Secondary Market or Stock Market

• What is the secondary market?

• Key features of the Secondary Market –
• Buying and selling of securities after their initial issue in the primary market
• Provides liquidity and help in price discovery
• Provides transparency and fair measurements
• Contribute to economic growth via efficient allocation of funds
• Motivates companies to improve performance
• Promotes corporate governance
• Trading is order-driven, T+1, 9:15 to 3:30 Monday to Friday
Advantages and disadvantages of Secondary Market

Advantages Disadvantages
Provides liquidity Market Volatility
Price discovery Transaction costs
Accessibility Risk of overtrading
 How does the Secondary Market work?
1. Trading platforms – BSE, NSE, OTC
2. Market Participants – Diverse range of individuals and entities
3. Brokerage Firms – Act as an intermediary, execute orders on the investor’s behalf
4. Orders – Market orders (investors accept the market price), Limit orders (investors specify
the price)
5. Price Determination – Forces of supply and demand
6. Clearing & Settlement – NSDL, CDS
7. Continuous Trading – On trading day throughout the market hours
8. Market Information – Access to information via various channels
9. Regulation & Oversight – SEBI, Securities Contracts (Regulation) Act,1956
 Difference between Primary and Secondary Markets
Particulars Primary Market Secondary Market

Definition New issue market The market for existing

securities
Purpose To raise capital for business To provide liquidity to existing
securities

Participants Issuers, underwriters, and Investors, brokers, and traders

investors

Transaction nature IPOs Buying and selling, FPOs

Price determination Set by issuer and underwriter Market supply and demand
forces

Impact on company Direct impact Indirect impact

 Organisation of Secondary Market or Stock Market
• Regional stock exchanges
• The National Stock Exchanges (BSE and NSE)
• The Over the Counter Exchange of India (OTCEI)
• The Inter-Connected Stock Exchange of India (ISE)
• Sec 2(3) of Securities Contracts (Regulation) Act,1956, ‘as any body of individuals, whether
incorporated or not, constituted for the purpose of assisting, regulating or controlling the business
of buying, selling or dealing in securities.’
• There are 7 stock exchanges in India – BSE Ltd. (1875), Calcutta Stock Exchange Ltd. (1908),
NSE Ltd. (1992), Metropolitan Stock Exchange of India Ltd. (2008), Multi Commodity Exchange
of India Ltd. (2003), National Commodity & Derivatives Exchange Ltd. (2003), Indian
Commodity Exchange Ltd. (2017)
• There are 28 regional stock exchanges that are no longer functional
• Stock exchanges in India were either Section-25 companies under the Companies Act or an
association of persons.
 Management and Membership of Stock Exchange

• Regional stock exchanges – The trading members who provide broking services owned,
controlled, and managed the exchanges. No separation of ownership and management.
• The OTCEI and the NSE – They are demutualized exchanges wherein the ownership and
management of the exchange are separated from the right to trade on exchange
• Broker – Member of the stock market that facilitates trade. Three classes of brokers, namely,
proprietary, partnership, and corporate. Sharekhan, Zerodha, TradeZero, 5Paisa
• Regulation – SEBI
• Brokerage – 0.01% to 0.5% or a fixed amount per trade
• Broker Services – Direct market access (DMA) facility to institutional clients that allow clients
direct access to the exchange-trading system
 Demutualization of Stock exchanges

• What is Demutualization?
• A process by which any member-owned organization can become a shareholder-owned company
• Separation of ownership rights and trading rights. A stock exchange becomes a corporate entity,
changing from a non-profit making company to a profit- and tax-paying company.
• Offers liquidity and marketability to the members.
• Kania committee recommended unforming demutualization of stock exchanges in India in 2002
• All stock exchanges in India are demutualized after amending the Securities Contract (Regulation)
Act in 2004
• 51% of the stake of an exchange should be held by the public, other than shareholders having
trading rights (brokers)
• Public includes financial institutions, PSUs, Insurance companies, etc.
 Demutualization of Stock Exchanges
• Why was it needed?
• Safeguards the interest of investors
• Brings out greater transparency in the functioning of the stock exchanges
• Reducing conflict of interests
• To leverage synergies in the working of exchanges

• What are the rules and regulations?

