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Fixed Income Securities Assignment

This document summarizes a group project analyzing a debt issue by the National Highway Authority of India (NHAI). 1. The debt issue had various tranches with maturity periods of 10 and 15 years, face value of Rs. 1,000 per bond, and credit ratings of AAA by major Indian rating agencies. 2. Key risks included interest rate risk, lack of sustained trading in the bonds, and potential delays in refunds. 3. While the bonds were issued at par, calculations showed their market value to be lower, indicating they were overpriced. However, the bonds provide security of capital as a government-backed security and offer tax benefits.

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Rajat Sharma
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103 views

Fixed Income Securities Assignment

This document summarizes a group project analyzing a debt issue by the National Highway Authority of India (NHAI). 1. The debt issue had various tranches with maturity periods of 10 and 15 years, face value of Rs. 1,000 per bond, and credit ratings of AAA by major Indian rating agencies. 2. Key risks included interest rate risk, lack of sustained trading in the bonds, and potential delays in refunds. 3. While the bonds were issued at par, calculations showed their market value to be lower, indicating they were overpriced. However, the bonds provide security of capital as a government-backed security and offer tax benefits.

Uploaded by

Rajat Sharma
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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FIXED INCOME SECURITIES

GROUP PROJECT

Submitted To: Submitted By: Group 5


Prof. Hanish Rajpal Roshni Agrawal 201811038
Vasundhara Chaturvedi 201811052
Prasad Joshi 201812081
Rajat Sharma 201812089
Andrea Fernandes 201821003
PGDM (2018-20) Term – IV

Project Report

Prospectus of Debt issue of National Highway Authority of India (NHAI), issue opened on
February 24th 2016. Questions Addressed in the report are:

Part-A
1. Explain, in detail, the issue structure and the terms of the issue.
2. Explain the risk factors involved in the issue.
3. Explain about the credit rating of the issue.

Part-B
4. Compute the value of all the bonds in the issue. For this purpose, consider the spot rates for
the respective period (to be taken from www.ccilindia.com). Add an appropriate credit
spread to spot rates (Annual credit spread data available in handouts folder).
5. Compute Macaulay’s Duration, Modified Duration, and Effective Duration of all the
bonds.
6. Compute the Effective Convexity of all the bonds.
7. Comment on the valuation and risk of the bonds.
PART – A
I. Explain, in detail, the issue structure and the terms of the issue:

 Issue type/ Mode of Issue – Public Issue


 Authority for the issue – National Highways Authority of India (Government of India)
 Nature – Tax-free, secured (Pari-Passu charge on fixed assets of NHAI), redeemable,
non-convertible)
 Form of allotment – Dematerialized and physical form
 Manner of allotment – Dematerialized or physical form
 Face value – Rs. 1,000.00 for each bond
 Issue Price – Rs. 1000.00 for each bond
 Listing – Listed on BSE and NSE
 Put/Call Option – Not applicable
 Issue Size – Rs. 50000 lakhs with an option to retain over subscription upto Rs.
2,80,000.00 lakhs aggregating up to Rs. 3,30,000.00 lakhs.
 Day Count Basis – Actual/Actual
 Period of Subscription -
Issue opened on February 24, 2016
Issue closed on March 1, 2016
 Underwriting – No underwriting
 Minimum subscription – no minimum subscription limit specified
 Minimum Application size & thereafter in multiples of – 5 bonds (Rs. 5000), individually
or collectively across all series of bonds & in multiples of 1 bonds (Rs. 1000) thereafter.
 Interest rate
For category I II III
Tranche II Series IA 7.04%
Tranche II Series IIA 7.39%
For category IV
Tranche II Series IB 7.29%
Tranche II Series IIB 7.69%
 Deemed date of allotment – March 12, 2016
 Frequency of interest payment – Annual
 Interest payment date – 1st October, every year except the last interest payment along
with redemption amount.
 Redemption value – Redeemable at par
 Mode of payment (interest/refund/redemption) – Direct credit or NECS or RTGS or
NEFT or Cheques or demand drafts
 The entire face value per Bond is payable on Application (except in case of ASBA
Applicants). In case of ASBA Applicants, the entire amount of face value of Bonds
applied for will be blocked in the relevant ASBA Account maintained with the SCSB. In
the event of Allotment of a lesser number of Bonds than applied for, the Issuer shall
refund the amount paid on application to the Applicant, in accordance with the terms of
this Prospectus Tranche-I.
o Escrow Collection Banks/Bankers to the Issue:
o IndusInd Bank Limited
o HDFC Bank Limited
o ICICI Bank Limited
o IDBI Bank Limited
o Axis Bank Limited
o State Bank of India
o Syndicate Bank
 Credit Rating Agencies – India Ratings and Research Private limited, Credit Analysis and
research limited, ICRA Ltd., CRISIL Ltd.

