NISM Series XV Research Analyst Study Notes: Chapter III — Terminologies in Equity and Debt Market (Part 3)
This study guide represents the final, integrated wrap-up (Part 3) of Chapter III. It acts as a comprehensive master review, comparative framework, and computational practice module. It consolidates all equity and debt terminologies from the previous parts to ensure maximum conceptual clarity, exam readiness, and practical mastery of the certification syllabus.
Section 1: Comparative Analysis — Equity vs. Debt Market Terminologies
Many financial terms are used across both equity and debt markets, yet they carry fundamentally different structural meanings, legal definitions, and valuation applications. This section contrasts those dual-market terms.
1. Face Value (Par Value)
- In the Equity Market: Face value refers to the nominal value of a share stated on the certificate. It represents the original legal cost of the stock at the time of the company's incorporation. Corporate dividends and capital divisions are calculated as percentages or multipliers of this face value.
- In the Debt Market: Face value is the nominal or par value stated by the issuer, representing the exact principal amount that the issuer is legally obligated to repay to the bondholder on the maturity date.
- Key Exam Distinction: Share face value is a static legal benchmark for dividends, whereas bond face value is the actual principal repayment obligation at maturity.
2. Intrinsic Value vs. Yield to Maturity (YTM)
- In the Equity Market (Intrinsic Value): This is the underlying "fundamental value" of a stock calculated through fundamental analysis, without referencing its current public trading price on the stock exchanges. Analysts compare intrinsic value to market price to identify underpriced or overpriced shares.
- In the Debt Market (YTM): YTM is the comprehensive internal rate of return (IRR) of a bond. It equates the present value of all future promised cash flows (periodic coupon interest payments plus the final maturity principal) to the bond's prevailing market price.
- Key Exam Distinction: Intrinsic value is an analyst's objective estimate of a stock's true value, while YTM is the actual mathematically implied rate of return of a bond based on its current market price and promised cash flows.
Section 2: Master Classification Matrix of Bond Structures
The debt market features specialized bonds designed to meet distinct corporate requirements, tax structures, and investor profiles.
| Bond Type | Coupon/Interest Mechanism | Principal Repayment structure | Unique Regulatory & Market Characteristics |
|---|---|---|---|
| Zero Coupon Bonds ("Zeroes") | No periodic coupon payments are made during the entire life of the bond. | Redeemed at par (face value) at maturity. | Issued at a steep discount to face value. Returns equal the difference between the discounted issue price and maturity par value. |
| Floating Rate Bonds | Coupon rate is not fixed. It resets periodically with reference to a defined market benchmark. | Paid at par on the maturity date. | Ensures interest payouts move in tandem with prevailing market rates, protecting investors from interest rate risk. |
| Convertible Bonds | Regular coupon payments are made during the debt phase. | Repaid in cash OR converted into equity shares of the issuing company. | Contains an embedded option giving investors the right to convert debt capital into company common stock at a later date. |
| Principal Protected Notes (PPN) | Coupon payments are rare; returns depend on secondary assets (equity, commodities, derivatives). | Maturing debt naturally builds back to the original principal amount. | A structured product where the majority of capital is put into debt to protect the principal, and the remainder is put into high-risk assets to boost yields. |
| Inflation Protected Securities | Fixed real coupon rate applied directly to an inflation-adjusted principal on each interest date. | Payout is the higher of the original face value or the final inflation-adjusted principal. | Protects investor purchasing power by dynamically adjusting both periodic coupon income and the principal value for inflation. |
