Module-2: Assignment for MBA
Student Name: Rahul MJ
USN No: CMS19EMB197
Mobile Number: 9632762919
1. Define bond and its types?
Bonds are fixed-income securities that are issued by corporations and governments to raise
capital. The bond issuer borrows capital from the bondholder and makes fixed payments to
them at a fixed (or variable) interest rate for a specified period.
Government bond and Corporate bonds are the two types of the bonds.
Government Bonds : The following are examples of government-issued bonds, which typically
offer a lower interest rate compared to corporate bonds.
A. Federal government bonds: The reduced yield is attributed to the federal government’s
ability to print money and collect tax revenue, which significantly lowers their chance of
default. The Central government’s debt is considered risk-free for this reason.
B. Treasury bills: Treasury bills or T-bills, which are money market instruments, are short
term debt instruments issued by the Government of India and are presently issued in
three tenors, namely, 91 day, 182 day and 364 day. Treasury bills are zero coupon
securities and pay no interest.
C. Zero Coupon Bonds: Zero-coupon bonds make no coupon payments but are issued at a
discounted price.
D. Municipal Bonds: Bonds issued by local corporations or states are called municipal
bonds. They come with a greater risk than central government bonds but offer a higher
yield.
Corporate bonds: Corporate bonds are issued by corporations and offer a higher yield relative to
a government bond due to the higher risk of insolvency. A bond with a high credit rating will pay
a lower interest rate because the credit quality indicates the lower default risk of the business.
A. Convertible bonds: A company may issue convertible bonds that allow the bondholders
to redeem these for a pre-specified amount of equity. The bond will typically offer a
lower yield due to the added benefit of converting it into stock.
B. Callable bonds: Callable bonds may be redeemed by the company before the maturity
date is reached, typically at a premium. It can be beneficial for a business operating in
an environment where interest rates are decreasing because the firm can reissue bonds
with a lower yield.
C. Investment grade bond: A bond with a high credit rating (minimum of “Baa” by
Moody’s) is considered investment-grade
D. Junk Bond: A junk bond comes with a credit rating of “BB” or lower and offers a high
yield due to the increased risk of company default.
2. What is meant by yield? Explain the relationship between yield and price change.
The rate return is usually a percentage earned by an investor who holds a bond for a certain
time of period.
The general relationship between bond price and market interest rate (yield) is inversely related.
If the market interest rate increases, bond price will decrease, or if the market rate decreases,
bond price will increase.
Change in bond price is higher when the maturity period of bond is longer, and change in bond
price is low when the maturity period of bond is less.
3. What is meant by Duration?
The term duration has a special meaning in the context of bonds. It is a measurement of how
long, in years, it takes for the price of a bond to be repaid by its internal cash flows. It is essential
for investors to consider, as bonds with higher durations carry more risk and have higher price
volatility than bonds with lower durations.
For each of the two basic types of bonds, the duration is the following:
1. Zero-Coupon Bond - Duration is equal to its time to maturity.
2. Vanilla Bond - Duration will always be less than its time to maturity.
4. A) An Investor purchases a bond at ₹900 with ₹100 as coupon payment and sells at ₹ 1050.
What is his holding period return?
Holding period return= Price gain (+) coupon payment
Purchase price
100+100
900
200
900
=0.2222
Holding period return = 22.22%.
b) If the bond is sold for ₹800 after receiving ₹100 as coupon payment. What is the holding
period return?
Holding period return = Gain or loss + Coupon payment/ Purchase price.
-100+100
900
0
900
Holding period return= 0.00%
5. Determine the yield the maturity if a Zero coupon bond with a face value of ₹1000 is sold at 300.
The maturity period is 10 years
Ans :
Yield to Maturity= (Face Value/Current Bond Price) ^ (1/Years to Maturity) −1
= (1000/300) ^ (1/10)-1
= (3.3333) ^ (0.1)-1
= 0.1-1
=-0.9
6. Determine the price of a ₹1000 zero coupon bond with a YTM of 15 percent and 10 years to
maturity?
