“ANALYSIS OF GOVERNMENT

SECURITIES WITH REFERENCE TO YTM

FOR SELECTED REPO RATE CHANGES”
Submitted to

Shri Ramdeobaba College of Engineering and Management, Nagpur

in partial fulfillment of IV Semester of

Master of Business Administration

in specialization

FINANCE

Submitted by Project Guide

Heena H. Budhwani Prof. Vishal Mehta

2016-17

Department of Management Technology

Shri Ramdeobaba College of Engineering & Management, Nagpur 440013
(An Autonomous Institute affiliated to Rashtrasant Tukdoji Maharaj Nagpur University
Nagpur)
April 2017

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 SHRI RAMDEOBABA COLLEGE OF
ENGINEERING & MANAGEMENT,
NAGPUR
(An Autonomous Institute affiliated to Rashtrasant Tukdoji
Maharaj Nagpur University Nagpur)
Department of Management Technology

CERTIFICATE

This is to certify that the Thesis on “Analysis of Government Securities

with reference to YTM for selected Repo Rate changes” is a bonafide
work of Heena H. Budhwani submitted to the Rashtrasant Tukdoji
Maharaj Nagpur University, Nagpur in partial fulfillment of IV Semester
of Master of Business Administration. It has been carried out at the
Department of Management Technology, Shri Ramdeobaba College of
Engineering and Management,Nagpur during the academic year 2016-17.

Date :

Place: Nagpur

Prof. Vishal Mehta

Project Guide

Dr. Rupesh Pais Dr. R. S. Pande

Head Principal
Department of Management Technology

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 DECLARATION

I, hereby declare that the project titled “Analysis of Government

Securities with reference to YTM for selected Repo Rate changes”
submitted herein, has been carried out in the Department of Management
Technology of Shri Ramdeobaba College of Engineering & Management,
Nagpur. The work is original and has not been submitted earlier as a
whole or part for the award of any degree / diploma at this or any
other institution / University

Date:

Place: Nagpur

Heena H. Budhwani

Roll no. - 09

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SYNOPSIS

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 CRITICAL ANALYSIS OF GOVERNMENT SECURITIES WITH
SPECIAL REFERENCE TO YIELD TO MATURITY

INTRODUCTION

Corporate, government and individuals rely on various sources of

funding to meet their capital requirements. Corporate use either internal or
external sources to finance their business. External sources include equity or
debt. Debt includes bank borrowings and bonds. We can also distinguish
private debt (bonds issued by private issuers) and public debt (issued by
central and state governments, municipal authorities).
As stated above, the study of public debt includes government
securities wherein we purpose to analyze the government securities with
respect to Yield to Maturity if there is change in interest rates and securities
are held for different time periods or till maturity. It is analyzed with the help of
yield curve according to short term and long term securities.
A government security is a bond issued by a government authority
with a promise of repayment upon maturity. Government securities such as
savings bonds, treasury bills and notes also promise periodic coupon or
interest payments. These securities are considered low-risk, since they are
backed by the taxing power of the government.
Yield to maturity (YTM) is the total return anticipated on a bond if the
bond is held until the end of its lifetime. Yield to maturity is considered a long-
term bond yield, but is expressed as an annual rate. In other words, it is the
internal rate of return of an investment in a bond if the investor holds the bond
until maturity and if all payments are made as scheduled.
A yield curve is a line that plots the interest rates, at a set point in
time, of bonds having equal credit quality but differing maturity dates. The
most frequently reported yield curve compares the three-month, two-year,
five-year and 30-year U.S. Treasury debt. This yield curve is used as a
benchmark for other debt in the market, such as mortgage rates or bank
lending rates, and it is also used to predict changes in economic output and
growth.

REVIEW OF LITERATURE

In any economy, a smoothly functioning debt market is considered

crucial for development and stability. After referring to “Corporate Bond
Market in India: A Study and Policy Recommendations”, prepared by Kanad
Chaudhari, Meenal Raje and Charan Singh. Publication year February 2014 it
is evident that there has been much deliberation on corporate debt scenario

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and it is argued by International Capital Markets Association (2013) that
vibrant corporate debt markets bring substantial economic benefits and are
important for all stakeholders concerned.
NSE working paper on “Nature of Corporate Bonds Yield Curves: The
case of India”. Prepared by Rituparna Das. Publication year in November
3013 stated that we can compare returns from same instruments at different
time periods by using yield curves and it helps to know about effect of
changes in interest rates on the prices of bonds and its returns.
Working paper on “Yield to Maturity: Basics of Bonds”. Published on Jan
14, 2009 stated that increase and decrease in interest rates affect the bond
market, its prices and returns.

After referring to above articles and some other research papers the
research is being conducted on Critical Analysis of Government Securities
with special reference to Yield to Maturity.

SIGNIFICANCE OF RESEARCH

It will help to know about the fluctuations in Yield to Maturity with

respect to changes in interest rates at different points of time. The yield curve
helps in assessing the health of an economy.

OBJECTIVE OF THE STUDY

a) To calculate YTMs of different government securities of different

maturity.
b) To make yield curve based on the YTMs calculated.
c) To assess effect of interest rate movement on returns realized on
government securities.

SCOPE OF RESEARCH

Government securities traded on National Stock Exchange

RESEARCH DESIGN

The research is being conducted on the basis of Secondary data such

as past records, internet, journals, research papers etc. This will help to
conclude about the analysis on government securities with respect to yield to
maturity.

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STATISTICAL TOOLS

MS Excel, graphs, charts, etc. will be used to present the data and
compare and analyze the findings.

