2 0.30672 Oct-09 10 0 0.5175 Oct-09 10 0 0.27565 Apr-10 10 2 0.5175 Apr-10 10 2 0.297983 17.595 12.57485
Floating Rate under Reference Rate of Average yield of 10 year Gsec Bond XIII- Opt-II Computation of Spread Avg Spread for AAA Bonds for 10 Years Jun-02 138 May-02 127 Apr-02 173 Mar-02 200 Feb-02 198 Jan-02 159 Avg. 165.8333
Computation of Floating Rates Average Yield for 10Yrs GSec( 12 Months preceding Coupon period) Interest Reference Payment Period Average Govt yield Spread Floating rate Fixed rate Jul-03 Jul 01 - Jun 02 8.11% 1.658% 9.77% 7.85% Jul-04 Jul 02 - Jun 03 6.39% 1.658% 8.05% 7.85% Jul-05 Jul 03 - Jun 04 5.28% 1.658% 6.94% 7.85% Jul-06 Jul 04 - Jun 05 6.70% 1.658% 8.36% 7.85% Jul-07 Jul 05 - Jun 06 7.33% 1.658% 8.99% 7.85% Jul-08 Jul 06 - Jun 07 7.88% 1.658% 9.54% 7.85%
Fixed Vs Floating Rate Rs. (Crs) Interest Payment-Fixed Interest Payment-Floating Opening Redemptio Opening Year Balance n Interest Year Balance Redemption Interest Jul-03 250.5 41.75 19.66425 Jul-03 250.5 41.75 24.47293 Jul-04 208.75 41.75 16.38688 Jul-04 208.75 41.75 16.80431 Jul-05 167 41.75 13.1095 Jul-05 167 41.75 11.5839 Jul-06 125.25 41.75 9.832125 Jul-06 125.25 41.75 10.46606 Jul-07 83.5 41.75 6.55475 Jul-07 83.5 41.75 7.508501 Jul-08 41.75 41.75 3.277375 Jul-08 41.75 41.75 3.983458 68.82488 74.81915
Summary Average Yield for 10Yrs GSec( Preceding Interest Payment) (Rs. Crs) Maturit Interest paid Under Under Bond y till Spread Fixed Floating Savings VIII 14 Apr-10 1.00% 18.009 15.29789 2.71111 163.205 IX 12 Feb-10 0.75% 497.8798 334.674 9 95.4274 X 14 Jun-09 1.015% 560.2883 464.8609 5 1.658% 68.82488 71.82599 -3.00112 XIII-Opt-II 6 Jul-08 1.507% 68.82488 73.49 -4.66512 0.648% 255.49 320.3901 -64.9001 XIV 12 Jul-09 0.711%2 255.49 323.0287 -67.5387 [1] Spread is determined taking previous 12 months’ average of Spread as published by FIMMDA
Cont Average Yield for 10Yrs GSec( Preceding Coupon period) (Rs. Crs) Interest paid Under Bond Maturity till Spread Under Fixed Floating Savings VIII 14 Apr-10 1.00% 17.59500 14.59242 3.002577 IX 12 Aug-10 0.75% 508.473 352.3925 156.0805 X 14 Jun-10 1.015% 601.7912 494.247 107.5442 1.658% 68.82488 74.81652 -5.99164 XIII-Opt-II 6 Jul-08 1.507%2 68.82488 70.4959 -1.67103 0.648% 286.4584 353.1248 -66.6663 XIV 12 Jul-10 0.711%2 286.4584 356.0833 -69.6249
Factors for Consideration  Term  Short Duration: Fixed  Long: Floating  Coupon Rate  Market Condition  XII Issue ( Unfavorable Market Condition)  Quantum of Loan  Repayment Structure
PG XIII- 10Year Gsec 12.00% 10.00% Term 8.00% 6.00% 4.00% 2.00% 0.00% 2002 2003 2004 2005 2006 2007 2008 10 Year Gsec + Spread PGXIII XIV- 10 Year Gsec 12.00% Coupon Rate 10.00% 8.00% 6.00% 4.00% 2.00% 0.00% 2003 2004 2005 2006 2007 2008 2009 10 Yr Gsec + Spread XIV
Findings and Recommendations  Fixed Coupon Rate  Easy Budgeting  Perferable by Fixed Income Section  Suitable for Conservative Company  But  Cannot take advantage of Interest Fall  True market situation is not reflected in interest payment  Is to be used when market is very favourable.
