Fixed Income-Securities

Agenda

Definition of Fixed Income securities

Classification of FI-Securities
Characteristic features & related terms
Life Cycle of FI securities
Basic Accounting
FLEXCUBE specific concepts

Financial System
Financial System
Financial
Assets
Forex

Financial

Financial

Markets
Capital

Intermediaries
Money

Primary Market
Secondary Market

Credit

Fixed Income-Securities
What is Securities ?
Abstract but verifiable financial stake that maybe represented through a
paper document or a computer system
What is Fixed Income Securities ?
Fixed Income- Predictable income, May/May not be fixed in value but
should be known beforehand.
Financial Assets

Equities/Stocks

Fixed Income

Derivatives

Fixed Income-Securities
What is a Bond?
Bond is a loan paper. The issuer is a borrower, investor is lender.
Classification :
On Tenor
Short term, long term
On Features
1)IB, NIB
2)callable, puttable

Fixed Income-Securities
Bond Features
Callable As with preferred stocks, bonds may be callable. Issuers
have the ability to retire the issue before maturity, if they want to, under
set conditions.
Convertible Usually this convertible feature allows the bond to be
converted into equity, thereby reducing the corporate debt.
Adjustable Rate Bonds- The coupon rate on this type of bond is
changed periodically. By changing the coupon rate to reflect current
economic conditions, the bonds price behaves more like that of a
short-term instrument.
Zero Coupon Bonds- These are discounted instruments offered below
the face amount, paying par or face value amount at maturity. The
difference is the interest earned.

Fixed Income-Securities
Registered / Bearer Bonds - name of the owner or that of the
nominee is maintained by a registrar. Interest on these bonds
would be paid to the owner as appearing in the books of the
registrar as of the interest payment date. Bearer bonds are
transferable by endorsement. The interest coupons are issued
along with the bonds and the person who submits the interest
coupon to the bank as of the interest payment date earns the
interest on those bonds. Registrar does not maintain the books of
the owners of the bonds for these bonds.

Fixed Income-Securities
Time Value of Money
Present Value
Discounting
Annuity- stream of cash flows occurring at regular intervals
Perpetuity- annuity with infinite duration
Bond Pricing/Valuation Concepts
P =Cn/(1+r)^n + M/(1+r)^n
Cn= periodic coupon value, M= maturity value
What is Yield?
Different Types of Yield
Nominal Yield,Current Yield, YTM,YTC
Price/Yield Relationship
Yield Curve

Fixed Income-Securities
Current Yield=Annual interest/price
Capital gain/loss not taken into account
Ignores time value of money
YTM=effective interest rate if bond is held till maturity
YTC =effective interest rate before maturity till the time of
call
Relationship coupon rate, yield, price
Price 1/ yield
Coupon < yield=> price < par (discount bond)
Coupon = yield=> price = par
Coupon > yield=> price > par (premium bond)
Yield Curve Analysis

Fixed Income-Securities

Price

par value
a

at issue

b
r

Yield

@issue, Yield=Coupon rate

Region a->Yield<Coupon =>high price=>selling@premium
Region b->Yield>Coupon =>low price=>selling@discount

Fixed Income-Securities

Accrued Interest
Accrued = [Face value of bond] x [rate of interest] x
{[Number of days bond is owned /360]}
Clean price/Dirty Price
Clean price without accrued interest
Dirty price - inclusive of all components hence also called net
consideration
Concept of Ex and Cum in securities terminology (Ex-dividend,
Cum-dividend, Ex-date etc)
Ex-date The time-interval before the coupon payment date
which decides who will receive the coupon payment from the
issuer in case of sale/purchase
After Ex-date, purchaser receives the coupon payment
Before Ex-date, seller receives the coupon payment
Day count conventions
Act/365, Act/Act, Act/360 etc
Duration of Bond

Fixed Income-Securities
Bond Prices and Interest Rates
Why does the bond price change?
Measures of Volatility (Sensitivity of Yield with Interest rate)
PVBP-Price Value of Basis Price (DV01)
YV-Yield Value
Duration(Macaulay duration)
Volatility= Duration/(1+Yield)

