Accrued Interest of a Bond

With the passage of time, interest gets accumulated on the bond but will be paid only at the next coupon payment date. This is similar to the interest payable on a loan. The interest on a loan gets accumulated daily but will be paid out monthly (IN EMIs). So the accrued interest is the interest that is accumulated from the previous coupon payment date or the date of issuance of the bond. If a bond holder wants to sell the bond before the coupon payment date then accrued interest is added to the sale price.

The formula for calculating accrued interest is

AI = Coupon * Number of Days from Last Coupon / Number of days in the Coupon Period

There are different market conventions for calculating Number of Days from Last Coupon and Number of days in the Coupon Period. Read more

May 29, 2008 | Filed Under Bonds | Leave a Comment

Clean Price and Dirty Price of a Bond

Clean Price:

Bond prices were quoted by calculating the present value of all the future cash flows then one would not under stand whether the change in the price of a bond occurred because of change in the market interest rate or accrued interest. So the bond prices are quoted by deducting the accrued interest from the present value of future cash flows of the bond. This quoted price is called clean price.

Dirty Price:

Dirty price is the settlement price of a bond. It contains two components clean price and accrued interest.
Dirty Price or Settlement price = Clean Price + Accrued interest

May 29, 2008 | Filed Under Bonds | Leave a Comment

Classification of bonds

Bonds can be classified based on the following

Issuer
Coupon Rate
Term to Maturity

Based on the type of issuer bonds can be classified as

Government bonds
Municipal bonds
Corporate bonds

Please visit "Bond Market/Fixed Income Market Basics" post for the detailed discussion of issuer based bonds.

Based on the coupon payment mode bonds can be classified as

Fixed coupon
Floating coupon
Inverse floater
Zero coupon

Fixed Coupon bonds

Usually these bonds are long term in nature. The interest rate and hence the amount of coupon is fixed irrespective of market conditions and the benchmark rate. The coupon is payable at specified time intervals before bond maturity, usually semi annually.

Floating coupon

The interest rate is reset periodically on the coupon reset date, in advance of the period to which it applies, based on some widely used benchmark rates LIBOR, treasury index rate.
The general formula isreference rate/benchmark rate + quoted margin. Read more

May 27, 2008 | Filed Under Bonds | Leave a Comment

What information do we get from bulk deals?

The following institutes/investors do bulk deals.

Mutual Funds
Foreign Institutional Investor
Banks
Financial Institutions
Insurance Companies
Venture Capitalists

To get an understanding on why bulk deals are happening in particular scrip, one has to know the profile of the above said institutes that involved in the bulk deal. If a stock appears in the list of bulk deals, it does not always mean that it would appreciate in future because in every deal there will be buyers as well as sellers. The strategy for both parties may be different. Some times bulk deals information is used to reveal upcoming multi baggers. If continuous bulk deals happen in a counter with high volumes and the pending quantity at the end of the trade is high then there would be good news in that counter and price will appreciate in near future. One has to be careful as the same phenomenon happens even in operator driven counters. So this information should be used as first level of investigation. Next step is to know the fundamentals of the company, its rank amongst the peers in the same industry and future prospectus of the company. Then you can take a decision if you can invest in that company.

May 25, 2008 | Filed Under Stocks | Leave a Comment

Difference between Bulk Deals and Block Deals:

Exchange provides a separate window for block deals. Bulk deals happen from normal trading windows that brokers provide.
There is only 35 minutes time window for block deals. Bulk deals can happen at any time during the trading hours.
Usually there will be one or none block deals in a day. There will be many bulk deals in a day.
A block deal should be a delivery trade i.e. the delivery of securities happens at T+2 days where as bulk deals are usually ‘day trades’ i.e. buy and sell on same day.
Block deals are associated with a minimum quantity of five lakh shares or a minimum value of Rs 5 crore. A transaction is a bulk deal if the total traded quantity exceeds 0.5% of the number of equity shares of a company.

What if the number of shares traded satisfies the quantitative definition of both bulk and block deals? For eg: A transaction of 5,75,000 shares(more than 0.5% of total shares) of a company whose total number of shares are 11,00,00,000. In this case if the transactions are traded by a separate trade window and are done on delivery basis they go into the list of block deals. If the transaction is a day trade it goes to the list of bulk deals. Usually we see transactions involving above 5,00,000 shares under bulk deals section as day trades.

The orders in a block deal are not shown to the people who trade from normal trade window. Bulk orders are visible to every one.
Usually, in a block deal, the trade happens between two agreed parties. It happens when one party would like to buy or sell to other party at an agreed price between them. Bulk deals are market driven.

May 25, 2008 | Filed Under Stocks | 1 Comment

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