Investment Valuation in India

LIBOR LIBOR stands for London Interbank Offered Rate is the average interest rate estimated by leading banks in London that they would be charged while borrowing from other banks. It is the primary benchmark, along with the Euribor, for short term interest rates around the world. As a popular benchmark, it is used for US Dollar, GB Pound, Euro, Swiss Franc, Canadian Dollar and Japanese Yen. Libor rates are calculated for ten currencies and 15 borrowing periods ranging from overnight to one year and are published daily at 11:30 am (London time) by Thomson Reuters. The British Bankers Association (BBA) collects data from 16 banks to calculate LIBOR for each maturity and for each currency. It weeds out the best four and the worst four and then calculates the average of remaining 8 rates which is published as LIBOR. Many financial institutions, mortgage lenders and credit card agencies set their own rates relative to it. At least $350 trillion in derivatives and other financia...

IT major Satyam Computers, after being in the news for all the bad reasons has reported a major scam which left the country shocked. The major developments: Satyam Chairman B Ramalinga Raju resigns as Chairman and issues a letter stating that he has been involved in major misrepresentations of accounts. The balance sheet carries as of September 30, 2008 a) Inflated (non-existent) cash and bank balance of Rs 5,040 crore (as against Rs 5361 crore reflected in the books) b) An accured interest of Rs 376 crore which is non-existent c) An understated liability of Rs 1,230 crore on account of funds arranged by Raju d) An over stated debtor position of Rs 490 crore (as against Rs 2651 reflected in the books. For 2Q 08, “reported revenue of Rs 2,700 crore and an operating margin of Rs 649 crore (24 per cent of revenues) as against the actual revenues of Rs 2,112 crore and an actual operating margin of Rs 61 crore (3 per cent of revenue)”. “In the last two years a net amount of Rs 1,230 crore w...

A convertible bond (CB) is debt at issuance and through its life, until converted into shares. Conversion into shares happens if the share price is above a certain share price (“conversion price”) either at maturity or through the life of the bonds. Typically on the day the convertible bond is priced, the volume weighted average price of the shares or the closing price of the shares is taken as a base price (“reference price”). Conversion price is then calculated as (reference price x (1 + conversion premium)) , where the conversion premium is typically between 10% and 30%. The number of shares per bond is fixed by dividing the denomination of the bond with the conversion price. This defines the maximum number of new shares that can be issued at any time, limiting maximum dilution for existing shareholders. In order to see how this works, let us take a simple example: Assumptions Issue Amount: USD 25m Reference price (closing price of shares): USD 100 Denomination of bonds: USD 100,000...

Understanding Financial Markets What are the various types of financial markets? The financial markets can broadly be divided into money and capital market. Money Market : Money market is a market for debt securities that pay off in the short term usually less than one year, for example the market for 90-days treasury bills. This market encompasses the trading and issuance of short term non equity debt instruments including treasury bills, commercial papers, bankers acceptance, certificates of deposits, etc. Capital Market : Capital market is a market for long-term debt and equity shares. In this market, the capital funds comprising of both equity and debt are issued and traded. This also includes private placement sources of debt and equity as well as organized markets like stock exchanges. Capital market can be further divided into primary and secondary markets. What is meant by the Secondary Market? Secondary Market refers to a market where securities are traded after being initia...