• The minimum stake of a single shareholder in a recognized stock exchange, directly or indirectly,
cannot exceed 5% of the total equity
• At least 51% of the total equity in such exchanges should be held by the public
• The holding limit of a single shareholder was enhanced to 15% in respect of six categories of
shareholders, which are public financial institutions, stock exchanges, depositories, clearing
corporations, banks, and insurance companies
 Listing of Securities
• Application – A company can list its stock on one or more stock exchanges. Apply with the
exchange before filing a prospectus with the registrar of companies
• Rules and regulations – Section 19 of the Securities Contract (Regulation) Rules, 1957*
• Requirements for listing –
1. When 10% of the securities (or 20 lakh) are offered to the public, the Issue size should be more
than 100 crores, and 60% of that should be allocated to QIBs
2. A company has to offer at least 20% of its securities to the general public
• Annual Listing fee – A major source of revenue for exchanges
• Post Listing requirements – All listed companies have to provide semi-annually results to the
stock exchanges
 Eligibility criteria for Listing of Securities
• Large-Cap companies –
• Minimum post-issue paid-up capital shall be Rs. 3 crores
• Issue size shall be Rs. 10 crores
• The market capitalization shall be Rs. 25 crores
• Small-cap companies –
• Minimum post-issue paid-up capital shall be Rs. 3 crores
• The issue size shall be Rs. 3 crores
• The market capitalization shall be Rs. 5 crores
• The income/turnover of the Company shall be Rs. 3 crores every year in the last three
preceding years
• No. of shareholders post issue shall be more than 1000
 Listing of Securities - Documents

• MOA, AOA, prospectus, or statement in lieu of prospectus (trust deed in case of debenture issue)
• Any circulars and advertisements in case of an offer for sale
• Last 5 years’ balance sheets and audited accounts
• A statement showing dividends and cash bonuses, if any, paid during the last 10 years, any arrears
• A brief history of the company since its incorporation including any reorganizations, restructuring,
and changes in its capital structure
• A statement containing particulars of all material contracts, agreements
• Any other relevant information.
 Delisting of Securities
• Failure to comply with the exchange’s requirement might lead to delisting of the securities

1. Compulsory delisting
• Non-compliance with the listing agreement for a minimum period of 6 months
• Insider trading
• Failure to maintain the minimum trading level of shares on the exchange
• Manipulation of share prices
• Unfair market practices by promoters/directors
• Inability to meet current debt obligations or to adequately finance operations due to sickness,
or has not paid interest on debentures for the last 2–3 years, or has become defunct, or there
are no employees
• The only exit option available to the shareholders is the buying of shares by the promoters or
continuing trading for 1 year
 Delisting of Securities
2. Voluntary delisting
• Substantial acquisition of shares by promoters or management
• Voluntary delisting guidelines are provided by the SEBI
• Need to obtain prior approval of the holders of the securities by passing a special resolution at a
General Meeting of the company
• If the public shareholding goes down to 10% or less of the voting capital of the company, the
acquirer making the offer has the option to buy the outstanding shares from the remaining
shareholders at the same offer price
• Exit price, average of the preceding 26-week high and low prices
• An exit-price mechanism called the ‘reverse book-building method’ is used to arrive at the price at
which the shares will be bought from the shareholders
 Central Listing Authority (CLA) 2003
• Purpose –
• To oversee the operations of stock exchanges. The demutualization of stock exchanges resulted in a
reorientation of their business model.
• To regulate the pre-listing and post-listing activities of issuers.
• To ensure uniform and standard practices for listing the securities on stock exchanges.
• Functions –
• Mandates companies to get a letter precedent to listing from CLA before making an application.
• A ‘letter precedent to listing’ means a letter issued by the CLA under Regulation 12 permitting the
applicant to make a listing application to any exchange
• The letter is valid for up to 90 days, subject to fulfillment of the CLA requirements.
• Regulation 17 provides penalties for non-compliance with CLA requirements.
 Risk Management in Secondary Market

• The stock exchanges have developed a comprehensive risk management system to promote a safe
and efficient market. For instance –
• Trading rules and regulations for broker-members
• Market surveillance systems to curb excess volatility
• Trade/settlement guarantee fund to ensure timely settlements even if a member defaults to deliver
securities or pay cash
• A clearing corporation to guarantee financial settlement of all trades
 Circuit Breakers/Price Bands

• Circuit breaker mechanisms to prevent excessive volatility in the market.