Cont  Floating Rate  Advantage of Fluctuations  Returns on security is reflected by Market conditions  Suitable in case if market is not favorable at the time of issue  But the company will not be able to budget, this can be solved by maintaining Provisions
 Fixed Interest rate with Call Option to issuer  Can Call for repayment in case of fall in Interest rates.  Also, since the Investors do not have the Put Option the uncertainty of Disbursements in case of sudden selling of bonds by investors is avoided.
Recommendations  The company can go for Fixed Intrest rate if the market conditions are favourable at the time of issue.  Also for the meagre loan amount, the company can be indifferent between the Fixed and the Floating rate.  For a longer maturity bond, Fixed interest is to be preferred if the yield curve of the GSec is at its low, and the floating is to be preferred if the yield curve is at its high.  In case of recession, the yield of GSec, the interest rates are low; the investors become prudent and prioritise the security to the returns. Thus at such conditions, fixed coupon rate can be issued as the company will be able to attract investment at low coupon rate.
Analysis of fixed and Floating Rates

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Analysis of fixed and Floating Rates

  • 1. Analysis of Fixed and Floating Interest Rates FOR POWER GRID CORPORATION OF INDIA LTD SUMMER INTERNSHIP Under Guidance of: Prof. Nalin Jain and Mr. K.C.Pant By: Madhusudan Partani PGDM-18 FORE School of Management
  • 2. Flow of Presentation  Objectives, Scope, Data  Financial Statement Analysis  Process of Debt Raising  Yield, Duration and Convexity of Bonds  Floating and Fixed Interest Rates  Findings and Recommendations
  • 3. Introduction of Company  Power Grid Corporation of India Limited ( PGCIL) was incorporated on 23rd October, 1989 as National Power Transmission Corporation Limited.. Renamed on 23rd Oct, 1992  Sole CTU( Central transmission Unit) in the country  From Power Transmission, diversified into Telecom and Consultancy.
  • 4. Bond Market  Fixed Income Instruments  Major Players  Government ( Central, State and Municipal Bodies)  PSUs  Corporate  Banks Usually Tradable ( NSE-WDM Segment) Different Maturities ( 180 Days to 15 years)
  • 5. Objectives  Financial Statement Analysis of PGCIL  Procedure of Debt raising through Bonds  Characteristics of Bonds  Analysis of Fixed and Floating Interest Rates
  • 6. Scope  Study of Bonds  For FSA, the results of last 8 years and FY 2008-09 is considered  For Understanding the procedural aspects, PG XXX issue is studied  Only 5 Bonds are considered for Analysis under fixed and floating rates.  FRBs of other issuers and also Gsec and few PSU Bonds are also studied
  • 7. Data  Primary  Working manuals of Company  Approval letters, Files, Workings,  Data pertaining to Bonds issue  Discussion with merchant Banker and Internal staff of the co.  Secondary  FIMMDA and Reuters  Balance Sheets of last 8 years  IndiaStat.com and also NSE WDM Segment
  • 8. Objectives  Financial Statement Analysis of PGCIL  Procedure of Debt raising through Bonds  Characteristics of Bonds  Analysis of Fixed and Floating Interest Rates
