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Bond
Bonds are debt investment instruments through whichinvestors give out loans to government and corporate entities. The latterborrow funding at fixed interest and for a specified period. The USgovernment and other governments use the money to finance variousactivities and projects. Other borrowers are states, municipalities, andcompanies.
Bonds are a main asset class, together with cash equivalents and stocks.They also fall under the category of fixed-income securities. The issueror the indebted entity issues bonds with certain interest rate, which arepayable at the maturity date of the bond principal (the loaned money).Bonds earn interest which is typically paid semi-annually, i.e. twice ayear. The major types of securities are notes and bills, municipal bonds,corporate bonds, and U.S treasury bills.
Bond Markets Defined
Municipal Securities Market
Treasury Securities Market
Federal Agency Securities Market
Corporate Bond Market
Money Market Instruments
Mortgage Securities Market
Asset-Backed Securities
Corporate Bond Market
Corporate debt securities are obligations issued by corporations for
capital and operating cash flow purposes. Corporate debt is issued by a
wide variety of corporations involved in the financial, industrial, and
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service-related industries. There is approximately $4.0 trillion in
corporate debt currently outstanding.
.
Corporate BondA Corporate Bond is a bond issued by a corporation. It is a bond that a
corporation issues to raise money in order to expand its business.a
corprate bond is a security issued by a corporation that represents a
promise to pay its bondholders a fixed sum of money at a future
maturity date,along with the periodic payments of debt.the fixed sum
paid at maturity is the bonds principal also called its par or face
value.the periodic interests are called its coupons. The term is usually
applied to longer-term debt instruments, generally with a maturity date
falling at least a year after their issue date.
Sometimes, the term "corporate bonds" is used to include all bonds
except those issued by governments in their own currencies. Strictly
speaking, however, it only applies to those issued by corporations. The
bonds of local authorities and supranational organizations do not fit ineither category.
Corporate bonds are often listed on major exchanges (bonds there are
called "listed" bonds) and ECNs like MarketAxess, and the coupon (i.e.
interest payment) is usually taxable. Sometimes this coupon can be zero
with a high redemption value. However, despite being listed on
exchanges, the vast majority of trading volume in corporate bonds in
most developed markets takes place in decentralized, dealer-based,
over-the-counter markets.
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Some corporate bonds have an embedded call option that allows the
issuer to redeem the debt before its maturity date. Other bonds, known
as convertible bonds, allow investors to convert the bond into equity.
One can obtain an unfunded synthetic exposure to corporate bonds via
credit default swaps.
corporate bonds distinct from common stock.
For an investors point of view,corporate bonds represent an investment
distinct from common stock.the three most fundamental differences are
these:
Common stock represent an ownership claim on the
corporation,whereas bonds represent a creditors claim on the
corporation.
Promised cash flows-that is, coupon and principal-to be paid to the
bondholders are stated in advance when the bond is issued.by
contrast,the amount and timing of the dividends pey to the common
stockholders may change at any time.
Most corporate bonds are issued as callable bonds,which means that
yhe bond issuer has the right to back outstanding bonds before the
maturity date of the bond issue.when a bond issue is called,coupon
payments stop and cash payment of a specified call price.by
contrast,common stock is almost never callable.
Types of Corporate Bonds
Mortgage Bonds:
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These are bonds secured or backed by a specific asset such as real
estate. Because these are secured bonds they often pay a lower interest
rate.
Convertible Bonds:
These are bonds that can be converted to a specific number of common
stock. Those who invest in convertible bonds would expect a rise in
common stock value.
1. The number of common stock shares acquired in exchange for
each converted bond is called the conversion ratio:
C.R = # of shares acquired by conversion
2. The par value of convertible bond divided by its conversion ratio is
called as bonds conversion price.
C.P = bond par value/conversion ratio
3. The market price of the common stock acquired by conversion
times the bonds conversion ratio is called the bonds conversion
value.
C.V= price per share of stock* conversion ratio
Commercial Paper:Normally used for short time periods such as 90 days. Commercial paper
is normally an IOU issued by the corporation to finance short term
needs.