Fixed Income-Securities
Corporate Actions on Securities
Cash dividend on equities / preference shares
Stock dividend on equities
Interest on bonds / fixed income securities
Redemption of bonds / fixed income securities either on Call /
maturity date
Exercise of rights / warrants associated with securities

Fixed Income-Securities
US treasuries are classified by name according to their maturity
period at the time of issue. There are three types of instrument:
Treasury Bonds

(T-Bonds)

These have original maturities of 10 30 years with fixed coupons

paid annually. At maturity the principal is repaid as a single bullet.
Treasury Notes

(T-Notes)

These are identical in structure to T-Bonds except their original

maturity is between 1 10 years.
Treasury Bills

(T-Bills)

These are discount instruments with original maturities of 12

months or less.

Fixed Income-Securities
T-Bills and T-Notes (All discounted and Non-interest Bearing
Instruments) are treated as Zero Coupon Bonds as far as life cycle
events are considered.
BEY- Bond Equivalent Yield (usually based on Act/365)
MMY/CDY- Money Market Equivalent Yield/CD Equivalent Yield
(usually based on Act/360)
MMY = 360*[R/(360-(D*R)]
R= discount yield, D= no of days securities was owned
Similarly,
BEY = 365*[R/(365-(D*R)]

Fixed Income-Securities
Some Key Terms
Safe Keeping Locations/Depositories
Holdings
Positions
Short Positions/Long Positions
Short Selling/Long Purchase
Repo / Reverse Repo
Costing Methods of Securities
FIFO
LIFO
Deal Matching

Fixed Income-Securities
Some Key Terms
MTM Revaluation
Importance
Methods of Revaluation
Limits Tracking
Pre-Settlement risk (risk of default before settlement)
Issuer Exposure risk

Fixed Income-Securities
What is Portfolio?
Portfolio is nothing but a basket for keeping different types of
securities separate for specific purpose.
Three Broad category of Portfolios
-Bank Portfolio
Bank manages its own portfolios
-Customer Portfolio
Bank manages customers portfolios
-Issuer Portfolio
Bank can also issue its own Securities ( e.g Citi-bonds) and
may act as issuer. So, it can maintain issuer portfolio for
managing the issues.

Fixed Income-Securities
Portfolio Types
AFS
Trading
Deal Categories
Bank Buys Customer Sells (BBCS)
Bank Sells Customer Buys (BSCB)
Bank Sells Issuer Buys-Redemption type(REDM)

Fixed Income-Securities
Types of Accounting
Deal accounting
Involves Monetary/Cash settlement with counterparty
on T+2/T+1
A/c entries immediate if value date is same as Settlement
date
Portfolio Accounting/Position Accounting
Also called ALPL(Asset Liability Profit Loss Accounting)
Always at EOD/BOD after settlement date
Each deal creates/increases/decrease a position which is
characterized by position reference no (decided by
Portfolio id, Security id,Market Type and other
parameters)

Fixed Income-Securities
PRODUCT DEFINITION FACILITY USING THE VARIOUS CLASSES
SECURITY
PRODUCT

SECURITY

DEAL
PRODUCT

PORTFOLIO
PRODUCT

Processed on Event date

Based on Ex-date positions / holdings
Collection from safekeeping location
Automatic / Manual
Disbursement to customers

PORTFOLIO(s)

Automatic / Manual

DEAL Input parameters Single leg deal or

Combination deal

CORPORATE
EVENTS

Life Cycle Events

Deal settlement
Corporate Action
Portfolio Maintenance
Charges
Taxes on income
Limit tracking
Issuer

MARKET / SECURITY
MARKET PRICE /
QUANTITY / TRADE
DATE / SETTLEMENT
DATES

POSITIONS /
HOLDINGS
Life Cycle Events
Book
Settlement (Money / Security)
Confirmation

SAFE KEEPING
LOCATION

- Counterparty
- Broker
- Delivery / receipt
Amendment / Cancellation / Extension / Reversal

Deal Charges, Deal Taxes

Securities-Accounting Treatment
Life cycle Events and Accounting Entries

Securities-Accounting Treatment

Securities-Accounting Treatment

Securities-Accounting Treatment