• Circuit breakers automatically bring about a halt/suspension in trading for a specified period if
market prices vary unusually on either side. (no order is permitted if it falls out of the specified
price range)
• Stock-specific circuit breakers – individual scrip-wise price bands of 5%, 10%, or 20% either way
• Index-based circuit breakers – done in three stages
• A 10% movement from the previous day’s closing price would result in a 45-minute trading
halt.
• A 15% movement triggers a 1-hour trading halt.
• A 20% movement halts trading for the rest of the day.
 Stock Market Index
• Index – Measures overall market sentiment through a set of stocks that are representative of the
market. It is a barometer of market behavior or the economy as a whole
• Constituents – It includes stocks that have high market capitalization and high liquidity
• Market Capitalization – Market value of all stocks. Market price multiplied by number of shares
outstanding.
• The future streams of expected returns from the companies are discounted to arrive at their present
value, known as market price.
• Liquidity – Ability to buy or sell a scrip at a price close to the current market price. Minimum bid-
ask spread.
• Calculation – The percentage of the aggregate market value of the set of stocks incorporated in the
index on that day to the average market value of the same scrips during the base period
 Methodologies for Calculating the Index
• Full market capitalization method: The number of shares outstanding multiplied by the market
price of a company’s share determines the scrip’s weightage in the index.
• Free-float market capitalization method: It is the percentage of shares that are freely available
for purchase in the markets. Excludes government and promoter holdings, ESOP, etc. It reflects the
investible market capitalization.

• Advantages of Free-float –
• More rational in terms of its constituents
• Reduces the concentration of a select few companies/stocks in the index
• Avoids multiple counting of companies having cross-holdings
Products Available on the Exchanges for Trading

Three types of financial instruments – Equities, Fixed-income/Debt, and Derivatives

Stocks, IDRs, ETFs, and units of closed-

Equity Segment
ended mutual fund schemes

Government securities, Corporate Bonds,

Fixed-income Segment Sovereign Gold Bonds, and other debt
securities

Derivative contracts on Equity, Indices,

Derivative Segment
Currency, Interest Rates and Commodities
 • Purpose – To restore investor’s confidence in the market,
brokers formed “The Native Share and Stock Brokers’
Association” in 1865
• BSE On-line Trading System (BOLT) – Electronic trading on
BSE was introduced in 1995 on the face of competition
• Listing Categories –
Bombay • A Group – Companies with large market capitalization
and high turnover. Blue-chip companies
Stock • B1 Group – Companies with equity above 3 crores and
high growth potential and trading frequency
Exchange • B2 Group – Companies with equity below 3 crores and
low trading volumes
(BSE) • Z Group – Companies that do not meet the regulatory
requirement of the exchange*
• F Group – For debt market segment
• G Group – For government securities
• BSE Indices – Sensitive Index (SENSEX) and other indices
 • Established in 1992 based on the recommendation of Pherwani
committee
• Purpose – Nationwide presence, equal access to the market,
uphold international standards, shorter settlement cycles,
electronic trading
• NSE’s Membership – Open to everyone meeting cash deposits
National or high net worth requirements
• National Securities Clearing Corporation Limited (NSCCL)
Stock — the first clearing corporation in the country to provide a
settlement guarantee
Exchange • National Securities Depository Limited (NSDL) — the first
depository in India to promote the dematerialization of
(NSE) securities
• India Index Services and Products Limited (IISL) – to
provide indices and index services
• Indices – It offers more than 100 indices, including broad-
based, benchmark, sectoral, and customized
 BSE and NSE at Glance

