Kinds of Debentures or Bonds

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A debenture or bond is a type of security issued by a co-operation. Debentures have a fixed rate of return, fixed maturity period and income certainty. Moreover, the risk of capital losses is low. Debentures may be secured (by the tangible assets of the company) or unsecured (secured only by the general creditworthiness of the company). The types of debentures are given as follows:
Registered Bond: Dues are payable only to the owner who is specified in the book of the issuer.
Bearer Bonds: Dues are payable to whoever has been endorsed and possesses the bond.
Non-Convertible Bonds: These debentures have a buy-back facility after an initial lock in period. These debentures are fully secured and can be redeemed typically at 105% of the par value. They enjoy tax friendly interest payments on a quarterly or half yearly basis.
Convertible Debentures: These types of debentures can be converted at the option of the holder into ordinary shares of the same company subject to specified terms and conditions.
Partly Convertible Debentures: These debentures have a shorter maturity period, typically for 5 years. The issuing company provides a buy-back facility for the non-convertible portion at the option of the investor.
Callable Bonds: These bonds have a repurchase provision which is advantageous to the issuer. The other option is the buyback facility-bay which is advantageous to the subscriber. The buy-back provision makes the bonds as 'puttable bonds' and enhances the liquidity of the bonds.
Zero-coupon Bonds: Also known as 'deep discount bonds' these bonds do not have a specific interest payment every year. Instead, zero coupon bonds are purchased at a substantial discount. The difference between the face value and purchase price is treated as capital gains which have favorable tax rates. Therefore, these bonds are advantageous for investors.
Sinking fund Bonds: These types of bonds are partially redeemed by the issuer every year so that only a small portion of the principal remains to be redeemed at maturity.
Junk-bonds: These types of bonds have been created and used in the USA during the 1980's. The features include high risk, high yield and low rating. These types of bonds are issued by co-operations in connection with mergers, leveraged buyouts and stock buybacks.

Functions of an Asset Management Company

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The two functions of an Asset Management Company are Investment and Marketing. Asset Management Companies are formed according to the rules and regulations of the Securities board of the country under consideration. Theses rules and regulations stipulate all the investment restrictions and also provide guidelines about individual and aggregate investments.

INVESTMENTS: Investments is one of the specialized functions of an Asset Management Company. The investment funds are handled by a fund manager. Sizes of schemes are not too large. A single fund manager handles many funds simultaneously. A fund managers expertise and experience in investment determines how much he can handle. Some fund types like the bank sponsored fund constitute committees to handle the investment exercise. These committees are called as 'Investment Committees' or 'Market Operation Committees'. Under this situation, it is not a single individual, but a committee that handles investment.
Another important role is played by the research and planning cell. The types of securities as well as the prospective investors are considered. Original research is important for the functioning of an Asset Management Company. The company may opt to appoint a 'dealer' to execute the purchase and sale transactions in the money or capital market. This is because the 'dealer' has an in depth understanding of stock market operations.

MARKETING: The marketing department seeks permission to market a product or a 'new scheme' from the Finance Ministry or the Central Bank or the Approved Securities board of the country. The Marketing division appoints a Registrar to the issue. The Marketing department also appoints the lead Manager and Manager to the issue. The other appointments include Solicitors, Auditors, Custodians and Transfer Agents. The department also authorizes the bankers to issue and accept applications.
Once the scheme has been approved, the marketing division is responsible for the printing of application forms, terms and conditions document. The department is also responsible for maintaining banking statements, stationary to issue certificates and refund orders as and when necessary and so on. A 'marketing scheme' or 'advertising scheme' is also designed by the Marketing department. Identification of market segment is another crucial function of this department.

Mutual Funds handle small investor's hard earned money. These investors are likely to be associated with the company for a longer time. Therefore, services after the issue of the unit certificate are important to ensure customer satisfaction.

Market Indicators

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Clues on how the market would behave in the future can be provided by the following two main indicators. These indicators are the breath of the market which is measured by the volume of transactions during the time. The other parameter to be considered is the market index or price. When the two parameters are studied together an investors will be in a position to make a judgment about the market behavior. The investor can then be enabled to form a suitable strategy to meet his objectives.

