Posts tagged yield
Weekly G Sec update May 29, 2010
Benchmark 7.8% 2020 bond lost considerable ground in the week due to tightening liquidity conditions arising from the 3G spectrum payment and direction of US treasuries. Yield for the said bond closed at 7.52% on Friday, up 14 bps from close of 7.38% last week.
Bonds were bearish throughout the week tracking weak US Treasuries as rise in stock markets led to a fall in demand for safe heaven assets. In India, tightening liquidity exerted pressure on bonds along with the bond auction of Rs 12,000 cr lined up for the week.
Amount of funds parked at RBI’s reverse repo window reduced this week to an average of Rs 6,332 cr this week against Rs 42,779 cr last week.
Yields rose to the extent of 7.64% on Friday, but announcements of RBI regarding additional liquidity to be provided through Second LAF facility to the extent of 0.5% of their NDTL and waiver of penalty interest on any shortfall in maintenance of SLR arising out of availment of such facility along with RBI Governor’s comments depicting not so confident recovery induced some buying back in the bonds and led to correction in yields.
Spain rating downgrade again ignited concerns of debt crisis and increased demand for safe heavens. Liquidity conditions are expected to tighten further next week and banks are expected to avail funds from RBI through Repo facility.
Author name:Praveen Bajaj
IFRS on Effective Interest Rate
Effective Interest Rate
Effective Interest Rate (EIR) is a new concept to the existing Indian GAAP.
TheEffective Interest Rate (EIR) method is a method of calculating the amortized cost of a financial asset or a financial liability and of allocating the interest income or interest expense over the relevant period.
TheEffective Interest Rate (EIR)use in the allocation process is the rate that exactly discounts estimated future cash flows (receipts or payments) to the net carrying amount of the financial instrument through the expected life of this instrument.
EIR calculation is not the same as for Yield to Maturity (YTM). YTM is nothing but the Internal Rate of Return (IRR) of the bond. But Effective Interest Rate (EIR) may also include some non-interest components such as loan origination charges, processing fees as part of the effective rate.
Under IFRS income from Loans and receivables has to be recognized through application of effective interest rate.
An illustration given below gives better clarity for calculation of Effective Interest Rate (EIR).
Given Data:
| Nominal value (payable in 5 years’ time) | INR 1,250 |
| Loan origination fee (inflow) | INR 40 |
| Transaction costs (directly related to loan origination, outflow) | INR (90) |
| Net transaction costs (40-90) | INR (50) |
| Fair value (net of transaction costs and fees) (1250+50) | INR 1,300 |
| Coupon Rate | 4.70% |
Calculation of INTERNAL RATE OF RETURN based on above data:
| Year 0 | -1300 |
| Year 1 (1250*4.7%) | 59 |
| Year 2 (1250*4.7%) | 59 |
| Year 3 (1250*4.7%) | 59 |
| Year 4 (1250*4.7%) | 59 |
| Year 5 1250 + (1250*4.7%) | 1309 |
Thus IRR will work out to 3.83%
Thus companies has to maintain Coupon rate as well as EIR which will practically for each transaction will be a major task and will add significantly load on IT systems.
Author: CA Shalini Tibe, IFRS Consultant