REFERENCES

www.nseindia.com
www.rbi.org.in
www.investopedia.com

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 ACKNOWLEDGEMENT

I would like to thank Dr. R. S. Pande the principal of my college RCOEM,

Nagpur, who gave me an opportunity to undertake this research. I would also
like to express my hearty gratitude towards Dr. Rupesh Pais, Head of
department DMT.I would like to thank my project guide Professor Vishal
Mehta for helping me on regular basis at every stage of the research project.
His constant guidance and suggestion helped me to complete the research on
time and with greater accuracy. A special word of thank to the entire faculty of
DMT, for imparting their knowledge in me and being cooperative and helpful
in all need.

Last but not the least; I would like to thank my friends and my colleagues who
instilled confidence and moral support at various stages during the course of
this training.

HEENA H. BUDHWANI

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 TABLE OF CONTENTS

Sr. No. TOPICS PAGE NO.

1. INTRODUCTION 10

2. RESEARCH METHODOLOGY 23

3. DATA FINDINGS AND INTERPRETATION 28

4. CONCLUSION 52

5. BIBLIOGRAPGHY 54

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INTRODUCTION

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INTRODUCTION

GOVERNMENT SECURITIES

A government security is a bond or other type of debt obligation that is issued

by a government with a promise of repayment upon the security's maturity
date. Government securities are usually considered low-risk investments
because they are backed by the
taxing power of a government.

The Treasury Department issues government securities through auctions to

institutional investors for buying and selling. Retail investors buy government
securities directly from the Treasury Department’s website, banks or brokers.
Since most government securities are backed by the full faith and credit of the
U.S. government, default is unlikely.

Rates on government bonds affect the entire U.S. economy. The

government’s sale or repurchase of its bonds affect the money supply and
influence interest rates. For example, when the Federal Reserve repurchases
Treasuries, sellers deposit proceeds in banks, which lend money to
customers, who deposit the loan proceeds in bank accounts, and use the
money for various purposes. Therefore, every dollar of repurchased
Treasuries increases the money supply by several dollars.

EXAMPLE

Savings bonds offer a fixed interest rate over a certain period of time. When
an investor buys and holds a savings bond until maturity, he receives the
bond’s face value plus accrued interest. Savings bonds are not redeemable
for the first 12 months that they are outstanding. Redeeming a bond in the first
five years means forfeiting the last three months of interest.

Treasury notes (T-notes) are intermediate-term bonds maturing in two, three,

five or 10 years. They provide semiannual interest payments at fixed coupon
rates. T-Notes typically have a $1,000 face value; those with two- or three-
year maturities have a $5,000 face value.

Treasury bonds (T-Bonds) are long-term bonds maturing in 10 to 30 years. T-

Bonds provide semiannual interest payments and have $1,000 face values.
The bonds fund shortfalls in the federal budget, regulate the nation’s money
supply, and execute U.S. monetary policy.

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PROS AND CONS OF GOVERNMENT SECURITIES

Government securities are exempt from state and local taxes, making
government bonds advantageous for investors in high tax brackets. The
bonds are very liquid, but have low rates of return. The securities rarely
protect against inflation and have little or no capital gains opportunity.

Many investors hold government securities through mutual funds. The funds
offer diversification among all types and maturities of bonds, which is difficult
for retail investors to achieve without investing more cash than mutual funds
require. However, fund-management fees lower investors’ overall returns.

Although government securities carry little risk of default, they carry interest
rate risk. When interest rates rise or fall, bond prices react inversely.
Fortunately, when interest rates rise, T-Note prices typically fall less than with
other bonds. With their steady income streams, government securities are a
conservative choice in a fluctuating market.

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BOND

A bond is a debt investment in which an investor loans money to an entity

(typically corporate or governmental) which borrows the funds for a defined
period of time at a variable or fixed interest rate. Bonds are used by
companies, municipalities, states and sovereign governments to raise money
and finance a variety of projects and activities. Owners of bonds are debt
holders, or creditors, of the issuer.

Bonds are commonly referred to as fixed-income securities and are one of the
three main generic asset classes, along with stocks (equities) and cash
equivalents. Many corporate and government bonds are publicly traded on
exchanges, while others are traded only over-the-counter (OTC).

HOW BONDS WORK

When companies or other entities need to raise money to finance new

projects, maintain ongoing operations, or refinance existing other debts, they
may issue bonds directly to investors instead of obtaining loans from a bank.
The indebted entity (issuer) issues a bond that contractually states the interest
rate (coupon) that will be paid and the time at which the loaned funds (bond
principal) must be returned (maturity date).

The issuance price of a bond is typically set at par, usually $100 or $1,000
face value per individual bond. The actual market price of a bond depends on
a number of factors including the credit quality of the issuer, the length of time
until expiration, and the coupon rate compared to the general interest rate
environment at the time.

EXAMPLE

Because fixed-rate coupon bonds will pay the same percentage of its face
value over time, the market price of the bond will fluctuate as that coupon
becomes desirable or undesirable given prevailing interest rates at a given
moment in time. For example if a bond is issued when prevailing interest rates
are 5% at $1,000 par value with a 5% annual coupon, it will generate $50 of
cash flows per year to the bondholder. The bondholder would be indifferent to
purchasing the bond or saving the same money at the prevailing interest rate.

If interest rates drop to 4%, the bond will continue paying out at 5%, making it
a more attractive option. Investors will purchase these bonds, bidding the
price up to a premium until the effective rate on the bond equals 4%. On the
other hand, if interest rates rise to 6%, the 5% coupon is no longer attractive
and the bond price will decrease, selling at a discount until its effective rate is
6%.
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BOND MARKET

The bond market – also called the debt market or credit market – is a financial
market in which the participants are provided with the issuance and trading of
debt securities. The bond market primarily includes government-issued
securities and corporate debt securities, facilitating the transfer of capital from
savers to the issuers or organizations requiring capital for government
projects, business expansions and ongoing operations.