Point of Difference BSE NSE

Year of establishment 1875 (1957) 1992
Location Mumbai Mumbai
Status Oldest Largest based on volume
Companies Listed 5315 2266
Benchmark Index Sensex (30 companies) Nifty 50 (50 companies)
 • OTCEI was established in 1989 based on the recommendation of
ICICI, UTI, LIC, IDBI, SBI, IFCI, and other financial institutions.
• It was demutualized in 1990 under section 25 of the Companies
Act, 1956
• It was the first electronic national exchange with a screen-based
Over the trading system
• It is an Indian version of the National Association of Securities
Counter Dealers Automated Quotation (NASDAQ) USA
• Purpose – To cater to the financial needs of small and medium
Exchange of companies (paid-up capital as low as 30 lakh)
• Public Offer – 2 ways
India • Direct offer – The company offers its shares to the public
(OTCEI) directly after getting it sponsored
• Indirect offer – The company sells the share to a sponsor first
• Sponsors – Brokers, responsible for all kinds of company
appraisal and monitoring. Usually done for 3 years.
 • Types of Securities Traded on OTCEI – 3 types
• Listed – Listed exclusively on the OTCEI
Over the • Permitted – UTI and other mutual funds are permitted to
be traded on the OTCEI
Counter • Initiated – Debentures can be offered for trading on the
OTCEI by any entity holding a minimum of 1 lakh
Exchange of debentures
• Market makers – Merchant bankers offer securities by
India providing bid and sell quotes. Spread is their profit margin.
• Disclaimer – OTCEI has failed to take off in India due to its
(OTCEI) inability to attract investors.
 • Stock exchange of stock exchanges
• Set-up – The Federation of Indian Stock Exchange
(FISE) established the ISE in 1998. ISE got demutualized
Inter- in 2005
• Purpose – To connect various regional stock exchanges.
Connected Aims to integrate smaller, fragmented markets into a
larger, more liquid national market.
Stock • The ISE, promoted by nine RSEs, opened a new national
Exchange of segment of trade to all members of the exchanges
• Membership – 15 regional stock exchanges, their 4500
India (ISE) members, and around 3500 securities
• Disclaimer – The ISE failed to take off as investors
preferred buying scrips from the BSE or the NSE rather
than from the ISE
Debt Market or Fixed Income Market
• Overview of the Indian debt market –
• The Indian bond market now stands at about US$2.59 trillion
• The Indian debt market, in terms of volume, is much larger than the equity market
• Dominated by government securities
• Offers a variety of instruments, greater safety, low transaction costs, and lower volatility
• Segments of the debt market –
• Private corporate debt market
• Public sector undertaking bond market
• Government securities market
• Government securities dominate the debt market, accounting for 90% of the market turnover
• Private corporate debt and public sector bond markets struggle for volume and liquidity
Participants and Regulation of Debt Market
• Key Participants –
• Central and State Governments – Issue securities for short and long-term purposes
• Primary Dealers – Market makers or intermediaries deals in government securities and
registered with RBI
• Public Sector Undertakings (PSUs) – Issuers as well as investors in the debt market
• Corporates – Issuers as well as investors in the debt market
• Banks – Issue CDs for short-term finance and bonds for long-term requirements
• Mutual funds, Insurance Companies, FIIs – They are key investors in the debt market
• Regulation –
• RBI regulates the government securities market
• SEBI regulates the corporate debt or public sector undertaking debt market
• Negotiated Dealing System (NDS) and Clearing Corporation of India Limited (CCIL) have
transformed the debt market
Types of Debt Instruments
• Debt instruments are stable financial assets and less risky
• Bonds – Debt instruments issued by corporations, governments, institutions, and municipalities.
Examples are government bonds and corporate bonds.
• Fixed Deposits (FD) – Provided by banks, NBFCs, and post offices.
• National Savings Certificate (NSC) – Fixed-income investment scheme offered by the post office and
backed by the government.
• Debentures – Debt instruments issued by corporations and government entities.
• Government Securities (G-Secs) – Debt instruments issued by the central or state governments. T-bills,
government bonds.
• Commercial Papers (CP) – Short-term, unsecured debt instruments issued by financial institutions and
large corporations.
Risk Associated with the Debt Instruments
• Default/Credit Risk – The issuer of a debt security may be unable to make timely payment of
interest or principal amount or comply with the provision of a bond indenture.
• Interest Rate Risk – Risk arising from an adverse change in the interest rate, which affects the
yield on the existing instruments.
• Reinvestment Rate Risk –This occurs when the cash flows from a bond need to be reinvested at
lower interest rates than the original bond, reducing overall returns.
• Counter-party Risk – Risk arising due to the inability of the opposite party to the contract to
deliver either the promised security or the sale value at the time of settlement.
• Price/Inflation Risk – Risk arising on account of the inability to receive the expected price due to
an adverse movement in the prices.
Primary Debt Market
• The Indian debt market is classified into two types: primary and secondary.
• In the primary market, new debt issues are made through public prospectus, right issue, or private
placement to raise capital for projects and government spending. Key types include:
• Government Bonds (G-Secs) – Issued by central and state governments, these are the safest due to
sovereign backing.
• State Development Loans (SDLs) – These are issued by state governments for development projects.
They offer slightly higher interest rates due to added risk.
• Corporate Bonds – These are issued by companies. They usually offer higher returns than government
bonds, but they are riskier.
• Municipal Bonds – Issued by local governments to finance infrastructure projects.
• PSU Bonds – Issued by government-owned corporations. They’re safer than corporate bonds but have
lower returns.
• Infrastructure Bonds – Issued to finance infrastructure projects, often with tax benefits.
Secondary Debt Market
• The secondary bond market provides liquidity by allowing investors to trade existing bonds. Key
types include:
• T-Bills – Short-term, safe, and liquid government securities. They mature in less than a year.
• Commercial Papers (CPs) – Short-term debt instruments issued by corporations for immediate
financing needs.
• Certificates of Deposit (CDs) – Issued by banks and financial institutions, offering higher interest
rates than savings accounts.
• Zero-Coupon Bonds – Issued at a discount and mature at par, with the difference as interest.
• Convertible Bonds – They can be converted into the issuing company’s shares. This offers
potential for capital appreciation.
• Call Money – It is short-term, overnight funds lent and borrowed between banks to maintain
liquidity.
• Repo (Repurchase Agreements) – Short-term borrowing via the sale and repurchase of securities.
Banks use it for liquidity management.
 Short term instruments Long term instruments
Debt • Call/Notice Money (1-14 • Government of India dated
Market - days) securities
• Term Money – FDs (up to 1 • Inflation-linked bonds
Instruments year) • Zero coupon bonds
• Repo (1-14 days) – 1 year • State government securities
• CBLO (1 day to 3 months) – (state development loans)
(Collateral Borrowing & • Public Sector Undertaking
Lending Obligation) Bonds (PSU Bonds)
• Treasury Bills (91 days, 182, • Corporate debentures
and 365 days) • Bonds of Public Financial
• Certificates of Deposits (up Institutions (PFIs)
to 1 year)
• Commercial Paper (up to 1
year)
• Bills Rediscounting schemes
 Debt Market - Instruments
Issuer Instruments
Central Government Treasury Bill, Government Loan, Zero coupon Bond, Index
Bond, Floating Rate Bond, Sovereign Gold Bond
State Government Development Loans