  • 9. Financial Statement Analysis  Capital Composition  Sources and Applications of Funds  Ratios  Cash Flow Analysis  To understand the financial performance and position of the company
  • 10. Capital Composition Capital Compostion 100% 9.72% 14.62% 14.34% 11.69% 90% 17.82% 22.06% 27.69% 80% 24.56% 35.31% 25.53% 26.50% 26.28% 70% 23.78% 22.08% 18.54% 60% 16.03% 50% 58.38% 13.33% 23.45% 27.17% 32.14% 40% 36.55% 41.64% 48.73% 30% 20% 30.32% 28.68% 26.25% 10% 35.33% 22.55% 18.49% 13.08% 7.34% 0% 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Unsecured Loans Secured Loans Reserves Total Share Capital
  • 11. Sources of Funds- 2008-09 Term Loans (Institutions) 1% Term Loans (Banks) Total Current Liabilities 1% 19% Unsecured Loans Non Convertible 6% Debentures 28% Secured Loans 47% Deferred Credit Reserves and Surplus 17% 20% Share Capital Reserves and Surplus Unsecured Loans Total Current Liabilities Non Convertible Debentures Term Loans (Institutions) Term Loans (Banks) Deferred Credit Share Capital 8%
  • 12. Applications of Funds- 2008-09 Total Current Assets 15% Investments 3% Net Block Capital Work in Progress Capital Work in Progress Investments 25% Net Block 57% Total Current Assets
  • 13. 30000 Multi-Step Analysis of Incomes 25000 20000 Sales 15000 PBIDT PBIT PBDT 10000 Sales PBT PAT PBIDT 5000 PBIT PBDT PBT 0 PAT 2003 2004 2005 2006 2007 2008 2009
  • 14. Cash Flow Analysis 200903Change 200803 Cash and Cash Equivalents at Beginning of the year 1865.59 1196.82 Net Cash from Operating Activities 6641.09 122% 2990.83 Net Cash Used in Investing Activities -9156.75 71% -5343.31 Net Cash Used in Financing Activities 3078.95 2% 3021.25 Net Inc/(Dec) in Cash and Cash Equivalent 563.29 -16% 668.77 Cash and Cash Equivalents at End of the year 2428.88 30% 1865.59 *Detailed Break-up is available on request
  • 15. Ratios  Debt Equity Ratios  Interest Coverage ratio  Other ratios are available on request
  • 16. Debt-Equity Ratio 1.95 1.75 1.55 1.35 1.15 0.95 0.75 2008-09 2007-08 2006-07 2005-06 2004-05 Debt-Equity Ratio 1.77 1.69 1.64 1.5 1.47
  • 17. Interest Cover Ratio 2.5 2.25 2 1.75 1.5 2008-09 2007-08 2006-07 2005-06 2004-05 Interest Cover Ratio 1.88 2.29 2.3 2.23 2.11
  • 18. Procedural Aspects of Debt raising (Bonds)  Issue Process  Dematerialization  Listing Agreement  Debt Servicing
  • 19. Procedure of Issuing Bonds Board Shortlist of Quotes' for Appointment of Approval arrangers Arrangers fees Arrangers Letters to and Letter of In Principal Draft Disclosure From Commitments with Approval from Document Trustee, Banker Bids NSE CRA Allotment, Letters Book Building to Arrangers and Investors
  • 20. Dematerialization Process Tri-Partite Agreement between Depository, Issuer and RTA Letter to NSDL and CDSL along with Application form, Master File and Disclosures Confirmation from NSDL and CDSL and Details of Demat Allotment
  • 21. Debt Servicing  Record date  BO Position  Registrar and Transfer Agents ( RTA)  Demat and Physical Holding  DP s  PAN  Master File  List o Beneficiaries sent to Bank  Single Investor
  • 22. Characteristics of Bonds  Yield  Current  YTM  Duration  Macaulay's  Modified  Convexity
  • 23. Yield  Current Yield  Yield to Maturity  Annualised yield  Yield to Call/ Yield to Put