In the bond market, participants can issue new debt in the market called the
primary market or trade debt securities in the market called the secondary
market. These products are typically in the form of bonds, but they may also
come in the form of bills and notes. The goal of the bond market is to provide
long-term financial aid and funding for public and private projects and
expenditures.

The participants of the bond market are nearly the same as the participants in
other financial markets. In bond markets, the participants are either buyers of
funds (that is, debt issuers) or sellers of funds (institutions). Participants
include institutional investors, traders, governments and individuals who
purchase products provided by large institutions. These projects may be in the
form of pension funds, mutual funds and life insurance, among many other
product types.

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CHARACTERISTICS OF BONDS

Most bonds share some common basic characteristics including:

Face value is the money amount the bond will be worth at its maturity, and is
also the reference amount the bond issuer uses when calculating interest
payments.
Coupon rate is the rate of interest the bond issuer will pay on the face value of
the bond, expressed as a percentage.
Coupon dates are the dates on which the bond issuer will make interest
payments. Typical intervals are annual or semi-annual coupon paymets.
Maturity date is the date on which the bond will mature and the bond issuer
will pay the bond holder the face value of the bond.
Issue price is the price at which the bond issuer originally sells the bonds.

Two features of a bond – credit quality and duration – are the principal
determinants of a bond's interest rate. If the issuer has a poor credit rating,
the risk of default is greater and these bonds will tend to trade a discount.
Credit ratings are calculated and issued by credit rating agencies. Bond
maturities can range from a day or less to more than 30 years. The longer the
bond maturity or duration the greater the chances of adverse effects. Longer-
dated bonds also tend to have lower liquidity. Because of these attributes,
bonds with a longer time to maturity typically command a higher interest rate.

When considering the riskiness of bond portfolios, investors typically consider

the duration (price sensitivity to changes in interest rates) and convexity
(curvature of duration).

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TYPES OF BOND MARKETS

The general bond market can be classified into corporate bonds, government
and agency bonds, municipal bonds, mortgage-backed bonds, asset-backed
bonds, and collateralized debt obligations.

CORPORATE BOND

Corporations provide corporate bonds to raise money for different reasons,

such as financing ongoing operations or expanding businesses. The term
"corporate bond" is usually used for longer-term debt instruments that provide
a maturity of at least one year.

GOVERNMENT BONDS

National governments issue government bonds and entice buyers by

providing the face value on the agreed maturity date with periodic interest
payments. This characteristic makes government bonds attractive for
conservative investors.

MUNICIPAL BONDS

Local governments and their agencies, states, cities, special-purpose districts,

public utility districts, school districts, publicly owned airports and seaports,
and other government-owned entities issue municipal bonds to fund their
projects.

MORTGAGE BONDS

Pooled mortgages on real estate properties provide mortgage bonds.

Mortgage bonds are locked in by the pledge of particular assets. They pay
monthly, quarterly or semi-annual interest.

BOND INDICES

Just like the S&P 500 Index or Russell Indexes for equities, bond indices
manage and measure bond portfolio performance. Big names include
Barclays Capital Aggregate Bond Index, the Merrill Lynch Domestic Master
and the Citigroup U.S. Broad Investment-Grade Bond Index. Many bond
indices are members of broader indices that may be used to provide and
measure the performances of global bond portfolios.

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REPO RATES

Repo rate is the rate at which the central bank of a country (Reserve
Bank of India in case of India) lends money to commercial banks in the
event of any shortfall of funds. Repo rate is used by monetary
authorities to control inflation. It is a short term lending. Banks borrow
from RBI to maintain liquidity with them, either because of some
statutory requirements or as a precautionary measure. So If repo rate is
high, banks know that they cannot get liquidity easily at low rate, so
they'd be less willing to lend and hence maintain more liquidity with
themselves so there is less need for borrowing.

RBI uses this rate to lend to banks so that they can meet their day-to-day
requirements and this is lent against an approved list of dated government
securities. These are then repurchased from the bank after a pre-fixed
number of days as directed by RBI; hence the name of the charge is
repurchase or repo rate. In the event of inflation, central banks increase repo
rate as this acts as a disincentive for banks to borrow from the central bank.
This ultimately reduces the money supply in the economy and thus helps in
arresting inflation.

The central bank takes the contrary position in the event of a fall in inflationary
pressures. Repo and reverse repo rates form a part of the liquidity adjustment
facility.

IMPACT ON FINANCES

A low repo rate signifies that banks are able to borrow funds cheap and
subsequently, will lend to customers too at a relatively lower rate. For
example, before Tuesday’s cut, the repo rate was 8.50% and current bank
base rates are around 10-11%. However, go back a few years to 2004-end,
the repo rate was 4.75% and banks were giving loans at roughly 7-8%. So,
among other things, lower repo rates translate into lower bank base rates,
which in turn mean low interest rates on your housing/personal/car loans or
any other kind of loan you take from banks. It also means you are likely to
earn less on your fixed deposits going forward.

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REVERSE REPO RATE

Reverse repo rate is the rate at which the central bank of a country
(Reserve Bank of India in case of India) borrows money from
commercial banks within the country. It is a monetary policy instrument
which can be used to control the money supply in the country.

An increase in the reverse repo rate will decrease the money supply
and vice-versa, other things remaining constant. An increase in reverse
repo rate means that commercial banks will get more incentives to park
their funds with the RBI, thereby decreasing the supply of money in the
market.