Volume data is supplied by the country's stock exchanges. Therefore it is possible to gather information about the market index/prices and volume traded for the market as a whole and for individual securities.

• A rising index with an increasing volume would indicate a bull market and a  buy signal. This type of market situation indicates that there is demand in the market that needs to be met with and prices are expected to increase.
• A rising market index accompanied by decreasing volume indicates that it is a bull market but losing its steam. A fall in prices is therefore likely.
• A falling market index with increasing volumes is another type of market index. Under this situation the prices can be expected to fall further. This is also known as a bear market.
• A falling market index accompanied by dwindling volume indicates a bear market that is getting fatigued. This situation will lead to a fall in price.

An investor will do well to be able to use this information which is available in the stock exchange. The availability of charting software has become popular. Information about the market index and volume data is provided and the charting software is designed to make a realistic calculation about market movements.

Personal taxation In India

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The last budget had seen major relief for Indians in the lower end of the taxable bracket. There was a tax credit of Rs 2000/- for those with annual income not exceeding Rs 5,00,000/- per annum. At present, income tax slab is applicable only for individuals whose income is more than Rs 2,00,000/- per annum.

The interim budget is to be presented soon by the Central Government of India. This falls two months ahead of the general elections for the country. The main budget will be presented in two months by the new government which will come to power after the general elections.

Any concession in personal income tax will give relief to the salaried class. The salaried class in India faces the difficulties of high inflation since the last few years.It will be a good en devour by the government in favor of the salaried classes in the event that the personal tax concessions are given.

Portfolio Planning

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Portfolio analysis considers the risks and returns that an investor may expect from holding a mix of various individual securities. Building a portfolio of stock and bonds require a good amount of research to be made. Gathering of reliable and dependable information is crucial for this purpose. A well diversified portfolio will reduce the risks of making a loss. An optimum portfolio that an investor can build will be one that maximizes returns on the investment made.

An investor not only needs to assess the returns on individual securities, but also will associate the risk with the performance of the whole market. This will help to minimize risks ahead of the market movements.

Another important area is the identification of undervalued and overvalued securities whose returns and the return pattern of the securities market can be compared.

Portfolio evaluation holds an equally important role as securities evaluation. For example, an investor is able to sell a stock that has risen by $14/-. He uses the capital to invest into a new and profitable security. On scrutiny of the security prices, the investor finds that the price of the share he sold has increased by another $5/-. The potential earning of $5/- that the investor lost can be considered as an opportunity cost and not as a loss. This happens because the investor considered the whole portfolio rather than a single security.

Holding on to a falling stock with an expectation that it will rise in the future can lead to loss making. This happens because the tendency of the investor is to book profits. An investor does not prefer to book losses while buying and selling shares. A better option in this circumstance is opt out of the holding and purchase a stock which is more profitable.

The objective of portfolio planning and designing is to achieve proper proportions of each of the holding so as to reduce the risk of making loss to be zero. Perhaps a good way to arrive at this situation is to find securities which tend to perform well when the others do not. This will ensure a more reasonable return for the portfolio as a whole even if a one or few of its components happens to be too risky to hold.

Technical Analysis for Investors

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Technical analysis aims at providing answers to the basic questions of whether a stock has a visible trend in its prices. Moreover, an investor needs to know if there is an indication or possibility of reversal in the trend of prices. Technical analysis uses many tools and has developed into a vast body of knowledge. Technical analysis basically uses three types of charts.
Let us take the following example with the information about share prices as given below:

1	31
2	32
3	34
4	35
5	29
6	27
7	34
8	25
9	29
10	30
11	26
12	35
13	28

1) A line chart:  The closing points for each day or a  chosen period of time is taken a a point . The period chosen can be a day, a week, a month or a year. When these points are joined together, by a trend line, they form a line.

2)  The information plotted refers to the volume and price of trading each day. The same information plotted can be formed into a bar chart also.

3) In a point and figure chart , a box matrix is used. Each rise in price is marked with an 'X' and each fall in price is marked with an 'O'. This chart can help establish pivotal or periodic prices, based on the trend set.These will serve as an indicator of whether the prices of the stock will either increase or decrease.

