What determines the term structure of interest rates? This question has long puzzled academicians and practitioners. Four principle explanations have been offered: the expectations theory, the liquidity preference theory, the preferred theory, the preferred habitat theory, and the market segmentation theory. Expectations Theory: This theory holds that the shape of the yield curve can be explained by the interest rate expectations of those who participate in the... Read more

The Indian capital market took a major step in its rapid modernization when the National Securities Depository Limited (NSDL) was set up as the first depository in India. NSDL, promoted by the Industrial Development Bank of India, Unit Trust of India, National Stock Exchange of India Limited, and State Bank of India was registered on June7, 1996 with SEBI and commenced operations in November 1996. NSDL is a public limited company formed under the... Read more

In the facilities location problems, whether multi-plant or single plant, the industrial policies of the governments are very important inputs in the overall consideration. In India, the industrial development of backward areas for balanced regional development of the country has always been emphasized. This has been attempted mainly through: 1. Licensing policy 2. Location of public sector projects 3. Investment subsidy 4. Concessional finance 5. Concession on income tax import duty etc and 6. Setting... Read more

The government employs two broad classes of macroeconomic policies viz., demand side policies and supply side policies. The former are meant to influence the demand for goods and services and the latter the supply for goods and services. Traditionally, the focus was mostly on fiscal and monetary policies, the two major tools of demand side economies. From 1980s onward, however supply side economics has received a lot of attention. Fiscal Policy: Fiscal... Read more

With the repeal of the Capital Issues Control Act and the enactment of SEBI Act in 1992, the rules of the game applicable to convertible bonds have changed. As per SEBI guidelines issued in June 1992, the provisions applicable to fully convertible bonds and partially convertible binds are as follows: * The conversion premium and the conversion timing shall be predetermined and stated in the prospectus. * Any conversion partial... Read more

While bonds are often purchased to be held to maturity many a times they are not. Henry Kaufman, a renowned bond expert argues that ‘bonds are bought for their price appreciation potential and not for income protection. Many bond investors subscribe to this view and pursue active strategies. They seek to profit by (1) forecasting interest rate changes and/or (2) exploiting relative mispricings among bonds. Forecasting Interest Rate Changes: ... Read more

Determinants of the P/E Ratio: P0= estimated price E1= estimated earnings per share P0/ E1 = justified price earnings ratio The determinants of the P/E ratio can be derived from the dividend discount model, which is the foundation for valuing equity stocks. Let us start with the constant growth dividend discount model: P0 = D1/ r-g ------------------- Eq 1 In this... Read more

As a practical expedient investment analysts apply simple rules of thumb to establish benchmark price earnings multiples. Three popular rules of thumb used in practice are described and evaluated below: Thumb Rule 1 The price earnings multiple or a share may be equated with the projected growth rate in earnings. For examples, if the projected growth rate in earnings for a firm is 20 percent, a price earnings multiple of... Read more

The macro economy is the overall economic environment n which all firms operate. The key variables commonly used to describe the state of the macro-economy are: (1) Growth rates of gross domestic product (2) Industrial growth rate (3) Agriculture and monsoons (4) Savings and investments (5) Government budget and deficit (6) Price level and inflation (7) Interest rates (8)Balance of payment, forex reserves and exchange rate. (9) Infrastructural facilities and arrangements ... Read more

Other things being equal, the price of a bond falls when the required rate of return rises and the price of a bond rises when the required rate of return falls. Since the required rate of return has an important bearing on bond price, you would know, what drives the required rate of return, which will hereafter, for the sale of simplicity, be referred to as interest rate. The interest rate on... Read more