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YIELD TO MATURITY (YTM)

The Yield to maturity (YTM), book yield or redemption yield of a bond or other
fixed-interest security, is the internal rate of return (IRR, overall interest rate)
earned by an investor who buys the bond today at the market price, assuming
that the bond will be held until maturity, and that all coupon and principal
payments will be made on schedule. Yield to maturity is the discount rate at
which the sum of all future cash flows from the bond (coupons and principal)
is equal to the price of the bond. The YTM is often given in terms of Annual
Percentage Rate (A.P.R.), but more usually market convention is followed. In
a number of major markets (such as gilts) the convention is to quote
annualized yields with semi-annual compounding (see compound interest);
thus, for example, an annual effective yield of 10.25% would be quoted as
10.00%, because 1.05 × 1.05 = 1.1025.

Calculations of yield to maturity assume that all coupon payments are

reinvested at the same rate as the bond’s current yield, and take into account
the bond’s current market price, par value, coupon interest rate and term to
maturity. YTM is a complex but accurate calculations of a bond’s return that
can help investors compare bonds with different maturities and coupons.

Though yield to maturity represents an annualized rate of return on a bond,

coupon payments are often made on a semiannual basis, so YTM is often
calculated on a six-month basis as well. Because yield to maturity is the
interest rate an investor would earn by reinvesting every coupon payment
from the bond at a constant interest rate until the bond’s maturity date, the
present value of all of these future cash flows equals the bond’s market price.
Coupon rate vs. YTM

If a bond's coupon rate is less than its YTM, then the bond is selling at a
discount.
If a bond's coupon rate is more than its YTM, then the bond is selling at a
premium.
If a bond's coupon rate is equal to its YTM, then the bond is selling at par.

VARIANTS OF YIELD TO MATURITY

As some bonds have different characteristics, there are some variants of

YTM:

Yield to call (YTC): when a bond is callable (can be repurchased by the issuer
before the maturity), the market looks also to the Yield to call, which is the

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same calculation of the YTM, but assumes that the bond will be called, so the
cash flow is shortened.

Yield to put (YTP): same as yield to call, but when the bond holder has the
option to sell the bond back to the issuer at a fixed price on specified date.

Yield to worst (YTW): when a bond is callable, putt able, exchangeable, or

has other features, the yield to worst is the lowest yield of yield to maturity,
yield to call, yield to put, and others.

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YIELD CURVE

A yield curve is a line that plots the interest rates, at a set point in time, of
bonds having equal credit quality but differing maturity dates. The most
frequently reported yield curve compares the three-month, two-year, five-year
and 30-year U.S. Treasury debt. This yield curve is used as a benchmark for
other debt in the market, such as mortgage rates or bank lending rates, and it
is also used to predict changes in economic output and growth.

The shape of the yield curve gives an idea of future interest rate changes and
economic activity. There are three main types of yield curve shapes: normal,
inverted and flat (or humped). A normal yield curve is one in which longer
maturity bonds have a higher yield compared to shorter-term bonds due to the
risks associated with time. An inverted yield curve is one in which the shorter-
term yields are higher than the longer-term yields, which can be a sign of
upcoming recession. In a flat or humped yield curve, the shorter- and longer-
term yields are very close to each other, which is also a predictor of an
economic transition.

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 RESEARCH
METHODOLOGY

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RESEARCH METHODOLOGY

OBJECTIVE OF THE STUDY

a) To calculate YTMs of different government securities of different

maturity.
b) To make yield curve based on the YTMs calculated.
c) To assess effect of interest rate movement on returns realized on
government securities.

SCOPE

Government securities traded on NSE on selected Repo Rate changed

dates.

COLLECTION OF DATA

The study is based on secondary data. Repo rate changes are considered for
last 6 years i.e. from 2011 to 2016.

SECONDARY DATA

The secondary data are those which have already been collected by someone
else and which have already been passed through the statistical process. The
method of collecting the secondary data is published data or unpublished
data. Any data that is available prior to the commencement of study is the
secondary data and hence it is called historical data.

The secondary data in the project is collected by referring:

1. Books
2. Internet.

The data collected for research purpose is analyzed by using various

statistical tools. The statistical tools include:

1. Internal rate of return

2. MS Excel
3. Charts
4. Graphs

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For the purpose of analysis of the yield of government securities, YTM of
various government securities with different maturity is calculated by using the
following formula:

Further, the YTMs of various government securities of different maturity with

same credit quality considering repo rate changes are plotted on line graphs
and analysis and interpretations are done with the help of follow types of yield
curves.

TYPES OF YIELD CURVES

NORMAL YIELD CURVE

A normal or up-sloped yield curve indicates yields on longer-term bonds may

continue to rise, responding to periods of economic expansion. When
investors expect longer-maturity bond yields to become even higher in the
future, many would temporarily park their funds in shorter-term securities in
hopes of purchasing longer-term bonds later for higher yields. In a rising
interest rate environment, it is risky to have investments tied up in longer-term
bonds when their value has yet to decline as a result of higher yields over
time. The increasing temporary demand for shorter-term securities pushes
their yields even lower, setting in motion a steeper up-sloped normal yield
curve.

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The normal yield curve is a yield curve in which short-term debt instruments
have a lower yield than long-term debt instruments of the same credit quality.
This gives the yield curve an upward slope. This is the most often seen yield
curve shape, and it's sometimes referred to as the "positive yield curve."

This yield curve is considered "normal" because the market usually expects
more compensation for greater risk. Longer-term bonds are exposed to more
risk such as changes in interest rates and an increased exposure to potential
defaults. Also, investing money for a long period of time means an investor is
unable to use the money in other ways and higher risk, so the investor is
compensated for this through the time value of money component of the yield.

INVERTED YIELD CURVE

An inverted or down-sloped yield curve suggests yields on longer-term bonds

may continue to fall, corresponding to periods of economic recession. When
investors expect longer-maturity bond yields to become even lower in the
future, many would purchase longer-maturity bonds to lock in yields before
they decrease further. The increasing onset of demand for longer-maturity
bonds and the lack of demand for shorter-term securities lead to higher prices
but lower yields on longer-maturity bonds, and lower prices but higher yields
on shorter-term securities, further inverting a down-sloped yield curve.
This type of yield curve is the rarest of the three main curve types and is
considered to be a predictor of economic recession. It is sometimes referred
to as a negative yield curve.