Debentures or Corporate Notes:
These bonds or notes are not secured by any assets. The only guarantee
is the credit worthiness of the issuer. These notes would typically pay a
higher interest because they are not secured.
Corporate Bond Information and
Features
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Call Feature:
Many corporate bonds will have a future call date at which time the
bond may be redeemed prior to the maturity date. If a corporate bond
had a maturity date of 30 years it would normally have a call date at the
10 year time period. If interest rates are lower in 10 years, the
corporation will redeem the bond by issuing new bonds at a lower
interest rate. If general interest rates are higher than the interest being
paid on the bond, the corporation will not call the bond.
Put Feature:
This allows the bond holder to force the corporation to redeem the bond.
This feature is not used often.
Sinking Fund: Some corporate bonds require the corporation to set
aside funds to redeem future bond obligations. This is meant to be a
safety feature to insure the bond will be redeemed as agreed.
Income Tax
Interest income and capital gains from corporate bonds is fully taxable
Bond indentures:
A bond indenture is a formal written agreement between the corporation
and bondholders. It is an important legal document that spells out in
detail the mutual rights and obligation of the corporation and the
bondholders with respect to the bond issue. Indentures contracts are
quite long, some time several 100 pages.
Indenture summary:
It provides the prospectus that was circulated when the bond issue was
originally sold to the public. Alternatively, a summary of the important
features of an indenture is published by debt rating agency.
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The trust indenture act of 1939 requires that any bond issue subject to
regulation by the SEC, which includes most corporate bonds and note
issue sold to the general public, must have the trustee appointed to
represent the interest of the bondholders.
Prospective covenants:
These agreements are designed to protect the bondholders by
restricting the actions of a corporation that might cause the
deterioration in the credit quality of the bond issue.
Negative covenants:
1. The firm cannot pay the dividends to stockholders I excess of what
is allowed by the formula based on the firms earrings.
2. The firm cannot issue new bonds that are senior to the currently
outstanding bonds. Also, the amount of a new bond issue cannot
exceed an amount specified by a formula based on the firms net
worth.
Positive covenants:
1. Proceeds from the sale of assets must be used either to acquire
other assets of equal value.
2. The firm must maintain the good condition of all asset pledged as
a security for an outstanding bond issue.
Bond valuation
Bond valuation is the process of determining the fair price of a bond.
As with any security or capital investment, the fair value of a bond is the
present value of the stream of cash flows it is expected to generate.
Hence, the price or value of a bond is determined by discounting the
bond's expected cash flows to the present using the appropriate
discount rate.
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Corporate bond credit rating:
When a corporation selles a new bond issue to investors, it usually
subscribes to several bond rating agencies for a credit evaluation of the
bond issue.each contracted rating agency then provides a credir
rating.An assessment of the credit quality of a bond issue based on the
issuers financial condition.
Established rating agencies in united states include Duff and Phelps,
(D&P); McCarthy,Crisanti and Maffei(MCM),Noodys investers service
(Moody,s) and Standerd & Poors corporation,(S&P).these companies
regulerly publish updated credit ratings for thousands of domestic andinternational bond issue.
Methods of Investing
Direct and Indirect. Corporate bonds may be purchased individually or
can be accessed through mutual funds.
Potential Risks in Corporate Bond Ownership
Default: The bond issuer may not be able to pay the agreed upon
interest or redeem the value of the bond at maturity.
Market: Changes in general interest rates can affect the value of a
bond. A bond sold prior to the maturity date may not have the same
value because of outside influences such as higher interest rates.
Investment
Corporate bonds are used because most are a higher arte of return than
municipal bonds. These bonds generally provide a safe and reliable
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income stream.
How Corporate Bonds Are Taxed
The following basic information addresses the tax aspects for individuals
of investing in corporate bonds. For advice about your specific situation,
you should consult your tax adviser.