Ans.
Price = Face value/ (1 + YTM)n
=1,000/ (1 + 0.15)10
= 1,000/11.5
= Rs. 86.9565
7. Define Mutual funds and its types?
Mutual Funds are pools of money collected from many investors for the purpose of investing
in stocks, bonds, or other securities. Mutual funds are owned by a group of investors and managed
by professionals. In other words, a mutual fund is a collection of securities owned by a group of
investors and managed by a fund manager.
Common Types of Mutual Funds
There are six common types of mutual funds:
Money Market Funds
Money market funds invest in short-term fixed-income securities. Examples of short-term fixed-
income securities would be government bonds, Treasury bills, commercial paper, and certificates of
deposit. These types of funds are generally a safer investment but with a lower potential return than
other mutual funds.
Fixed Income Funds
Fixed income funds buy investments that pay a fixed rate of return. This type of mutual fund focuses
on getting returns coming into the fund primarily through interest.
Equity Funds
Equity funds invest in stocks. Furthermore, there are different types of equity funds such as funds
that specialize in growth stocks, value stocks, large-cap stocks, mid-cap stocks, small-cap stocks, or a
combination of these stocks.
Balanced Funds
Balanced funds invest in a mix of equities and fixed-income securities – typically in a 40% equity 60%
fixed income ratio. The aim of these funds is to generate higher returns but also mitigate risk
through fixed-income securities.
Index Funds
Index funds aim to track the performance of a specific index. For example, the S&P, or TSX. Index
funds follow the index and go up when the index goes up and goes down when the index goes
down. Index funds are popular as they typically require a lower management fee compared to other
funds (due to the manager not needing to do as much research).
Specialty Funds
Specialty funds focus on a tiny part of a market such as energy, telecommunications, healthcare,
industrials
8. How is a fundamental analysis useful to a prospective investor?
Fundamental analysis is the method of weighing relevant economic, financial, non-financial, and
other quantitative and qualitative variables to assess a security's fair worth (also known as intrinsic
value).
In other words, a fundamental analyst assesses a company's health and success by looking at key
statistics and economic metrics.
Importance’s of fundamental analysis.
Management Assessment
Management is like the company's spirit. It is essential in a company's growth and performance.
Fundamental research aids in comprehending the structure of management and how it has
performed over time.
Examining the company's strengths
Regardless about how good or poor management or other considerations are, financial success is
ultimately what matters the most. Fundamental research is a complicated process. It is impossible
for people to do stock analysis.
Fundamental research is essentially "looking beyond the frame" in the absence of fixed criteria.
Determining a company's ability to outperform its competitors
Even if the company's financial success is good, it remains to be seen if the company will outperform
its rivals. It would not be able to prosper in the long term if it is unable to outperform its peers.
Fundamental review should be used to do this peer evaluation.
Calculating equal worth
The market valuation of a stock can be easily determined with the aid of fundamental analysis by
closely reviewing the company's past and current results. Fair valuation can help determine whether
an organization is overvalued or undervalued.
On the basis of this report, one should decide what course of action to take. As a result,
fundamental research is critical in stock picking.
9. What is the difference between Technical analysis and Fundamental Analysis?
Explanation:
Differentiate between fundamental analysis and technical analysis techniques:
Fundamental Analysis is the difference between stocks value & price. On the other hand,
Technical Analysis can be used on any security with historical trading data.
Technical Analysis helps identify trading opportunities using the actions of Market Participants
through charts, patterns, and indicators. Still, fundamental Analysis helps identify trading
opportunities using the actions of Market Participants through stocks value & price.
Technical Analysis is based on an idea that helps to identify the future pattern. Still, fundamental
Analysis is concerned with the stock's value & the price, which identifies the present
issue.4.Fundamental Analysis is considered the value of company value, but Technical Analysis is
concerned with the price action.
.Fundamental Analysis is concerned with the stocks value & the price of the trading, but
Technical Analysis is concerned with the price action.