Historically, inversions of the yield curve have proceeded many of the U.S.
recessions. Due to this historical correlation, the yield curve is often seen as
an accurate forecast of the turning points of the business cycle. A recent

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example is when the U.S. Treasury yield curve inverted in 2000 just before the
U.S. equity markets collapsed. An inverse yield curve predicts lower interest
rates in the future as longer-term bonds are being demanded, sending the
yields down.

FLAT YIELD CURVE

A flat yield curve may arise from normal or inverted yield curve, depending on
changing economic conditions. When the economy is transitioning from
expansion to slower development and even recession, yields on longer-
maturity bonds tend to fall and yields on shorter-term securities likely rise,
inverting a normal yield curve into a flat yield curve. When the economy is
transitioning from recession to recovery and potentially expansion, yields on
longer-maturity bonds are set to rise and yields on shorter-maturity securities
are sure to fall, tilting an inverted yield curve toward a flat yield curve.

The flat yield curve is a yield curve in which there is little difference between
short-term and long-term rates for bonds of the same credit quality. This type
of yield curve is often seen during transitions between normal and inverted
curves.

When short- and long-term bonds offer equivalent yields, there is usually little
benefit in holding the longer-term instrument; the investor does not gain any
excess compensation for the risks associated with holding longer-term
securities. If the yield curve is flattening, it indicates the yield spread between
long term and short term is decreasing. For example, a flat yield curve on U.S.
Treasury bonds is one in which the yield on a two-year bond is 5% and the
yield on a 30-year bond is 5.1%.

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DATA FINDINGS
AND
INTERPRETATION

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DATA FINDINGS

REPO RATES CHANGED DATES:

DATES OF NEW
INCREASE/DECREASE
CHANGE RATE
25-Jan-11 6.50% 0.25%
17-Mar-11 6.75% 0.25%
03-May-11 7.25% 0.50%
16-Jun-11 7.50% 0.25%
26-Jul-11 8.00% 0.50%
16-Sep-11 8.25% 0.25%
25-Oct-11 8.50% 0.25%
17-Apr-12 8.00% -0.50%
29-Jan-13 7.75% -0.25%
19-Mar-13 7.50% -0.25%
03-May-13 7.25% -0.25%
20-Sep-13 7.50% 0.25%
29-Oct-13 7.75% 0.25%
28-Jan-14 8.00% 0.25%
15-Jan-15 7.75% -0.25%
04-Mar-15 7.50% -0.25%
02-Jun-15 7.25% -0.25%
29-Sep-15 6.75% -0.50%
05-Apr-16 6.50% -0.25%
04-Oct-16 6.25% -0.25%

REPO RATE CHANGES

9.00%
8.00%
7.00%
6.00%
5.00%
4.00%
3.00% NEW RATE
2.00%
1.00%
0.00%

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INFLATION RATES

Inflation is the rate at which the general level of prices for goods and services
is rising and, consequently, the purchasing power of currency is falling.
Central banks attempt to limit inflation, and avoid deflation, in order to keep
the economy running smoothly. Below are the inflation rates for the past 6
years:

YEARS INFLATION RATES

2011 6.49%
2012 11.17%
2013 9.13%
2014 5.86%
2015 6.32%
2016 2.23%

INFLATION RATES
12.00% 11.17%

10.00% 9.13%

8.00% 6.49% 5.86% 6.32%

6.00%
INFLATION
4.00% RATES
2.23%
2.00%
0.00%
2011 2012 2013 2014 2015 2016

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INDIA INDUSTRIAL PRODUCTION

The Index of Industrial Production (IIP) is an index for India which details out
the growth of various sectors in an economy such as mining, electricity and
manufacturing. The all India IIP is a composite indicator that measures the
short-term changes in the volume of production of a basket of industrial
products during a given period with respect to that in a chosen base period.
Following is the graph of IIP for the period 25.1.2011 to 4.10.2016.

All the further analysis is done on the above data.

Page | 30
INTERPRETATION

Repo Rate Change

Date 25-01-2011 6.50%

Maturity YTM
Security
(Years) Before After
CG2011A 0.5 0.089 0.090
CG2013 2 0.092 0.093
CG2016 5 0.089 0.091
CG2017 6 0.090 0.090
CG2024 13 0.088 0.088

YTM
0.094 0.093
0.091
0.092 0.090
0.090
0.092
0.090
0.088 YTM Before
0.090
0.088 0.089 0.089 YTM After
0.086 0.088
0.084
0.5 2 5 6 13

INTERPRETATION-

On this date Repo rate increased from 6.25% to 6.50%

The above graph shows that, post repo rate change the YTM has gone up as
compared to pre repo rate change. YTM has risen in the short run but
declined thereafter. The probable reason is rise in interest rates to control
inflation in short run followed by recession anticipated thereafter.

Page | 31
 Repo Rate Change
Date 17-03-2011 6.75%

Maturity YTM
Security
(Years) Before After
CG2013 2 0.080 0.080
CG2014 3 0.094 0.094
CG2016 5 0.085 0.085
CG2017 6 0.081 0.082
CG2019 8 0.084 0.084
CG2024 13 0.089 0.089
CG2026 15 0.085 0.085

YTM
0.100
0.094
0.095
0.089
0.090 0.094 0.085
0.085 0.084
0.085 0.082 0.089 YTM Before
0.080
0.085 0.084 0.085 YTM After
0.080
0.080 0.081
0.075
0.070
2 3 5 6 8 13 15

INTERPRETATION-

On this date Repo rate increased from 6.50% to 6.75%

The above graph shows that, pre repo rate and post repo rate there is no
change in YTM. Overall, it has risen in the short run then declined and again
risen in medium term but there is decline thereafter. The probable reason is
rise in interest rates to control inflation in short run followed by recession
anticipated thereafter.