  • 24. Duration and Convexity  Macaulay’s Duration = Average time to receive back the investment ( considering the YTM)  Modified Duration= Sensitivity of bond's price to changes in the yield to maturity  Convexity is a measure of the curvature or 2nd derivative of how the price of a bond varies with interest rate, i.e. how the duration of a bond changes as the interest rate changes
  • 25. Analysis  All PGCIL Bonds and two each of PFC and GOI.  Tenure/ Maturity  Average Tenure  Coupon Rate  STRPP
  • 26. Yield Curve -PGXXX 3 2.5 2 Price 1.5 1 0.5 PRICE 0 0.00% 5.00% 10.00% 15.00% 20.00% 25.00% 30.00% 35.00% 40.00% Yield Yield Curve- GSec 8.20% 200 150 Price 100 50 Price 0 0.000% 5.000% 10.000% 15.000% 20.000% 25.000% Yield Yield Curve - PFC Bond 57 200 150 Price 100 50 Price 0 0% 3% 6% 9% 12% 15% 18% 21% 24% 27% 30% 33% 36% 39% Yield
  • 27. Characteristics of Duration Duration- Yield 8 7.5 7 Duration 6.5 6 5.5 Macaulay's Duration 5 4.5 Modified Duration 4 7.000% 8.000% 9.000% 10.000% Yield Duration- Maturity 7 6 5 Maturity 4 3 Macaulay's Duration 2 Modified Duration 1 0 0 2 4 6 8 10 12 14 16 Duration
  • 28. Characteristics of Convexity Coupon Rate- Convexity-Maturity 10.20% 10.00% Coupon Rate 9.80% 9.60% 9.40% 9.20% 9.00% 8.80% 8.60% 0.46000 0.46500 0.47000 0.47500 0.48000 0.48500 0.49000 0.49500 0.50000 0.50500 Convexity Coupon Rate-Convexity-Duration 9.00% 8.50% Coupon Rate 8.00% 7.50% 7.00% 6.50% 6.00% 0.20000 0.25000 0.30000 0.35000 0.40000 0.45000 0.50000 0.55000 Convexity
  • 29. Analysis of Fixed and Floating Rate  Fixed rates  Floating rates  FRBs  Computation of Floating Rates
  • 30. Fixed vs Floating  Rate Determination  Fixed: Book Building for Coupon Rate  Floating: Book Building for Spread  Effect of Interest Rates Movements
  • 31. Indian issuers going for FRBs  GOI  GOI FLOATING RATE +0.13% 2011  GOI FLOATING RATE +0.50% 2015  Indian Railway Finance Corporation Limited (IRFCL)  Power Finance Corporation Limited,  ICICI Bank  EXIm Bank
  • 32. Analysis  All PGCIL Bonds and two each of PFC and GOI.  Tenure/ Maturity  Average Tenure  Coupon Rate  STRPP
  • 33. Observations Coupon Rate Vs Avg Gsec Yield 13.00% 12.00% 11.00% 10.00% 9.00% 8.00% 7.00% 6.00% 5.00% Rate P.A. Avg Yield of GS
  • 34. Coupon Rate Vs Gsec Rate 14.00% 13.00% 12.00% 11.00% 10.00% 9.00% 8.00% 7.00% 6.00% 5.00% 4.00% 3.00% 2.00% 1.00% 0.00% Coupon Rate- PG Bonds Interest on Govt Securtiy
  • 35. Bonds for Analysis Bond Date of Loan Coupon Redemption Maturity Intrest Loan Repayment Descriptio Drawn Rate Date (Yrs.) Payment Amount Structure n (Rs. Crs) Bonds VIII 27-04-2000 10.35% 4/2014 14 Half-Yrly 20.00 5 Yr.Moratorium Issue + 10 Eq Ann.Inst Bonds IX 22-08-2000 12.25% 8/2012 12 Half-Yrly 576.50 3 Yr.Moratorium Issue + 10 Eq Ann.Inst Bonds X 21-06-2001 10.90% 6/2015 14 Annual 761.52 3 Yr.Moratorium Issue + 12 Eq Ann.Inst Bonds XIII- 31-07-2002 7.85% 07/2008 6 Annual 250.50 1 Yr.Moratorium Issue + 6 Eq Ann.Inst Bonds 17-07-2003 6.10% 07/2015 12 Annual 699.00 1 Yr.Moratorium XIV-Issue + 12 Eq Ann.Inst
  • 36. Floating Rate  Assumptions  Reference Rates  Average Monthly yield of 10 Year GSec preceding the reset month  Average Yield of 10 year GSec for 12 months preceding the reset month. Average Yield of 10 year GSec for 6 months preceding the reset month ( for Semi Annual Intrest Payment)  Average of 1 Year GSec for the past 3 days preceding the reset date.