Interest
The interest you receive from corporate bonds is subject to federal and
state income tax. (If you own shares in bond mutual funds, your interest
income will come to you in the form of dividends from the fund, but
these are fully taxable and are not eligible for the maximum 15% tax
rate that otherwise applies to dividends.)
Gains and losses
You may generate capital gains on a corporate bond if you sell it at a
profit before it matures. If you sell it up to a year from purchase, thegains are taxed at your ordinary rate. If you sell it more than a year from
purchase, your capital gains are considered long-term and are currently
taxed at a maximum rate of 15%.
Conversely, if you sell a bond for less than you paid, you may incur a
capital loss. You may offset an unlimited amount of such losses dollar-
for-dollar against capital gains you have realized on other investments
(bonds, stocks, mutual funds, real estate, etc.). If your losses exceed
your gains, you may currently deduct up to $3,000 of net capital losses
annually from your ordinary income. Any capital losses in excess of
$3,000 are carried forward and can be used in future years. (These rules
apply to the sale of shares in bond funds as well as to individual bonds.)
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Original-issue discount
When bonds are issued at substantially less than par (face) value, the
difference between the face amount and the initial offering price is
known as original-issue discount. Zero-coupon bonds are the best-known
variety of this category of bonds.
The tax treatment of original-issue-discount bonds is particularly
complicated, so if you plan to invest in them, it is essential to consult
your tax attorney or adviser. During the time you own original-issue-
discount bonds, you will pay tax each year on a portion of the discount
(even though you do not receive it in cash). However, if you hold them
to maturity, you do not pay capital gains or other taxes on the amount
by which the face value you receive exceeds the discounted amount you
paid for the bonds. The reason is that you paid taxes on that excess
incrementally each year that you held the bonds.
Benefits of Investing in Corporate Bonds
Investors buy corporates for a variety of reasons:
Attractive yields. Corporates usually offer higher yields than
comparable-maturity government bonds or CDs. This high-yield potential
is, however, generally accompanied by higher risks.
Dependable income. People, who want steady income from their
investments, while preserving their principal, may include corporates in
their portfolios.
Safety. Corporate bonds are evaluated and assigned a rating based on
credit history and ability to repay obligations. The higher the rating, the
safer the investment as measured by the likelihood of repayment of
principal and interest. (See Understanding Credit Risk.)
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Diversity. Corporate bonds provide an opportunity to choose from a
variety of sectors, structures and credit-quality characteristics to meet
your investment objectives.
Marketability. If you must sell a bond before maturity, in most
instances you can do so easily and quickly because of the size and
liquidity of the market. (See Marketability.)
All information and opinions contained in this publication were produced
by the Securities Industry and Financial Markets Association from our
membership and other sources believed by the Association to be
accurate and reliable. By providing this general information, the
Securities Industry and Financial Markets Association makes neither a
recommendation as to the appropriateness of investing in fixed-income
securities nor is it providing any specific investment advice for any
particular investor. Due to rapidly changing market conditions and the
complexity of investment decisions, supplemental information and
sources may be required to make informed investment decisions.
Bond Funds
Many investors who want to reap the good returns available in the
corporate bond market buy shares in bond mutual funds instead of
individual bondsor in addition to individual bonds. They do so for the
same reasons investors have flocked to mutual funds of all kinds in
recent yearsdiversification, professional management, modest
minimum investments, automatic dividend reinvestment, and other
convenience features.
Diversification is an especially important advantage of bond funds. Many
investors in individual bonds buy only a few securities, thus
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concentrating their risk. A fund manager, by contrast, spreads credit
risk, interest-rate risk and, indeed, all other kinds of risk, over many
bonds. Different issuers, sectors, credit ratings, coupons and maturities
are all represented in a diversified portfolio.
However, lower risk does not mean no risk. All the underlying risks that
affect bonds affect bond fundsbut not as sharply. You should be aware
that prices of bond fund shares fluctuate inversely with interest rates,
just as individual bonds prices do, and when you sell fund shares, they
may be worth more or less than you paid for them.