Page | 32
 Repo Rate Change
Date 03-05-2011 7.25%

Maturity YTM
Security
(Years) Before After
CG2011A 0.5 0.174 0.176
CG2013 2 0.085 0.086
CG2014 3 0.098 0.098
CG2016 5 0.085 0.085
CG2017 6 0.084 0.084
CG2019 8 0.096 0.086
CG2026 15 0.087 0.087

YTM
0.200 0.176

0.150 0.174
0.098
0.100 0.086 0.085 0.084 0.086 0.087 YTM Before
0.098 0.096 YTM After
0.085 0.085 0.084 0.087
0.050

0.000
0.5 2 3 5 6 8 15

INTERPRETATION-

On this date Repo rate increased from 6.75% to 7.25%

The above graph shows that, pre repo rate and post repo rate there is no
change in short and medium run but pre repo rate YTM has slightly risen in
long run as compared to post repo rate change. Overall, it has declined in the
short run then raised but again there is decline and becomes steep thereafter.
The probable reason is rise in interest rates to control inflation followed by
recession anticipated thereafter.

Page | 33
Repo Rate Change
Date 16-06-2011 7.50%

Maturity YTM
Security
(Years) Before After
CG2013 2 0.095 0.094
CG2014 3 0.082 0.082
CG2016 5 0.087 0.087
CG2017 6 0.087 0.087
CG2019 8 0.088 0.088
CG2026 15 0.088 0.088

YTM
0.100
0.094
0.095
0.095 0.088 0.088
0.090 0.087 0.087
YTM Before
0.085 0.082 0.088 0.088
0.087 0.087 YTM After
0.080 0.082
0.075
2 3 5 6 8 15

INTERPRETATION-

On this date Repo rate increased from 7.25% to 7.50%

The above graph shows that, pre repo rate and post repo rate there is no
change in YTM. Overall, it has declined in the short run then gone up but it
becomes steep thereafter. The probable reason is rise in interest rates to
control inflation followed by recession anticipated thereafter.

Page | 34
 Repo Rate Change
Date 26-07-2011 8.00%

Maturity YTM
Security
(Years) Before After
CG2013 2 0.099 0.100
CG2019 8 0.093 0.093
CG2020 9 0.088 0.088
CG2024 13 0.088 0.088
CG2026 15 0.089 0.089

YTM
0.105
0.100
0.100
0.099 0.093
0.095
0.088 0.089 YTM Before
0.088
0.090 0.093 YTM After
0.085 0.088 0.088 0.089
0.080
2 8 9 13 15

INTERPRETATION-

On this date Repo rate increased from 7.50% to 8.00%

The above graph shows that, pre repo rate and post repo rate there is no
change in YTM. Overall, it has declined in the short run then it becomes steep
thereafter. The probable reason is rise in interest rates to control inflation
followed by recession anticipated thereafter.

Page | 35
 Repo Rate Change
Date 16-09-2011 8.25%

Maturity YTM
Security
(Years) Before After
CG2012 1 0.084 0.085
CG2013 2 0.085 0.085
CG2017 6 0.085 0.085
CG2019 8 0.087 0.087
CG2020 9 0.090 0.091
CG2024 13 0.090 0.090

YTM
0.092 0.091
0.090
0.090
0.090
0.088 0.087 0.090
0.085 0.085 0.085 YTM Before
0.086
0.087
0.084 YTM After
0.085 0.085
0.084
0.082
0.080
1 2 6 8 9 13

INTERPRETATION-

On this date Repo rate increased from 8.00% to 8.25%

The above graph shows that, post repo rate change the YTM has gone up as
compared to pre repo rate change YTM. Overall, it has risen in the short run
and medium run but declined thereafter. The probable reason is rise in
interest rates to control inflation in short run followed by recession anticipated
thereafter.

Page | 36
 Repo Rate Change
Date 25-10-2011 8.50%

Maturity YTM
Security
(Years) Before After
CG2012 1 0.095 0.097
CG2013 2 0.091 0.091
CG2016 5 0.088 0.088
CG2017 6 0.087 0.087
CG2019 8 0.088 0.089
CG2024 13 0.091 0.091

YTM
0.100
0.097

0.095
0.095 0.091 0.091
0.088 0.089 YTM Before
0.090 0.087
0.091 0.091
YTM After
0.085 0.088 0.088
0.087

0.080
1 2 5 6 8 13

INTERPRETATION-

On this date Repo rate increased from 8.25% to 8.50%

The above graph shows that, post repo rate change YTM has slightly gone up
as compared to pre repo rate change YTM. Overall, it has declined in the
short run then it has increased thereafter. The probable reason is rise in
interest rates to control inflation followed by recession anticipated thereafter.

Page | 37
Repo Rate Change
Date 17-04-2012 8.00%

Maturity YTM
Security
(Years) Before After
CG2013 1 0.090 0.090
CG2015 3 0.084 0.084
CG2016 4 0.090 0.088
CG2017 5 0.089 0.089
CG2018 6 0.097 0.097
CG2027 15 0.089 0.089

YTM
0.100 0.097

0.095 0.097
0.090 0.089
0.088 0.089
0.090
0.084 YTM Before
0.090 0.090 0.089 0.089
0.085
YTM After
0.080 0.084

0.075
1 3 4 5 6 15

INTERPRETATION-

On this date Repo rate decreased from 8.50% to 8.00%

The above graph shows that, pre repo rate change the YTM has slightly gone
up as compared to post repo rate change YTM. Overall, it has declined in the
short run but then increased in medium run but declined thereafter. The
probable reason is decline in interest rates to increase growth in future.