Fundamental Analysis for an Investor

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An investor will have to identify key economic variables in order to make a fundamental analysis for investing in stocks and shares:

GROWTH RATE OF NATIONAL INCOME AND OTHER MACROECONOMIC INDICATORS:

Gross National Product (GNP) denotes the measures of total economic output in a country. Net National Product (NNP) refers to the total income of a country. The rate of growth of these macroeconomic indicators is available on an annual basis. The estimates of growth rate of an economy will serve as a tool to decide the prospects for the industrial sector. Therefore, the returns that can be expected if one invests in shares can be calculated.

INFLATION: An estimate of the GNP and NNP will show the 'nominal' growth rate of a country. The 'real' growth rate can be estimated by discounting the 'nominal'  growth rate of the country with the rate of inflation. Inflation is measured in terms of Wholesale Price Indicators (WPI) as well as Consumer Price Indicators (CPI). A high rate of Inflation will hamper the growth of a economy. A moderate rate of inflation, on the other hand can help the economy by providing a stimulus to produce more while not creating imbalances in demand and supply in an economy.

Firms need to make both monthly and yearly estimates of inflation.  This will help them in establishing the projected costs and revenue and in making decisions regarding pricing and distribution of their product.

GROWTH RATE OF THE PRODUCTION SECTOR: Growth rate of the industrial sector are made on estimated demand for goods and commodities. Estimates can be made even on a monthly basis and aggregate demand for each of the industries can be estimates also. Similarly, the expected market share of each industry and firm can be drawn. This indicator can signify whether it will be profitable to invest in the industry or firm.

INTEREST RATES: Short term interest rates include rate for the call money market and the rate at which banks lend to each other. Long term interest rates include rates on government loans and corporate bonds. A lower interest rate implies that the cost of finance is lower. Therefore, the rate of expected return on stocks will decrease. A higher interest rate implies that the expected return on stocks will increase.

FOREIGN TRADE: Measures that go to affect the foreign exchange reserves and exchange rate of a country include:

a) An excess of exports to imports in an economy that leads to a surplus situation in the balance of payment situation and vice-versa

b) Foreign exchange earned by 'invisible' transactions like hospitality and tourism. These are included in the current account.

c) Loans received and repaid: Loans made and repaid are included as capital transactions.

Exchange rates are published in financial dailies. An increase in the foreign exchange rate can improve the performance of industries that engage in import and export transactions. Hence, the returns on these shares will be greater.

Other important factors that affect the performance of industries and their stocks and shares include, the Governments spending and encouraging of targeted industries, the saving and investment pattern of individual firms and industries and demographic data that sets demand for commodities and services. Favorable weather conditions can also enable grow of the industries and economy.

Bonds - An Overview

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A bond is also known as debenture. A bond is a contractual financial instrument. Under this financial arrangement, a bond is bought by a consumer from an institution or firm. The issuer is obliged to pay to the customer, a given sum of money known as maturity value at a fixed date in the future known as maturity date.Moreover, interest is paid periodically at a fixed rate of interest known as the coupon rate.

Bonds are easy to value. This is because the principal amount and the maturity date is fixed at the time of inception of the contract. However, the bond price are determined by several factors. These factors include:

• Maturity value: As the bond approaches maturity, the price of the bond will sell at par value or the maturity value.
• Investors required rate of return:  When then coupon rate of interest is equal to the required rate of return, the bond will sell at par. When the coupon rate is more than the required rate of return the bond will sell at a premium and vice versa.
• Changes in the market interest rates: With an increase in interest rate, the price of the will decrease and vice versa.   In other words,there is an inverse relationship between  bond prices and interest rate changes.

There are many different types of interest rates that affect the pricing of bonds.

Treasury Rates: These are also known as risk free rates and refer to the rate of interest at which the government borrows its own currency. It is risk free because the government can always pay back the amount by printing more money. Therefore, the US dollar treasury rate is the rate at which the US government can borrow in US dollar and the Indian rupee treasury rate is the rate at which the Indian government can borrow in Indian rupees and so on.

LIBOR Rates: This is also known as London Inter bank Offer Rate. This rate specifies the rate at which a large international bank lends money to another large international bank. LIBOR rates often change because economic conditions keep changing.