Public Sector Unit Promissory Note, Taxable Bond, Tax-Free Bond, Zero Coupon
Bond, Floating Rate Bond, Infrastructure Bonds

Local Bodies Municipal Taxable Bonds, Municipal Tax Free Bonds

Corporates Commercial Paper, Debentures, Promissory Notes, Deep
Discount Debentures, Floating Rate Debenture, Infrastructure
Bonds
Banks Bonds, Certificate of Deposit, Floating Rate Bonds, Perpetual
Bonds, Zero Coupon Bonds
 Zero Coupon Bonds –

• Issued by RBI on behalf of the government at a discount. Discount is the

implicit interest
• Offer no coupon payments (long maturity T-Bills)

Floating Rate Bonds –

Debt Market • Issued by RBI, offers an attractive interest rate, 8.05% p.a., for a period of
7 years
• Linked to NSC rate, o.35% over NSC rate
- • Offer regular income, half-yearly interest payments in January and July
every year
• Minimum investment is 1000, and no maximum limit
Instruments Inflation Linked Bonds –

• Kind of an index bond

• Coupon payment is linked with the inflation rate at a particular point in
time
• Total coupon rate is the sum of base coupon rate and inflation rate (CPI)
• Minimum investment is 5000, and the maximum is 10 lakh for individuals
and 25 lakh for institutions
 • Sovereign Gold Bonds –
• Unique instruments issued by the Reserve Bank of India
on behalf of the government wherein investors can invest
in gold for an extended period without having to invest in
physical gold
• Maturity is 8 years
• Promissory Notes –
Debt • Also known as notes payable. One party, known as
the maker, promises to repay a specified amount of
Market - money to another party, the payee.
• Secured debt instruments

Instruments • Infrastructure Bonds –

• Debt securities issued by entities such as PSUs,
banks, etc., to finance infrastructure projects
• Offer fixed-interest payments
• Maturity is 10-15 years
 • Deep Discount Bonds –
• Issued at a high discount as compared to zero coupon
bond
Debt • May offer periodic interest payments
• Offer tax advantage

Market - • Perpetual Bonds –

• Long-term debt instruments with no maturity date

Instruments • They indefinitely pay a fixed interest rate to bondholders

• Some perpetual bonds offer a call option
• They have a subordinated status in the event of liquidation
or bankruptcy
Bonds
• Bond terminologies
• Coupon –
• The periodic interest payment made by the issuer (amount)
• Coupon rate –
• The interest rate used to calculate the coupon amount the bond will pay (rate)
• Face (par) value –
• The face value represents the principal in the loan agreement
• Maturity date –
• The date the loan contract ends. At this time, the issuer pays the face value to the investor who owns the bond
• For example –
• XYZ company needs to buy a piece of equipment. It issues bonds that have a maturity date of 10 years from the date
of issue and a face value of Rs.1,000. The company will issue as many bonds as it needs for the equipment purchase –
if the equipment costs Rs.10,000,000 fully installed, it will issue 10,000 bonds.
 Bond Valuation
• The coupon rate dictates whether the bonds will be sold in the secondary market at face value or at a
discount or premium.
• If the coupon rate is higher than the prevailing interest rate, the bonds will sell at a premium; if the
coupon rate is lower than the prevailing interest rate, the bonds will sell at a discount.
• Bond pricing –
• Bond price is the present value of all future cash flows from the bond, including coupon payments
and maturity amount

