1. Bonds-Basics Dr. Lokanandha Reddy Irala (www.irala.org) 1

2. Bonds- Basics  What is a bond?  How does it differ from Equity  Do you like a bond or Equity?  How do you value a bond?  What determines the value of a bond?  How to measure returns from a bond? Dr. Irala 2 Bonds

3. The basic features of a Bond  Face Value  Issue Price  Interest/Coupon rate  Life of the Bond/ Term To Maturity(TTM)  Redemption Value(RV)  Market Price  Yield Dr. Irala 3 Dividends

4. Lokanandha Reddy Irala 4 Two Main Forms of Capital  Equity  Debt Two Main Forms of Investment

5. Lokanandha Reddy Irala 5 Two Main Forms of Capital Equity Capital Issue through Equity shares Ownership (Voting Rights) Full control over the company Returns in the form of Dividends & Capital appreciation

6. Lokanandha Reddy Irala 6 Two Main Forms of Capital Equity Capital Dividends are not fixed.. High dividends possible & Low or no dividends can’t be ruled out Dividends may not be regular (Dividends are not periodic)

7. Lokanandha Reddy Irala 7 Two Main Forms of Capital Equity Capital Huge capital appreciation possible when firm does well … Capital loss can’t be ruled out when going gets tough Infinite life ( Equity shares not redeemed... Buy back of equity possible though)

8. Lokanandha Reddy Irala 8 Two Main Forms of Capital Equity Capital Claim only on the residual assets, while liquidation

9. Lokanandha Reddy Irala 9 Two Main Forms of Capital Equity Vs Debt  Equity Issue through Equity shares Ownership (Voting Rights) Full control over the company Returns in the form of Dividends & Capital appreciation  Debt Issue through Debentures / Bonds No Ownership (No Voting Rights) Low or No control over the company Returns in the form of Interest & Capital appreciation

10. Lokanandha Reddy Irala 10 Two Main Forms of Capital Equity Vs Debt  Equity Dividends are not fixed.. High dividends possible & low or no dividends can’t be ruled out Dividends may not be regular (not periodic)  Debt Interest is contractually fixed Interest payments are periodic

11. Lokanandha Reddy Irala 11 Two Main Forms of Capital Equity Vs Debt  Equity Huge capital appreciation possible when firm does well … Capital loss can’t be ruled out when going gets tough Infinite life  Debt Capital appreciation possible ( may not be huge though ) … There will not be any Capital Loss even when going gets tough… until liquidation Finite life

12. Lokanandha Reddy Irala 12 Two Main Forms of Capital Equity Vs Debt  Equity Claim only on the residual assets, While liquidation High risk  Debt Claim on assets preceding many others, while liquidation Relatively low risk

13. Lokanandha Reddy Irala 13 Two Main Forms of Capital Equity Vs Debt : Firm Perspective  Equity Dividends are paid after taxes Dividends are appropriation of profits Dividend is not contractually fixed  Debt Interest is paid before taxes Interest is an expense of the business Interest is contractually fixed