FINANCIAL INSTITUTIONS & MARKETS

NUMERICALS – Part I

By Dr. Ashima Arora, Faculty, SSCBS, DU

 Coupon Yield
• Meaning:
– The coupon yield is simply the coupon payment as
a percentage of the face value.
– Coupon yield refers to nominal interest payable on
a fixed income security like G-Sec. This is the fixed
return the Government (i.e., the issuer) commits
to pay to the investor.
– Coupon yield = Coupon Payment / Face
Value
By Dr. Ashima Arora
 Example
Q. Calculate the coupon yield for a G-sec with
following features:
• Coupon: 8.24
Face Value: ₹100
Market Value: ₹103.00

By Dr. Ashima Arora

 Answer
• Coupon yield = 8.24/100 = 8.24%

• Note: Coupon yield thus does not reflect the

impact of interest rate movement and
inflation on the nominal interest that the
Government pays.

By Dr. Ashima Arora

 Current Yield
• Meaning-
– The current yield is simply the coupon payment as
a percentage of the bond’s purchase price
– In other words, it is the return a holder of the
bond gets against its purchase price which may be
more or less than the face value or the par value.
– Current yield = (Annual coupon rate /
Purchase price) X100

By Dr. Ashima Arora

 Example
Q. What would be the current yield for a 10 year
8.24% coupon bond selling for ₹103.00 per ₹100
par value??

By Dr. Ashima Arora

 Answer
• Annual
  coupon interest = 8.24% x ₹100 =
₹8.24
• Current yield =
= 8.00%

By Dr. Ashima Arora

 Yield to Maturity
• Definition:
– YTM is the expected rate of return on a bond if it
is held until its maturity.
– The price of a bond is simply the sum of the
present values of all its remaining cash flows. 

𝒏
 
𝑰𝒏𝒕𝒆𝒓𝒆𝒔𝒕 𝑹𝒆𝒅𝒆𝒎𝒑𝒕𝒊𝒐𝒏 𝑽𝒂𝒍𝒖𝒆
𝑷𝒓𝒊𝒄𝒆 𝒐𝒇 𝒂𝒃𝒐𝒏𝒅=∑ 𝒕
+ 𝒏
𝒕 =𝟏 ( 𝟏+𝒓 ) (𝟏+𝒓 )

By Dr. Ashima Arora

 Yield of a T- Bill
•  It is calculated as per the following formula

Where
P-Purchase Price
D- Days to Maturity
PS: (Day Count for T-Bills = Actual no. of days/365)

By Dr. Ashima Arora, Faculty - SSCBS

 Example
Q1 (a). Assuming the price of a 91 days T-Bill at
issue is Rs. 98.20, what would be the yield of this
instrument?

A????

Q1 (b). If after 41 days, if the same T-Bill is trading

at a price of Rs. 99, what would be its yield?

By Dr. Ashima Arora

 ANSWER
•Ans
  (a)

By Dr. Ashima Arora

•(b) 

Why 50 days???

By Dr. Ashima Arora

Different types of auctions used for issue of
securities
1. Yield – based Auctions
2. Price– based Auctions

By Dr. Ashima Arora

 Yield Based Auction
• It is generally conducted when a new G-Sec is
issued.
• Bids are arranged in ascending order
• Bids at or below the cut-off yield are accepted
while higher than the cut-off yield are
rejected.

By Dr. Ashima Arora

 Example of Yield Based Auction
Yield based auction of a new security
Maturity Date: January 11, 2026
Coupon: It is determined in the auction (find the cut
off yield in the illustration below)
Auction date: January 08, 2016
Auction settlement date/Issue date: January 11,
2016*
Notified Amount: ₹1000 crore

By Dr. Ashima Arora

Details of bids received
Amount of bid
Bid No. Bid Yield
(₹ Cr)
1 8.22% 100
2 8.20% 200
3 8.24% 100
4 8.19% 300
5 8.22% 100
6 8.20% 250
7 8.23% 150
8 8.21% 150

By Dr. Ashima Arora

 Solving the question
Details of bids received in the increasing order of bid yields

Amount of bid Cumulative amount

Bid No. Bid Yield
(₹ Cr) (₹ Cr)
1      
2      
3      
4      
5      
6      
7      
8      

By Dr. Ashima Arora

 Answer
Details of bids received in the increasing order of bid yields

Cumulative
Bid Amount of bid Price* with
Bid Yield amount
No. (₹ Cr) coupon as 8.22%
(₹ Cr)

1 8.19% 300 300 100.19

2 8.20% 200 500 100.14
3 8.20% 250 750 100.13
4 8.21% 150 900 100.09
5 8.22% 100 1000 100
6 8.22% 100 1100 100
7 8.23% 150 1250 99.93
8 8.24% 100 1350 99.87

By Dr. Ashima Arora

 Price Based Auction
 A price based auction is conducted when
Government of India re-issues securities which have
already been issued earlier.
 Bidders quote in terms of price per ₹100 of face
value of the security
 Bids are arranged in descending order of price
offered.
  Bids at or above the cut-off price are accepted. Bids
which are below the cut-off price are rejected.

By Dr. Ashima Arora

 Example of Price Based Auction

Yield based auction of a new security

Maturity Date: January 11, 2026
Coupon: 8.22%
Auction date: January 08, 2016
Auction settlement date/Issue date: January 11,
2016*
Notified Amount: ₹1000 crore

By Dr. Ashima Arora

 Details of bids received

Price of bid with coupon Amount of bid

Bid No. as 8.22%
(₹ Cr)
1 99.93 150
2 100.14 200
3 100 100
4 100.09 150
5 100 100
6 100.19 300
7 99.87 100
8 100.13 250

By Dr. Ashima Arora

 Solving the question
Details of bids received in the decreasing order of bid price

Cumulative
Amount of bid amount
Bid no. Price of bid
(₹ Cr) (₹ Cr)
1
2
3
4
5
6
7
8
By Dr. Ashima Arora
 Answer
Details of bids received in the decreasing order of bid price

Cumulative
Amount of bid
Bid no. Price of bid Implicit yield amount

(₹ Cr) (₹ Cr)
1 100.19 300 8.19% 300
2 100.14 200 8.20% 500
3 100.13 250 8.20% 750
4 100.09 150 8.21% 900
5 100 100 8.22% 1000
6 100 100 8.22% 1100
7 99.93 150 8.23% 1250
8 99.87 100 8.24% 1350

By Dr. Ashima Arora

Further different types of Auctions
1. Uniform Price basis
2. Multiple Price basis. 

Further different types of Bidding

1. Competitive Bidding
2. Non-Competitive Bidding 

By Dr. Ashima Arora

By Dr. Ashima Arora
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By Dr. Ashima Arora