The turmoil has left investors with a headache as household names take
a battering and they search for a sound place to invest. Some experts
suggest corporate bond funds could deliver the required results.
The classification of a bear market is a sharp slide in stock value over a
prolonged period or more specifically, a 20% drop in two months. The
last bear market, which encompassed three years of investment turmoil,
ended in March 2003.
The bears are back. At one point on Tuesday(July 8), the FTSE 100 index
of the UK's largest firms collapsed by more than 150 points to 5358.7,
compounded by fears a recession is on the way.
Ted Scott, fund manager of the F&C UK Growth & Income portfolio,
said: 'At present the UK economy has only just begun to slow after a
robust 2007 when GDP growth was above trend.
'Despite months of gloomy headlines, house prices have so far only
fallen a few per cent from their peaks and unemployment is low, albeit
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rising. Therefore, if a recession does become a reality - and the risks
lean that way - there could be further to go.'
Over the past year the market has witnessed shares in many household
names tumble - M&S is down nearly 70% from its 2007 high, while
Halifax Bank of Scotland has endured a near 80% fall.
During the last similar period, the 2000-2003 bear market, equities
tumbled from 1999 highs when the FTSE 100 touched the 7,000-mark
and bond funds took centre stage as investors fled markets in search of
a safehaven for their cash.
Event Risk
Corporate bonds are like no other in that they have an implied event risk.
Takeovers, corporate restructuring, and even LBO's can have dramatic
consequences to a bonds credit rating and even price. Unless you were acting on
inside information, it was nearly impossible to predict these dramatic shifts in a
company and therefore; corporate bond issuers were forced to provide additional
bond features to remove some of the uncertainty associated with corporate
bonds.
Event Risk Mitigation (Special Features)
Poison pill provisions, floating rate notes, and putable bonds are a few key
features that were added to corporate bonds to ease the investors' mind.
Poison Pill Provision
The poison pill provision is probably the most important risk prevention measure
that a corporation can make; it allows shareholders to buy the stock of the
acquiring company or more of the same stock at a heavily discounted price,
usually half of the market rate, during a takeover situation. The provision
attempts to thwart would be takeover attempts by forcing the acquirer to
negotiate terms with the board of directors on the terms of the takeover. If the
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board is amenable to the terms, they will recant the pill. If not, the pill could be
triggered; and shareholders can exercise the option to purchase shares at a deep
discount. This would have negative ramifications to the acquirer as it would
dilute their interest in the company.
Floating Rate Notes
Floating rate notes (FRN) are corporate bonds that have a variable coupon
structure to protect purchasers against interest rate risk. The coupon is reset
usually every three months using a benchmark index as a basis; usually a short
term treasury instrument or LIBOR. Sometimes, floaters will have a floor in place
to provide that much more protection to the corporate bond holder against
interest rate movements. The idea behind a floating rate note is to protect the
bond holder against rate fluctuations and at the same time keeping the bond
value close to par.
Putable Bonds
A corporate bonds with a putable feature allows the bond holder to return, or
"tender", the bond back to the issuer at par before the bond's maturity date. This
feature is designed to protect a bonds value against interest rate fluctuations.
The intervals in which this put feature can be executed are specified in the bondindenture. Effectively, a corporate bond with a putable option turns the security
into a shorter term instrument.
Putable bonds are not as great in interest rate environments that are shifting
sharply; this is so due to the fact that the bond holder will need to wait for
specific intervals in which they may tender the bond back to the issuer.
Additionally, similar to its callable bond counterpart, the putable bond carries an
option premium which will reduce your yield.
Credit Risk
Analyzing credit risk for corporate bonds is a little more complex than a more
simple method in which municipal bonds are be evaluated. Corporate bonds have
a tiered repayment structure, similar in concept to the one that a CMO has. Each
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bond issuer may have multiple issuances; each of these issues will receive
different ratings from the credit agencies due to the fact that they have different
repayment structures and conditions. For example, there may be a senior class
of debt, and then a subordinated class of debt which is less senior. Obviously, the
senior class will bear a higher credit rating.