  • 37. 14.000% 1 Yr Gsec Yield Vs PG Bonds 12.000% 10.000% 8.000% 6.000% 4.000% 2.000% 0.000% IN1YT=RR PG Rate
  • 38. Floating Rate under Reference Rate of Average yield of 1 Year Gsec –PG VIII  Date of Issue: 27th April, 2000  Intrest Payment: Semi Annually  Coupon Rate: 10.35%  Loan Amount: Rs. 20 Crores  Repayment: 5 years Moratorium and 10 equal Instalments  Maturity: 27th April, 2014
  • 39. Determination of Spread Date Yield-1yr GSec Average yield Coupon Rate Spread 26-04- 2000 9.291 25-04- 2000 9.306 9.3140% 10.35% 1.03600% 24-04- 2000 9.345 931.40%
  • 40. Computation of Floating Rate Average Yield of 1 years GSec ( 3 days preceding Intrest rate) Intrest Payment Reference Period Average Govt yield Spread Floating rate Fixed rate 1.036 27-Oct-00 Oct- 23, 24, 25 10.39233% % 11.428% 10.35% 1.036 Apr-01 Apr- 23, 24, 26 8.88833% % 9.924% 10.35% 1.036 Oct-01 Oct- 23, 24, 25 6.89533% % 7.931% 10.35% 1.036 Apr-02 Apr- 23, 24, 26 6.17367% % 7.210% 10.35% 1.036 Oct-02 Oct- 23, 24, 25 5.64967% % 6.686% 10.35% 1.036 Apr-03 Apr- 23, 24, 25 5.12000% % 6.156% 10.35% 1.036 Oct-09 Oct- 22, 23, 26 4.47700% % 5.513% 10.35% 1.036 Apr-10 Apr- 22, 23, 26 4.92367% % 5.960% 10.35%
  • 41. Fixed and Floating Rates Intrest Payment-Fixed Intrest Payment-Floating Opening Opening Year Balance Redemption Interest Year Balance Redemption Interest Oct-00 20 0 1.035 Oct-00 20 0 1.142833 Apr-01 20 0 1.035 Apr-01 20 0 0.992433 Apr-08 14 2 0.7245 Apr-08 14 2 0.62202 Oct-08 12 0 0.621 Oct-08 12 0 0.50484 Apr-09 12 2 0.621 Apr-09 12 2 0.30672 Oct-09 10 0 0.5175 Oct-09 10 0 0.27565 Apr-10 10 2 0.5175 Apr-10 10 2 0.297983 17.595 12.57485
  • 42. Floating Rate under Reference Rate of Average yield of 10 year Gsec Bond XIII- Opt-II Computation of Spread Avg Spread for AAA Bonds for 10 Years Jun-02 138 May-02 127 Apr-02 173 Mar-02 200 Feb-02 198 Jan-02 159 Avg. 165.8333
  • 43. Computation of Floating Rates Average Yield for 10Yrs GSec( 12 Months preceding Coupon period) Interest Reference Payment Period Average Govt yield Spread Floating rate Fixed rate Jul-03 Jul 01 - Jun 02 8.11% 1.658% 9.77% 7.85% Jul-04 Jul 02 - Jun 03 6.39% 1.658% 8.05% 7.85% Jul-05 Jul 03 - Jun 04 5.28% 1.658% 6.94% 7.85% Jul-06 Jul 04 - Jun 05 6.70% 1.658% 8.36% 7.85% Jul-07 Jul 05 - Jun 06 7.33% 1.658% 8.99% 7.85% Jul-08 Jul 06 - Jun 07 7.88% 1.658% 9.54% 7.85%
  • 44. Fixed Vs Floating Rate Rs. (Crs) Interest Payment-Fixed Interest Payment-Floating Opening Redemptio Opening Year Balance n Interest Year Balance Redemption Interest Jul-03 250.5 41.75 19.66425 Jul-03 250.5 41.75 24.47293 Jul-04 208.75 41.75 16.38688 Jul-04 208.75 41.75 16.80431 Jul-05 167 41.75 13.1095 Jul-05 167 41.75 11.5839 Jul-06 125.25 41.75 9.832125 Jul-06 125.25 41.75 10.46606 Jul-07 83.5 41.75 6.55475 Jul-07 83.5 41.75 7.508501 Jul-08 41.75 41.75 3.277375 Jul-08 41.75 41.75 3.983458 68.82488 74.81915
