The ultimate goal of any individual or a firm is the maximization of profit or rate of returns or in other words market value of one’s investments. Thus, investments management is an on-going process which needs to be constantly monitored by way of information as this may affect the value of securities or rate of return of such securities The managers should have knowledge of securities that help to get a good return.

Corporations sell bonds to borrow money from investors. As a financial instrument, a bond represents a contractual agreement between the corporation and the bondholders. Eventually, the corporation has to repay the principal to the investors and pay interest to them in the meantime.

Bond Valuation

The face value: This is the value stated on the face of the bond and is also known as per value. It represents the amount of borrowing by the firm which it specifies to repay after a specific period of time i.e the of maturity. A bond is generally issued at face value or par value which is usually RS100 and may sometimes be 1000 RS.

The coupon rate, c. This is the stated rate of interest of the bonds. For example, a bond may be paying 8% interest to the bondholders. The amount of interest C is the product of the face amount of the bond and the coupon rate.

The time to maturity: A bond is issued for a specific period of time. It is repaid on maturity. Typically corporate bond has a maturity period of 7-10 years whereas governments bonds have maturity period up to 20-25 years.

Redemption value: The value which a bondholder gets on maturity is called as redemption value. A bond may be redeemed at par, at a premium (more than par) or at discount ( less than par value).

Market Value: A bond may be traded in a stock exchange market value is the price at which the bond is usually bought or sold. Market value may be different from par value or redemption value.

Yes. If the dividend grows at a steady rate, so does the stock price. In other words, the dividend growth rate and the capital gains yield are the same.

.The three factors are:

1) The company’s future growth opportunities.

2) The company’s level of risk, which determines the interest rate used to discount cash flows.

3) The accounting method used.

Rate of Return

The object of investor is to maximize expected returns from his investments, subjects to various constraints, primarily risk. Return is the motivating force, inspiring the investor in the form of rewards, for undertaking the investment.

There are two types of returns Realized or Historical Return and Expected Return.

Realized Return

This is ex-post (after the fact) return or return that was or could have been earned.

Example A deposit of RS 2000 bank on January 1, at a stated annual interest rate of 10% will be worth RS 2200 exactly a year later.

Expected Return

This is the return from an asset that investors anticipate or expect to earn over some future period. The expected return is subject to uncertainty, or risk, and may not occur.

Measuring The Rate of Return

The rate of return is the total return the investor receives during the holding period (the period when the security is owned or held by the investor) stated as a percentage of the purchase price of the investment at the beginning of the holding period.

The general equation for calculating the rate of return is shown below.

K = Rate of Return

P_t= Price of the security at a time ‘t’ i.e. at the end of the holding period.

Pt_-1= Price of the security at a time ‘t-1’ i.e. at the beginning of the holding period or purchase price.

D_t = income or cash flows receivable from the security at a time ‘t’.

A rate of return is usually stated at an annual percentages rate to allow comparison of return between securities.

A stock’s rate of return

What are the two components of return from shares? The first component “Dt” is the income in cash from dividends and the second component is the price change (appreciation and depreciation)

Example if a share of ACC is purchase for Rs.3580 on February 8, 1994, and sold for Rs,3800 on February 9, 1995, and the company paid a dividend of Rs.35 for the year, how do we calculate the rate of return?

K=Dt+(Pt-Pt-1)/Pt-1

= 35+(3800-3580)/3580

= 7.12%

A rate of Return of a Bond (Debenture)

In the case of bonds, instead of dividends, the investor is entitled to payments of interest annually or semi-annually, based on the coupon rate. The investor also benefits if there is an appreciation in the price of the bond.

Example if a 14% Rs1000 ICICI debenture was purchased for Rs.1350 and price of this security rises to Rs.1500 by the end of a year. A rate of return for this debentures would be

=140+(1500-1350)/1350

=21.48%