Page | 38
 Repo Rate Change
Date 29-01-2013 7.75%

Maturity YTM
Security
(Years) Before After
CG2014 1 0.095 0.095
CG2015 2 0.092 0.092
CG2017 4 0.093 0.093
CG2018 5 0.085 0.085
CG2027 14 0.085 0.085
CG2028 15 0.085 0.085

YTM
0.100
0.095
0.095 0.092 0.093

0.090 0.095 YTM Before

0.092 0.093 0.085 0.085 0.085
0.085 YTM After
0.085 0.085 0.085
0.080
1 2 4 5 14 15

INTERPRETATION-

On this date Repo rate decreased from 8.00% to 7.75%

The above graph shows that, pre repo rate and post repo rate there is no
change in YTM. Overall, it has declined in the short run and becomes steep
thereafter. The probable reason is decline in interest rates to increase growth
in future.

Page | 39
 Repo Rate Change
Date 19-03-2013 7.50%

Maturity YTM
Security
(Years) Before After
CG2013 0.5 0.089 0.090
CG2016 3 0.082 0.082
CG2018 5 0.090 0.090
CG2024 11 0.085 0.085
CG2027 14 0.086 0.086

YTM
0.092 0.090 0.090
0.090
0.088 0.090 0.086
0.086 0.089 0.085
0.084 0.082 0.086 YTM Before
0.082 0.085
YTM After
0.080 0.082
0.078
0.076
0.5 3 5 11 14

INTERPRETATION-

On this date Repo rate decreased from 7.75% to 7.50%

The above graph shows that, post repo rate change the YTM has slightly
gone up as compared to pre repo rate change YTM in short run. Overall, it
has decreased in the short run but gone up thereafter. The probable reason is
decline in interest rates to increase growth in future.

Page | 40
 Repo Rate Change
Date 03-05-2013 7.25%

Maturity YTM
Security
(Years) Before After
CG2016 3 0.082 0.072
CG2017 4 0.081 0.081
CG2018 5 0.093 0.093
CG2027 14 0.081 0.082

YTM
0.093
0.100
0.081 0.082
0.080 0.072
0.093
0.082 0.081 0.081
0.060
YTM Before
0.040
YTM After
0.020
0.000
3 4 5 14

INTERPRETATION-

On this date Repo rate decreased from 7.50% to 7.25%

The above graph shows that, pre repo rate change the YTM has slightly gone
up as compared to post repo rate change YTM in short run. Overall, it is steep
in the short run and declines thereafter. The probable reason is decline in
interest rates to increase growth in future.

Page | 41
 Repo Rate Change
Date 20-09-2013 7.50%

Maturity YTM
Security
(Years) Before After
CG2015 2 0.098 0.099
CG2016 3 0.093 0.090
CG2017 4 0.092 0.083
CG2018 5 0.088 0.089
CG2024 11 0.092 0.115
CG2025 12 0.094 0.101
CG2027 14 0.095 0.089

YTM
0.140
0.115
0.120 0.101
0.099
0.100 0.090 0.089 0.089
0.083
0.080 0.098 0.093 0.094 0.095
0.092 0.088 0.092 YTM Before
0.060
YTM After
0.040
0.020
0.000
2 3 4 5 11 12 14

INTERPRETATION-

On this date Repo rate increased from 7.25% to 7.50%

The above graph shows that, pre repo rate change the YTM has slightly gone
up in short run and later decreased as compared to post repo rate change
YTM. Overall, it is steep in the short run and declines thereafter. The probable
reason is rise in interest rates to slow down rapidly growing economy and
control inflation followed by anticipated recession thereafter.

Page | 42
 Repo Rate Change
Date 29-10-2013 7.75%

Maturity YTM
Security
(Years) Before After
CG2016 3 0.094 0.094
CG2017 4 0.095 0.095
CG2024 11 0.095 0.095
CG2027 14 0.093 0.091

YTM
0.096 0.095 0.095
0.095 0.094
0.094 0.095
0.095
0.093 0.094 YTM Before
0.092 0.091
0.093 YTM After
0.091
0.090
0.089
3 4 11 14

INTERPRETATION-

On this date Repo rate increased from 7.50% to 7.75%

The above graph shows that, there is no change in post repo rate change in
short run but later has decreased as compared to pre repo rate change YTM.
Overall, it has increased in short run then becomes steep and declines
thereafter. The probable reason is rise in interest rates to slow down rapidly
growing economy and control inflation followed by recession anticipated
thereafter.

Page | 43
Repo Rate Change
Date 28-01-2014 8.00%

Maturity YTM
Security
(Years) Before After
CG2014 1 0.159 0.125
CG2016 2 0.100 0.102
CG2017 3 0.098 0.099
CG2025 11 0.098 0.098
CG2027 13 0.097 0.098

YTM
0.200

0.150 0.125
0.159 0.102 0.099 0.098 0.098
0.100 YTM Before
0.100 0.098 0.098 0.097 YTM After
0.050

0.000
1 2 3 11 13

INTERPRETATION-

On this date Repo rate increased from 7.75% to 8.00%

The above graph shows that, pre repo rate change the YTM has gone up as
compared to post repo rate change YTM in short run. Overall, it declines in
short run and becomes steep thereafter. The probable reason is rise in
interest rates to slow down rapidly growing economy and control inflation.