  • 45. Summary Average Yield for 10Yrs GSec( Preceding Interest Payment) (Rs. Crs) Maturit Interest paid Under Under Bond y till Spread Fixed Floating Savings VIII 14 Apr-10 1.00% 18.009 15.29789 2.71111 163.205 IX 12 Feb-10 0.75% 497.8798 334.674 9 95.4274 X 14 Jun-09 1.015% 560.2883 464.8609 5 1.658% 68.82488 71.82599 -3.00112 XIII-Opt-II 6 Jul-08 1.507% 68.82488 73.49 -4.66512 0.648% 255.49 320.3901 -64.9001 XIV 12 Jul-09 0.711%2 255.49 323.0287 -67.5387 [1] Spread is determined taking previous 12 months’ average of Spread as published by FIMMDA
  • 46. Cont Average Yield for 10Yrs GSec( Preceding Coupon period) (Rs. Crs) Interest paid Under Bond Maturity till Spread Under Fixed Floating Savings VIII 14 Apr-10 1.00% 17.59500 14.59242 3.002577 IX 12 Aug-10 0.75% 508.473 352.3925 156.0805 X 14 Jun-10 1.015% 601.7912 494.247 107.5442 1.658% 68.82488 74.81652 -5.99164 XIII-Opt-II 6 Jul-08 1.507%2 68.82488 70.4959 -1.67103 0.648% 286.4584 353.1248 -66.6663 XIV 12 Jul-10 0.711%2 286.4584 356.0833 -69.6249
  • 47. Factors for Consideration  Term  Short Duration: Fixed  Long: Floating  Coupon Rate  Market Condition  XII Issue ( Unfavorable Market Condition)  Quantum of Loan  Repayment Structure
  • 48. PG XIII- 10Year Gsec 12.00% 10.00% Term 8.00% 6.00% 4.00% 2.00% 0.00% 2002 2003 2004 2005 2006 2007 2008 10 Year Gsec + Spread PGXIII XIV- 10 Year Gsec 12.00% Coupon Rate 10.00% 8.00% 6.00% 4.00% 2.00% 0.00% 2003 2004 2005 2006 2007 2008 2009 10 Yr Gsec + Spread XIV
  • 49. Findings and Recommendations  Fixed Coupon Rate  Easy Budgeting  Perferable by Fixed Income Section  Suitable for Conservative Company  But  Cannot take advantage of Interest Fall  True market situation is not reflected in interest payment  Is to be used when market is very favourable.
  • 50. Cont  Floating Rate  Advantage of Fluctuations  Returns on security is reflected by Market conditions  Suitable in case if market is not favorable at the time of issue  But the company will not be able to budget, this can be solved by maintaining Provisions
  • 51.  Fixed Interest rate with Call Option to issuer  Can Call for repayment in case of fall in Interest rates.  Also, since the Investors do not have the Put Option the uncertainty of Disbursements in case of sudden selling of bonds by investors is avoided.
  • 52. Recommendations  The company can go for Fixed Intrest rate if the market conditions are favourable at the time of issue.  Also for the meagre loan amount, the company can be indifferent between the Fixed and the Floating rate.  For a longer maturity bond, Fixed interest is to be preferred if the yield curve of the GSec is at its low, and the floating is to be preferred if the yield curve is at its high.  In case of recession, the yield of GSec, the interest rates are low; the investors become prudent and prioritise the security to the returns. Thus at such conditions, fixed coupon rate can be issued as the company will be able to attract investment at low coupon rate.