Bond Valuation: Preeti Jaiswal’s Dilemmas

Bond Valuation: Preeti Jaiswal’s Dilemmas

On May 1^st 2015, Preeti Jaiswal (Preeti) was promoted as Junior Software Engineer at Brilliant Software Solutions Pvt. Ltd., located in Bangalore, India. Preeti had always been very enthusiastic, jubilant and inquisitive by nature. However, she had a mediocre academic track record. Interestingly, she fared very well in extracurricular activities, especially in sports. Realising her potential in sports, her badminton coach at school encouraged her to pursue sports. Due to her dedication and perseverance, she was successful in streamlining her high energy levels productively and made a mark in various national and international badminton competitions. Though her parents were quite happy with her sports track record, they were still very anxious about her low grades in academics. As she was gearing up to give engineering entrance exams, her parents were apprehensive about her ranks too. However, when the entrance results were announced, their happiness was boundless as she could gain admission into one of the premier engineering institutions in India through sports quota........

Indian Bond Markets: Status Quo

Preeti tried to make a note of the gist of the given information. Preeti observed that the Indian bond markets were performing well in recent years. Like any other country, India also issued both government bonds as well as corporate bonds though it has been predominantly dominated by government bond issues. Generally, governments issue bonds to facilitate the mobilisation of funds to support the infrastructural development. Bonds in India are popularly referred to as debentures. There were several types of bonds issued by financial institutions and government which include public sector undertaking bonds, capital gains bonds, zero coupon bonds, emerging markets bonds, tax-savings bonds, etc.............

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..............

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..............

Exhibits

Exhibit I: Foreign Bonding

Exhibit II: Percentage of Outstanding Par Amount in the S&P Pan Asia Bond Index

Bond Valuation: Preeti Jaiswal’s Dilemmas

Synopsis

The caselet offers interesting discussion on the bond valuation model as well as bond pricing theorems. Bond markets play a crucial role in mobilising funds from investors. These markets are prominent sources of finance, especially in developing economies like India. Though bonds are perceived as one of the important avenues which offer stable returns, they do carry certain amount of risk due to their fluctuating prices. This caselet through the dilemmas of the protagonist Preeti Jaiswal (Preeti) enables students to get the basic idea of bond valuation methods and how the interest rates impact the bond prices on a daily basis. The caselet also deals at length about various concepts such as bond types, bond yields and yield curve, etc. The caselet elucidates how the bond pricing theorems would help the bond investors in taking right decision while investing in bonds.

Prerequisite Conceptual Understanding

• • M. Y. Khan and P. K. Jain, “Valuation of Bonds and Shares”, Financial Management, 6^th Edition, McGraw Hill Education (India), 2013

Case Positioning and Setting

This caselet can be used for the following module/course:

• • Valuation of Bonds and Shares chapter in Financial Management course of the MBA program – To understand how the interest rate fluctuations impact the value of the bonds as well as analyse the importance of bond pricing theorems in evaluating the various types of bonds

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. ...............

Suggested Orchestration

During the Caselet Discussion in the Classroom

The discussion on the caselet was conducted under three broad related topics [Exhibit (TN)-I]. The classroom analysis of the caselet was carried out by  discussing in detail about each of the sections of the caselet. However, for each of the three sections, the discussion hovered around an ‘anchor point of discussion’. ...............