Junk Bonds
The term "junk bonds" refers to high-yield corporate bond issuances which are
classified as non-investment grade. They are speculative in nature and have very
low credit ratings. Standard and Poors defines junk bonds as issues with a rating
lower than BBB while Moody's classifies a bond as junk below Baa3. Typically,
issuers of junk bonds have just gotten into deep financial issues and need to
raise cash immediately; other times, issuers may be trying to re-emerge from
bankruptcy. In either case, the corporate bonds credit quality is low and investors
who purchase them are speculating on the future of the company. Junk bonds are
typically purchased at tremendous discounts to par; many times you can get
them for 10 to 20 cents on the dollar.
While junk bonds may seem to be a risky proposition; nearly 1 out of every 5
companies are rated in "junk" status. The market for these bonds has become
more diversified; including some bigger names and more recently, public growthcompanies looking for financing. Junk bonds actually provide a portfolio with
diversification since these companies typically are on their own page and doing
their own thing regardless of what the general market is doing. Additionally, junk
bond yields are quite a bit higher than their treasury equivalents. If you can spot
the right investment, the compounding interest can be quite staggering over the
life of the bond.
In a nutshell, if you plan on investing in junk bonds, you can expect a riskier
investment with great returns if it works out. Be prepared to lose your money if
the company does not work out as you thought; therefore, never throw a large
portion of your portfolio into these investments.
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Bond Investment Strategies
The way you invest in bonds for the short-term or the long-term depends on yourinvestment goals and time frames, the amount of risk you are willing to take andyour tax status.
When considering a bond investment strategy, remember the importance ofdiversification. As a general rule, its never a good idea to put all your assets andall your risk in a single asset class or investment. You will want to diversify therisks within your bond investments by creating a portfolio of several bonds, eachwith different characteristics. Choosing bonds from different issuers protects youfrom the possibility that any one issuer will be unable to meet its obligations topay interest and principal. Choosing bonds of different types (government,agency, corporate, municipal, mortgage-backed securities, etc.) createsprotection from the possibility of losses in any particular market sector. Choosingbonds of different maturities helps you manage interest rate risk.
Passive Bond Strategy
The passive buy-and-hold investor is typically looking to maximize the incomegenerating properties of bonds. The premise of this strategy is that bonds areassumed to be safe, predictable sources of income. Buy and hold involvespurchasing individual bonds and holding them to maturity. Cash flow from thebonds can be used to fund external income needs or can be reinvested in theportfolio into other bonds or other asset classes.
In a passive strategy, there are no assumptions made as to the direction offuture interest rates and any changes in the current value of the bond due toshifts in the yield are not important. The bond may be originally purchased at apremium or a discount, while assuming that full par will be received uponmaturity. The only variation in total return from the actual coupon yield is thereinvestment of the coupons as they occur. On the surface, this may appear tobe a lazy style of investing, but in reality passive bond portfolios provide stableanchors in rough financial storms. They minimize or eliminate transaction costs,and if originally implemented during a period of relatively high interest rates,they have a decent chance of outperforming active strategies.
One of the main reasons for their stability is the fact that passive strategies work
best with very high-quality, non-callable bonds like government or investmentgrade corporate or municipal bonds. These types of bonds are well suited for abuy-and hold strategy as they minimize the risk associated with changes in theincome stream due to embedded options, which are written into the bond'scovenants at issue and stay with the bond for life. Like the stated coupon, calland put features embedded in a bond allow the issue to act on those optionsunder specified market conditions.
Bond Laddering
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Ladders are one of the most common forms of passive bond investing. This iswhere the portfolio is divided into equal parts and invested in laddered stylematurities over the investor's time horizon. Figure 1 is an example of a basic 10-year laddered $1 million bond portfolio with a stated coupon of 5%.
Indexing Bond Strategy
Indexing is considered to be quasi-passive by design. The main objective ofindexing a bond portfolio is to provide a return and risk characteristic closely tiedto the targeted index. While this strategy carries some of the samecharacteristics of the passive buy-and-hold, it has some flexibility.