Page | 44
 Repo Rate Change
Date 15-01-2015 7.75%

Maturity YTM
Security
(Years) Before After
CG2016 1 0.101 0.102
CG2017 2 0.094 0.095
CG2026 11 0.081 0.079
CG2027 12 0.084 0.085
CG2030 15 0.084 0.084

YTM
0.120 0.102
0.095
0.100 0.085 0.084
0.079
0.101
0.080 0.094
0.081 0.084 0.084
0.060 YTM Before

0.040 YTM After

0.020
0.000
1 2 11 12 15

INTERPRETATION-

On this date Repo rate decreased from 8.00% to 7.75%

The above graph shows that, pre repo rate and post repo rate there is no
change in YTM. Overall, it has declined in the short run then it becomes steep
thereafter. The probable reason is decline in interest rates to increase
declined growth.

Page | 45
Repo Rate Change
Date 04-03-2015 7.50%

Maturity YTM
Security
(Years) Before After
CG2016 1 0.082 0.082
CG2026 11 0.081 0.081
CG2027 12 0.084 0.084
CG2028 13 0.081 0.081

YTM
0.086
0.084
0.084 0.082
0.081 0.084 0.081 YTM Before
0.082
0.080 0.082 YTM After
0.081 0.081
0.078
1 11 12 13

INTERPRETATION-

On this date Repo rate decreased from 7.75% to 7.50%

The above graph shows that, pre repo rate and post repo rate there is no
change in YTM. Overall, it has declined in the short run then it goes up in
medium term but declines thereafter. The probable reason is decline in
interest rates to increase growth.

Page | 46
 Repo Rate Change
Date 02-06-2015 7.25%

Maturity YTM
Security
(Years) Before After
CG2016 1 0.098 0.098
CG2017 2 0.090 0.090
CG2026 11 0.081 0.081
CG2027 12 0.084 0.085
CG2030 15 0.084 0.087

YTM
0.120
0.098
0.100 0.090 0.085 0.087
0.081
0.080 0.098
0.090 0.084
0.081 0.084 YTM Before
0.060
0.040 YTM After
0.020
0.000
1 2 11 12 15

INTERPRETATION-

On this date Repo rate decreased from 7.50% to 7.25%

The above graph shows that, pre repo rate and post repo rate there is no
change in YTM. Overall, it has declined in the short run then it becomes steep
thereafter. The probable reason is decline in interest rates to increase
declined growth.

Page | 47
Repo Rate Change
Date 29-09-2015 6.75%

Maturity YTM
Security
(Years) Before After
CG2016 1 0.083 0.086
CG2017 2 0.083 0.084
CG2020 5 0.088 0.088
CG2025 10 0.081 0.081
CG2026 11 0.085 0.084
CG2027 12 0.0813 0.0800

YTM
0.090 0.088
0.086
0.084 0.088 0.084
0.085
0.081 0.085 YTM Before
0.083 0.0800
0.080 0.083 YTM After
0.081 0.0813

0.075
1 2 5 10 11 12

INTERPRETATION-

On this date Repo rate decreased from 7.25% to 6.75%

The above graph shows that, post repo rate change the YTM has gone up as
compared to pre repo rate change YTM in short run. Overall, it has decreased
in the short run but gone up and later declined in long run. The probable
reason is decline in interest rates to increase growth.

Page | 48
Repo Rate Change
Date 05-04-2016 6.50%

Maturity YTM
Security
(Years) Before After
CG2017 1 0.079 0.079
CG2023 7 0.082 0.082
CG2026 10 0.084 0.084
CG2029 13 0.079 0.078
CG2030 14 0.085 0.085

YTM
0.086 0.085
0.084
0.084 0.085
0.082
0.082 0.084
0.079 0.082 0.078
0.080 YTM Before

0.078 YTM After

0.079 0.079
0.076
0.074
1 7 10 13 14

INTERPRETATION-

On this date Repo rate decreased from 6.75% to 6.50%

The above graph shows that, pre repo rate and post repo rate there is no
change in YTM. Overall, it has gone up in the short run then declined and
again increased thereafter. Thus, although the repo has declined, yet the
interest rates have had no impact.

Page | 49
Repo Rate Change
Date 04-10-2016 6.25%

Maturity YTM
Security
(Years) Before After
CG2017 1 0.077 0.078
CG2018 2 0.090 0.090
CG2023 7 0.074 0.073
CG2026 10 0.076 0.076
CG2027 11 0.072 0.072
CG2030 14 0.077 0.075

YTM
0.100 0.090
0.078 0.076 0.0754
0.080 0.073 0.072
0.090
0.077 0.074 0.076 0.077
0.060 0.072
YTM Before
0.040
YTM After
0.020

0.000
1 2 7 10 11 14

INTERPRETATION-

On this date Repo rate decreased from 6.50% to 6.25%

The above graph shows that, pre repo rate and post repo rate there is no
change in YTM. Overall, it has risen in the short run, then becomes inverted
and finally flattens thereafter. This indicates slow down in future.

Page | 50
CONCLUSION

Page | 51
CONCLUSION

1. Change in repo rate does not affect the yield curve much. Except on
few instances where yield curve has partially shifted upwards with rise
in repo / downwards with fall in repo, in most of the cases, the yield
curve has not moved much.
2. The yield curve in most cases is inverted, which shows that short term
securities are generating higher YTMs than the long term securities. A
normal yield curve slopes upwards giving higher risk premium for long
term securities. In Indian scenario the Yield Curve is not normal.
3. Yield curve, being inverted in most of the 6 years period taken into
consideration, indicates that the manufacturing in the country has faced
slow down which is corroborated by the IIP growth rates. The scenario
does not change much in the future also.

Page | 52
BIBLIOGRAPHY

Page | 53
BIBLIOGRAPHY

 www.rbi.org.com
 www.investopedia.com
 www.nseindia.com
 www.wikipedia.com
 http://japan.pimco.com

Page | 54