Cost of Capital^49
was from State Bank of India (SBI). It issued unsecured, redeemable, subordinated,
floating interest rate bonds in the nature of promissory notes carrying a coupon rate of
3 per cent per annum above the bank's maximum term deposit rate.
Pass Through Certificates (PTCs)
Pass Through Certificates (PTCs) are debt securities that pass through income from
debtors through intermediaries to investors. Primarily banks who have a strong retail
loan portfolio are the intermediaries who issue these certificates. The most common
form if pass through is mortgage backed security, in which the principal and and interest
payment from the home loan (or car loan) takers are passed from the banks or savings
agencies that pool and repackage them in the form of securities, to investors. The bank
that collects the payments from debtors charges a fee fro its services, which is deducted
from the income passed on to investors. These securities are credit rated and the
interest payment is according to the rating. The rating (i.e. P1+) is followed by (So) to
denote the transaction is that of securitization.
Rate of return of a Bond
In case of bonds, instead of dividends, the investor is entitled to payments of interest
annually or semi-annually. The investor also benefits if there is an appreciation in the
value of bond, otherwise there is the redemption of the bond at par value or at premium.
Using the present value formula developed above we can say that:
( 1 i)nPrincipal Amount
(1 i)Present Value of a Bond n Interest Amount
t 1= + t + +
=Here interest amount is individually brought to its present value or we can apply the
annuity factor table to get its present value. The principal amount is brought to its
present value when it is due.
Or to use the tables the change would be:
Present Value = Interest Amount * (Present Value Annuity Factorn,i) + Principal Amount
- (Present Value Interest Factorn,i)
Example
A bond is paying 10 % interest per annum and is going to mature in the next two yeaRs
At maturity it will pay its principal amount of Rs 100. If the expected return on bonds
today are (i) 7 %, (ii) 10 % and (iii) 15 %, what value would you pay for the bond today.
Solution
Using the above formula for situation 2), we can say that