• Where;
• C = Coupon payment (coupon rate multiplied by face value)
• t = Time period till maturity
• r = Discount rate or YTM
• F = Face value of Bond
Bond Valuation
• For example, what is the present value of a bond with a two-year maturity date, a face value of Rs.1,000,
and a coupon rate of 6%? The current prevailing rate for similar issues is 5%.
• For example, the annual interest rate is 5%, and semi-annual interest payments are made for two years,
after which the bond matures and the principal must be repaid. Assume a YTM of 3%:
• F = $1,000 for corporate bond
• Coupon rate annual = 5%, therefore, Coupon rate semi-annual = 5% / 2 = 2.5%
• C = 2.5% x $1000 = $25 per period
• t = 2 years x 2 = 4 periods for semi-annual coupon payments
• T = 4 periods
• r = YTM of 3% / 2 for semi-annual compounding = 1.5%
• What is the bond value?
Bond Valuation
• Corporate bonds tend to rise in value when interest rates fall, and they fall in value when interest
rates rise.
• Usually, the longer the maturity, the greater is the degree of price volatility.
• The inverse relationship between bonds and interest rates—that is, the fact that bonds are worth
less when interest rates rise and vice versa can be explained as follows:
• When interest rates rise, new issues come to market with higher yields than older securities,
making those older ones worth less. Hence, their prices go down.
• When interest rates decline, new bond issues come to market with lower yields than older
securities, making those older, higher-yielding ones worth more. Hence, their prices go up.
• As a result, if one sells a bond before maturity, it may be worth more or less than it was paid for.
Bond Yields
• Yield –
• Yield is the rate of return on bond investment
• It is a tool to measure the return of one bond against another
• It is not fixed, like a bond's stated interest/coupon rate. It changes to reflect the price movements in
a bond caused by fluctuating interest rates
• For example –
• You buy a bond, hold it for a year while interest rates are rising, and then sell it.
• You receive a lower price for the bond than you paid for it because no one would otherwise accept
your bond's now lower-than-market interest rate.
• Although the buyer will receive the same amount of interest as you did and will also have the same
amount of principal returned at maturity, the buyer's yield, or rate of return, will be higher than
yours because the buyer paid less for the bond.
Bond Yields
• Yield is commonly measured in two ways: current yield and yield to maturity.
• Current Yield
• The current yield is the annual return on the amount paid for a bond, regardless of its maturity. If you
buy a bond at par, the current yield equals its stated interest rate. Thus, the current yield on a par-value
bond paying 6% is 6%.
• Current Bond Yield = Coupon amount / current price of a bond
• However, if the market price of the bond is more or less than par, the current yield will be different. For
example, if you buy a Rs. 1,000 bond with a 6% stated interest rate at Rs. 900, your current yield would
be 6.67% (Rs. 1,000 x .06/Rs.900).
Bond Yields
• Yield is commonly measured in two ways: current yield and yield to maturity.
• Yield to Maturity
• It tells the total return you will receive if you hold a bond until maturity. It also enables you to compare bonds
with different maturities and coupons.
• Yield to maturity includes all your interest plus any capital gain you will realize (if you purchase the bond
below par) or minus any capital loss you will suffer (if you purchase the bond above par).
• YTM is the Internal Rate of Return on the bond
• It can be determined by equating the sum of the cash flows throughout the life of the bond to zero
• There is an inverse relationship between bond price and yield
Bond Yields
Bond Yields
There is an inverse relationship between bond price and interest rate
There is an inverse relationship between bond price and yield

1. If the market price is equal to the face value of the government security, then the current yield, coupon
yield, and Yield to maturity will all be equal to the coupon rate
Coupon rate = Yield to maturity if Market price = Face value
2. If the Market Price is less than the face value of the government security, the current yield and yield to
maturity will be higher than the coupon rate
Coupon rate < Yield to maturity if, Market price < Face value
3. If the market price of the bond is more than its face value, the current yield and Yield to maturity will be
lower than the coupon rate
Coupon rate > Yield to maturity if, Market price > Face value