II- Explain the risk factors involved in the issue:

 The Bonds are classified as ‘Tax Free Bonds’ eligible for tax exemption under Section
10(15) of the Income Tax Act, up to an amount of interest on such bonds.
 There is a risk of Bonds not being listed on the NSE / BSE in a timely manner, or at all.
 Investor may not be able to recover, on a timely basis or at all, the full value of the
outstanding amounts and/or the interest accrued thereon in connection with the Bonds.
 Changes in interest rates may affect the price of the Bonds.
 Payments made on the Bonds will be subordinated to certain tax and other liabilities
preferred by law.
 There has been only a limited trading in the bonds and it may not be available on
sustained basis in the future.
 There is a risk of volatility in the price of the Bonds.
 Any downgrading in credit rating of the Bonds may affect the value of Bonds and thus
NHAI’s ability to raise further debts.
 There may be a delay in making refunds to applicants.
 Risk regarding enforcement of security on account of default.

Apart from the aforementioned various risks relating to investment in Bond, NHAI is also
exposed to Internal as well as External Risks.
III- Explain about the credit rating of the issue:

IRRPL vide its letter dated September 2, 2015 has assigned a credit rating of “IND AAA”
and revalidated the said rating vide its letter dated February 4, 2016, CARE vide its letter
no. CARE/DRO/RL/2015-16/1615 dated September 3, 2015 has assigned a credit rating of
“CARE AAA” and revalidated the said rating vide its letter dated February 5, 2016 and
ICRA vide its letter dated September 08, 2015 has assigned a credit rating of “ICRA
AAA” with stable outlook and revalidated the said rating vide its letter dated February 5,
2016 and CRISIL vide its letter dated September 8, 2015 has assigned a credit rating of
“CRISIL AAA/Stable” and revalidated the said rating vide its letter dated letter dated
February 8, 2016. Instruments with this rating are considered to have the highest degree of
safety regarding timely servicing of financial obligations. Such instruments carry lowest
credit risk. Instruments with these ratings are considered to have the highest degree of
safety regarding timely servicing of financial obligations. Such instruments carry lowest
credit risk.

The above ratings are not a recommendation to buy, sell or hold securities and investors are
expected take their own decision. The ratings may be subject to revision or withdrawal at
any time by the assigning rating agencies and should be evaluated independently of any
other ratings. For details in relation to revalidation of credit ratings, please refer to
Annexure-II of this Prospectus Tranche-II, for rationale for the credit rating by IRRPL,
CARE, ICRA and CRISIL, please refer Appendix – III of Shelf Prospectus
Part – B
Computation of the value of all the bonds in the issue. (For this purpose, we are
considering the spot rates for respective period):
10 Years Maturity Bonds:

 For category I, II, III: Tranche II Series IA


946.18
 For category IV: Tranche II Series IB
963.20

15 Years Maturity Bonds:

 For category I, II, III: Tranche II Series IIA


953.02
 For category IV: Tranche II Series IIB
978.99

Computation of Macaulay’s Duration, Modified Duration, and Effective Duration of


all the bonds & Effective Convexity of all the bonds:
10 Years Maturity bonds:

 For category I, II, III: Tranche II Series IA

Macaulay's Duration 7.390


Modified Duration 6.852
Effective Duration 6.855
Effective Convexity 62.567

 For category IV: Tranche II Series IB

Macaulay's Duration 7.345


Modified Duration 6.811
Effective Duration 6.814
Effective Convexity 61.877
15 Years maturity bonds:

 For category I, II, III: Tranche II Series IIA

Macaulay's Duration 9.335


Modified Duration 8.648
Effective Duration 8.655
Effective Convexity 106.608

 For category IV: Tranche II Series IIB

Macaulay's Duration 9.262


Modified Duration 8.580
Effective Duration 8.586
Effective Convexity 105.415

Comment on the valuation and risk of the bonds.


Bonds are issued by NHAI at par value, however the calculated value of the bonds as per our
model is significantly less than its face value, which shows that bonds are overpriced. These are
government backed securities and thus provide full security of invested capital and these are also
rated AAA by the rating agencies. These are also the tax-free bond which naturally attracts a lot
of demand from the investors. Considering low risk nature and tax benefits, which these bonds
will provide, the compromise that we must make on reduced return than market expectation is
acceptable.

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