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My Notes 17-January-2018 17-01-2018

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17 January 2018


Govt to revisit Malimath committee report

Justice Malimath committee had given sweeping recommendations on reforming criminal Justice system in India. They are

Admissibility of a confession given before police above the rank of SP shall be admissible as evidence in court of law.

Standard of proof beyond reasonable doubt followed in criminal cases be done away with.

Stringent punishment is necessary for false registration of cases.

National judicial commission need to be appointed to make impeachment of judges less difficult.

Section 54 of IEA be substituted by a provision to the effect that in criminal cases, evidence of bad character and antecedents is relevant.


Following the grain trail

PDS is a successful example in India to showcase a fight against hunger. One of the reasons India did not see a famine after independence is due to successful grain distribution network created through PDS. Today an element of technocracy and centralisation is creeping in to the system.

Aadhar driven direct benefits transfer is making the poor inaccessible to their basic right to food. Many of the ration cards not seeded to Aadhar are removed. Direct benefits transfer, where a beneficiary need to go to bank to collect his subsidy to buy the grain made it difficult for him to access benefits.

All gore

Jallikattu - bull taming sport in tamil nadu claimed few more lives this year. Argued as a tradition, district authorities are not in a position to regulate the sport. Scale, complexity and attitude of the mob makes it difficult.


The people connection

Young Israelis visit India each year after their compulsory army service. Added to this, there is a strong Indian expat community in Israel who reached there through Aaliyah.


Face the inevitable

As bond yields are surging, banks are facing an erosion of loss of principal value. After demonetisation, as credit growth is no as expected most of the banks have invested in government securities. Now, erosion of value can be a big loss to banks. RBI did not agree to intervene for market losses faced by banks.


Read this to understand bond prices and bond yields

Why Bond Prices and Yields Move in Opposite Directions

By Thomas Kenny Updated November 13, 2017

The fact that bond prices and yields move in opposite directions is often confusing to new investors. Bond prices and yields are like a seesaw: when bond yields go up, prices go down, and when bond yields go down, prices go up.

In other words, a move in the 10-year Treasury yield from 2.2% to 2.6% indicates negative market conditions, while a move from 2.6% to 2.2% indicates positive market performance.

But why does the relationship work this way? The simple answer: there is no free lunch in investing.

The key to understanding the relationship is to realize that from the time bonds are issued until the date that they mature, they trade in the open market – where prices and yields are always changing. As a result, yields converge to the point where investors are being paid approximately the same yield for the same level of risk.

This prevents investors from being able to purchase a 10-year U.S. Treasury note with a yield to maturity of 8% when another one is yielding 3% - no more than a store could charge $5 for a gallon of milk when the store across the street is charging $3. The best way to gain a sense of the relationship between prices and yields is to look at some examples.


Rates Rise, Prices Fall

Consider a corporate bond that comes to market in a given year with a coupon of 4% (let’s call it “Bond A”).

Prevailing rates rise during the next 12 months, and one year later the same company issues a new bond (Bond B) – but this time with a yield of 4.5%.

At this point, why would an investor purchase Bond A with a yield of 4% when he or she could buy Bond B with a yield of 4.5%? Nobody would do that, of course, so the price of Bond A needs to adjust downward in order to attract buyers.

But how far does its price fall?

Here’s how the math works: Bond A is priced at $1000 with a coupon of 4%, and its initial yield to maturity is 4%. In other words, it pays $40 annually. Over the course of the following year, the yield on Bond A has moved to 4.5% to be competitive with prevailing rates (as reflected in the 4.5% yield on Bond B).

Since the coupon always stays the same, the price must fall to $900 in order for the bond’s yield to remain the same as Bond B. Why? Because $40 divided by $900 equates to a 4.5% yield. The relationship isn’t this exact in real life, but this example helps provide an illustration of how the process works.

Rates Fall, Prices Rise

In this example, the opposite scenario occurs. The same company issues Bond A with a coupon of 4%, but this time yields fall. One year later, the company can issue new debt at 3.5%. What happens to the first issue? In this case, the price of Bond A needs to adjust upward as its yield falls in line with the newer issue.

Again, Bond A came to the market at $1000 with a coupon of 4%, and its initial yield to maturity is 4%. The following year, the yield on Bond A has moved to 3.5% to match the move in prevailing rates (as reflected in the 3.5% yield on Bond B).

Since the coupon stays the same, the price must rise to $1142.75. Due to this increase in price, the yield declines (because the $40 coupon divided by $1142.75 equals 3.5%).

Pulling It All Together

Bonds that have already been issued and that continue to trade in the secondary market must continually re-adjust their prices and yields to stay in line with current interest rates. As a result, a declining in prevailing yields means that an investor can benefit from capital appreciation in addition to yield.

Conversely, while rising rates can lead to principal loss, hurting the value of bonds and bond funds. Still, there are ways an investor can protect their portfolios from rising rates.


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