Due to the size of this index, the strategy would work well with a large portfoliodue to the number of bonds required to replicate the index. One also needs toconsider the transaction costs associated with not only the original investment,
but also the periodic rebalancing of the portfolio to reflect changes in the index.
Immunization Bond Strategy
This strategy has the characteristics of both active and passive strategies. Bydefinition, pure immunization implies that a portfolio is invested for a definedreturn for a specific period of time regardless of any outside influences, such aschanges in interest rates. Similar to indexing, the opportunity cost of using theimmunization strategy is potentially giving up the upside potential of an activestrategy for the assurance that the portfolio will achieve the intended desiredreturn. As in the buy-and-hold strategy, by design the instruments best suited forthis strategy are high-grade bonds with remote possibilities of default. In fact, thepurest form of immunization would be to invest in a zero-coupon bond and match
the maturity of the bond to the date on which the cash flow is expected to beneeded. This eliminates any variability of return, positive or negative, associatedwith the reinvestment of cash flows.
Active Bond Strategy
The goal of active management is maximizing total return. Along with theenhanced opportunity for returns obviously comes increased risk. Someexamples of active styles include interest rate anticipation, timing, valuation andspread exploitation, and multiple interest rate scenarios. The basic premise of allactive strategies is that the investor is willing to make bets on the future rather
than settle with what a passive strategy can offer.
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PARACTI CAL STUDY
History
The history ofNational Savings Organization dates back to theyear 1873 when the Government Savings Bank Act, 1873 waspromulgated.During the first world war, the British Government introducedseveral Schemes for collection of funds to meet the expenditure. It was in thiscontext that the Post Office Cash Certificates and, during the second worldwar, Post Office Defence Savings Certificates were floated. The need to setupa separate agency was felt and a National Savings Bureau was established in1943- 44 as an attached department of the Ministry of Finance of theundivided Government of India. The department was headed by NationalSavings Commissioner with the status of a Joint Secretary. At that time themain functions of the Savings Department were to initiate all policy mattersand issue directives for the execution of policy decisions of the Central
Government, and to review the Savings Schemes from time to time.Gradually, Savings Organization were established in almost all the Provincesof the sub-continent with the objective of popularizing the Savings Schemesamong the masses as well as to supervise, guide and control the working ofauthorized agents under their jurisdiction. The agents, who were appointed bythe local authorities. They were paid commission @ 2 1/2 on the investmentsecured by them. These authorized agents were in those days the only agencyfor securing investment in terms of Savings Certificates from the generalpublic. In nutshell the central agency viz. National Savings Bureau, Simla, wasmainly concerned with the policy and planning matters of the SavingsSchemes whereas the responsibility of execution of various Savings Schemesvested with Provincial authorities .
At the time of Independence there was no time for any sort of innovations inthe field of administration. Thus an organization with the name of 'Pakistansavings Central Bureau' was created and the Savings work was entrusted to itby the Government of Pakistan, but this Bureau had its own peculiarities. ThePakistan Savings Central Bureau had no independent entity and was not giventhe same status as enjoyed by Savings Bureau, Simla. The head of thePakistan Savings Central Bureau was then called Central National SavingsOfficer, a Junior Officer of the Ministry of Finance with the status of an UnderSecretary to the Government of Pakistan. He was assisted by aSuperintendent having some auxiliary staff. In 1953, the Pakistan SavingsControl Bureau was re-named as Central Directorate of National Savings and itcarried out the functions on the lines of National Savings Bureau Simla but as
a part and parcel of the Finance Division, Central Directorate of NationalSavings was only responsible for publicity, and the operative agents were theProvincial Governments as well as Pakistan post Offices. However, the entireexpenditure in this regard was borne by the Central Government. Such anarrangement created a large number of administrative difficulties and stuntedthe growth of savings. In view of these difficulties the Central Directorate ofNational Savings was given the status of an Attached Department inSeptember, 1960, and was made responsible for all policy matters and
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execution of various National Savings Schemes.