Repo Rates: This is quoted when there is a repurchase agreement to fund trading activities. An owner sells securities to a third party and agrees to buy them at a higher rate. The difference it the rates is referred to as repo rate. Overnight repo rates negotiations are most common, where the agreement is renegotiated everyday. Longer term arrangements which are used at times are known as term repos.

Types of Return

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Returns accrue as an amount or rate of produce, gain or profit for an enterprise or firm. It acts as a reward for and a motivational factor for investment. The objective is usually to maximize returns.
Typically, return on investment consist of income (interest, dividend) and capital gain or loss(difference  between sale price of an asset and the price at which it was purchased).

INTERNAL RATE OF RETURN: Also known as the yield rate, IRR is the rate of discount which makes the present value of all the cash flows from the investment equal to the total cost of investment.

BOND RATE: The face value or the par value of the bond is known as the bond rate. For example, a bond issued for $ 300/- for 15 years and a 10% interest rate is said to have a coupon rate or bond rate of 10%.

BASIC YIELD: The actual lowest yield in the market by high grade bonds of a given maturity range. It is linked with highest quality bonds. It is akin to the pure rate of interest as it implies absolute safety and certainty of principal and interest. Moreover, the rate is not susceptible to losses due to changes in commodity prices and taxes.

NOMINAL AND REAL RETURNS: Nominal returns refer to the returns in actual dollars. Real returns refers to nominal returns adjusted for inflation or changes in price level of the economy.

GROSS AND NET YIELD: Gross yield refers to yield realized by the investor before paying taxes. Net yield refers to what remains with the investor after paying taxes.
Net Yield = Gross Yield(1- Tax Rate)

CURRENT YIELD: Also known as the running yield or market yield, this measurement does not take into account the appreciation or depreciation in the value of the bond. It is calculated as follows:
Current Yield = Coupon Interest per year/Current market price of the bond.

DIVIDEND YIELDS: This refers to the ratio as given below:

• Per share (expected or prospective) dividends gross of tax/Current Market  Price of the Share

EARNING YIELDS: This refers to the ratio as given below:

• Expected Earnings per Share/Current Market Price of the Share.

The dividend yield and expected yield will be the same in the situation where the firm distributes all the net earnings in the form of dividends. In other words, the firm has a 100% dividend payout ratio.

Profitability of a Firm

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There is an inherent complex interrelationship in the production process and profit of  industries within an economy. In other words, a demand for a particular good or service does not just influence the supply of that good or service. However, there are many circles of secondary demand that are created because of the inter dependencies between industries. For example, there is an increased demand for corn flour in households. Corn flour is a product of the agricultural sector. An increase in the demand for cornflour will create more demand for fertilizers and pesticides, tractors and other technology used for irrigation and transport. Another circle of demand is created for fuel and crude oil. And in this manner a simple increase in consumer demand can create circles of secondary demand. A firm will therefore not just consider the firm level factors that affect production, but will also take into consideration, the economy level factors and the industry level factors that affect the profitability of production.

A firm's profitability is affected by the following factors:

1) THE ECONOMY OF THE COUNTRY: Macroeconomic indicators are those including Gross National Product and Growth Rate of the industry, the price levels, the interest rates charged by banks for short-term loans, the level of exports and imports and the exchange rate.These factors can be advantageous or disadvantages to the firm..

2) THE INDUSTRY:  A firm's profitability is affected by the industry in which it belongs to. The factors that go to affect are the emergence of substitute commodities, an increased gap in the demand-supply condition for the product and last but not the least, the Government's policy of restraining or encouraging the industry.

3) THE FIRM:  A firm's profitability also rests with the factors that are specific to the firm. These include, the  brand image that the firm has, expert management and so on The returns to variable factors employed by the firm determines the firm's profitability in the short run. In the long run, the level of technology and the returns to scale determine the level of profitability of the firm. An firm will have a higher profitability potential with the judicious and efficient use of the factors of production.

An increase in demand for mobile phones and laptops by the consumers, may just about create secondary demand circles for online purchases, online banking and insurance services, and online travel booking services. This may lead to an overall increase in production of firms in the agricultural sector, the manufacturing sector and also the services sector of the economy.