Subsequently, it was also declared a Technical Department by theGovernment. The Director General, National Savings (BPS-20) now enjoys fullpowers of a Head of the Department.
Till December, 1971, the National Savings Organization functioned as aPublicity organization and its activities were merely promotional in nature. Butin early 1972, the scope of its activities was enlarged as the CentralDirectorate started selling II-Rupee Prize Bonds, and subsequently engaged inthe operations of other savings schemes. This resulted in considerableexpansion of the National Savings Organization.
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DEFENSE SAVINGS CERTIFICATE
The Government of Pakistan introduced Defence Savings Certificatescheme in the year 1966. The scheme has specifically been designedto meet the future requirements of the depositors. This is 10 years'maturity scheme with built in feature of automatic reinvestment after
the maturity. These certificates are available in the denominations ofRs.500, Rs.1000, Rs.5,000, Rs.10,000, Rs.50,000, Rs.100,000,Rs.500,000 and Rs.1,000,000/=.
Who Can Invest .
These certificates can be purchased by a single adult, a minor, twoadults in their joint names with the options of payable to the holders
jointly (Joint-A ) or payable to either (Joint-B). An adult can alsopurchase these certificates on behalf of a single minor, two minors
jointly or himself/herself and a minor jointly.
How To Purchase.
These certificates can be purchased from any National SavingsCentre (NSC), Pakistan Post Offices (PPO), Authorized branches of Scheduled
Banks and State Bank of Pakistan (SBP) by filling in a prescribed form calledSC-1, which is available at all the above offices of issue free of cost. A copyof the Computerized National Identity Card (CNIC) or in case of a foreignnational, a copy of the Passport is required to be attached with theapplication form.
Mode Of Deposit
These certificates can be purchased by depositing cash at the issuing officeor by presenting a cheque. The certificates shall immediately be issued onreceipt of cash. However, in case of deposit through cheque the certificatesshall be issued from the date of realization of the cheque after receipt of theclearance advice.
What Is The Investment Limit.
The minimum investment limit is Rs.500/-, however, there is no maximumlimit of investment in this scheme.
What About Redemption.
These certificates are encashable at par any time after the date ofpurchase. However, no profit is payable if encashment is made beforecompletion of one year.
Further, certificates purchased on or after 15-11-2010 can not beautomatically reinvested. However, other better options are available for
investment in National Savings Schemes. What is the return.
In this scheme the profit is paid on maturity or encashment forcompleted years. Every Rs.100,000/- will become Rs.105,500/-,Rs.112,000/-, Rs.120,000/-, Rs.131,000/-, Rs.146,000/-, Rs.166,000/-,Rs.191,000/-, Rs.222,000/-, Rs.260,000/- and Rs.308,000/- on completion of1, 2, 3, 4, 5, 6, 7, 8, 9 and 10 years, respectively. These rates are effectivefrom 1st January, 2012. The average compound rate of return on maturitypresently works to 12.33% p.a. For any other time period rates table is also
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available on website.
Tax & Zakat Status.
At present, the profit earned is exempt from withholding tax, if thetotal investment in the scheme by the investor(s) does not exceedRs.150,000/-. However, withholding tax @ 10% is deductible at source on
the profit(s) earned if the total investment exceeds Rs.150,000/- by theinvestor(s). The Zakat is collected at source as per rules.
Conclusion
The corporate bond market can offer very high yields but they come with a
price; extra risk. We spoke about a few ways to mitigate that risk but also run
your numbers and remember that treasury equivalents in term may have
lower yields but offer different tax structures. Therefore, run your taxable
equivalent yield formula and solve for tax exempt yield to see if the corporate
bond provides you with the added risk premium when compared to a riskless
treasury bond. When buying a corporate bond, be sure to ask the key
questions: What is the credit rating? Is there a putable option? Is there a
callable option embedded into the bond? How liquid is the bond? Is the
corporate bond listed on an exchange (these will tend to have more liquidity)?
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