Portfolio Evaluation

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 Evaluation of a portfolio of investments becomes necessary for individuals, firms, for mutual fund firms and also for academicians and researchers. Though the objective of research will naturally be different, the method of evaluation is the same for all of them.
Given here is an explanation of how portfolios are evaluated:

In the short run,say one year the total returns can be calculated as given below:

(Capital Appreciation* of the total portfolio; including cash and money market instruments)

+ (The income out of the portfolio and other capital distributions from the portfolio)

_ (The capital infusions into the portfolio)

* Capital Appreciation is calculated as follows:

(Market Value of the portfolio at the end of the period) - (Value of the portfolio at the beginning of the period)

When we consider the long run, the cash flow rate will need to be timed.This is because these are cash flows for the long run. Therefore, greater care will need to be taken to evaluate the portfolio return in the long run. This rate of return is precisely what we call the Internal Rate of Return.

Growth and Employment in Tata Consultancy Services

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Tata Consultancy Services, is one of the biggest software services provider in India.  During the year 2013, the company reported a huge net profit of around $90 crore during the third quarter ended 31st December 2013.
The company provides a stable business environment for its clients.A strong international demand for the company's services and discipline in execution has helped the company to maintain the momentum of growth in rendering of services.
Overall economic development in the World economy has increased the need for software services. Demand for the company's services was driven by industries like life sciences and healthcare, manufacturing, media, travel and telecom.
The growth of the company has been accompanied by the growth in hiring as well. During the last quarter of 2013, there was a net addition of 5463 employees, taking the employee strength to 2,70,913. While the attrition rate has been stable at 10.9 percent, the company is increasing its hiring target this year by 5000 employees to reach a hiring level of 55,000 employees.
The relationship between the growth of the company and the employment level within the industry provides a good example of the direct relationship between growth and employment in industries in the modern era.

World Bank sees recovery of the global economy

The global economy has started picking up, led by advanced economies, after five years of financial crisis and recession.The World Bank's twice yearly Global Economic Prospects report stipulates that the expected growth rate for the world is expected to increase. It was 2.4 percent in 2013. It is expected to grow to 3.2 percent this year and reach 3.4 percent in 2014.
The World Bank report has stated that large economies like the United States and Japan are building up strong momentum of economic growth. These economies should support developing countries also.  
The risks to the global economy include:

• Vulnerability of interest rates
• Volatility in the capital market and fiscal uncertainty as the United States Federal Reserve eases up on the extraordinary stimulus that it has provided for the United States economy; the largest of its kind
• Protracted recovery in the euro zone
• Possible setbacks in China's restructuring policies.

The World Bank said that the Fed's decision to begin trimming its intervention in the market is welcome as this "reflects increasingly convincing signs that a self-sustaining recovery is under way". The world will be likely to see an increase in the Global economic growth rate in the near future.

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Managerial economics propagates optimum utilization of the factors of production. Asset Management, one of the most important finance function of a firm is helpful in achieving the objective of optimizing the utilization of the factors of production.
Asset Management  includes the vast area of financial planning, forecasting of cash flows, budget preparation and  allocation of funds.

• The underlying principles of investment decisions in s firm are the security and liquidity of funds while yields are maximized at the same time. 
• Moreover, for manufacturing firms,decisions are made to establish the optimum level of inventory of raw materials and finished goods. The other decisions to be made are for the purchase or renting of buildings for factory and office premises, purchase of equipment and machinery and so on. 
• These decisions are made  by the Chief Financial Officer of a firm. In a scenario of severe competition in the market, these decisions can help to improve the profitability of the firm.

World's first driverless cars

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The world's first driverless car has been made by a French company. The first commercially available driverless car has been made available and it is called -the Navia. The car has been launched at the international CES show in Las Vegas during January 2014 . It can carry upto eight passengers. It is an electrical vehicle and costs around $2,50,000/-. The vehicle does not go beyond 12.5 miles per hour. The vehicle uses lasers on board to detect obstacles in its path. The company at present enjoys a monopolistic situation, and will continue to do so until production catches up with other major giant producers as well.

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