| Foreign Currency Bonds | Coupons are paid in a foreign currency. | Repaid in the designated foreign currency. | Issued by companies in emerging markets in economically mature currencies (like USD) to capture significantly lower interest rates. |
| External Bonds (Euro Bonds) | Coupons are denominated in a currency different from the country where the bond is issued. | Principal is repaid in the external denomination currency. | Example: A US-Dollar-denominated bond issued in Kuwait. |
| Masala Bonds | Coupons are settled in foreign currency but denominated/valued in Indian Rupees (INR). | Principal is denominated in Indian Rupees (INR). | These are Rupee-denominated external bonds issued and traded entirely outside of India, transferring exchange-rate risk to foreign investors. |
| Perpetual Bonds | Periodic coupon payments are made indefinitely. | No stated maturity date; the issuer has no legal obligation to redeem the principal. | Investors are entitled to coupon interest payouts in perpetuity. |
Section 3: Comprehensive Formulas Cheat Sheet (Simple Line Format)
Below is the complete list of equity and debt formulas from Chapter III, written in the simple-line format requested for direct copying:
Equity Market Formulas:
- Market Capitalization: Market Capitalization = Market Price per share * No. Of Outstanding Shares
- Earnings Per Share (EPS): Earnings Per Share (EPS) = Net Profit / No. of outstanding shares
- Dividend Per Share (DPS): Dividend Per Share (DPS) = Dividend Declared / Face Value of share
- Price-to-Earnings Ratio (PE Ratio): Price to Earnings Ratio (PE Ratio) = Market Price per share / Earnings per Share
- Price-to-Sales Ratio (P/S Ratio): Price to Sales Ratio = Market Capitalization / Annual Net Sales
- Price-to-Book Value Ratio (P/B Ratio): Price to Book Value Ratio = Net Worth / No. Of outstanding shares
Debt Market Formulas:
- Holding Period Return (HPR): Holding Period Returns (HPR) = (End Value - Initial Value) / Initial Value
- Current Yield: Current Yield = (Annual Coupon / Current Market Price) * 100
- Zero Coupon Bond Return: ZCB Return = Redemption Value - Issue Price
Section 4: Practical Mock Case Studies with Step-by-Step Calculations
Case Study 1: Equity Valuation Analysis
Scenario: An analyst is evaluating Omega Global Services, a large-cap company with the following characteristics:
- Total Outstanding Shares: 2,000,000 shares
- Current Market Price per share: Rs. 400
- Face Value of share: Rs. 10
- Annual Net Profit: Rs. 16,000,000
- Annual Net Sales: Rs. 80,000,000
- Total Net Worth: Rs. 100,000,000
- Total Dividend Declared: Rs. 4,000,000
Step-by-Step Calculation:
-
Market Capitalization:
- Formula: Market Cap = Market Price per share * No. Of Outstanding Shares
- Calculation: Rs. 400 * 2,000,000 shares = Rs. 800,000,000
-
Earnings Per Share (EPS):
- Formula: EPS = Net Profit / No. of outstanding shares
- Calculation: Rs. 16,000,000 / 2,000,000 shares = Rs. 8
-
Dividend Per Share (DPS):
- Formula: DPS = Dividend Declared / Face Value of share (NISM specific formula)
- Calculation: Rs. 4,000,000 / Rs. 10 = 400,000
-
Price-to-Earnings Ratio (PE Ratio):
- Formula: PE Ratio = Market Price per share / Earnings per Share
- Calculation: Rs. 400 / Rs. 8 = 50
-
Price-to-Sales Ratio (P/S Ratio):
- Formula: Price to Sales Ratio = Market Capitalization / Annual Net Sales
- Calculation: Rs. 800,000,000 / Rs. 80,000,000 = 10
-
Price-to-Book Value Ratio (P/B Ratio):
- Formula: Price to Book Value Ratio = Net Worth / No. Of outstanding shares (NISM specific formula)
- Calculation: Rs. 100,000,000 / 2,000,000 shares = 50
Case Study 2: Bond Return & Yield Calculations
Scenario: An investor buys a corporate debt security issued by Gamma Infrastructure Ltd with the following details:
- Face Value: Rs. 1,000
- Coupon Rate: 9%
- Current Market Price: Rs. 960
- Initial Purchase Price (at start of the period): Rs. 920
- Ending Market Price (at end of the period): Rs. 950
- Annual Coupon Payment Received: Rs. 90 (9% of Rs. 1,000 Face Value)
Step-by-Step Calculation:
-
Current Yield:
- Formula: Current Yield = (Annual Coupon / Current Market Price) * 100
- Calculation: (Rs. 90 / Rs. 960) * 100 = 9.375%
-
Holding Period Return (HPR):
- Formula: HPR = (End Value - Initial Value) / Initial Value
- Here, the ending value includes both the ending market price of the bond and the coupon interest cash inflow: End Value = Rs. 950 (Bond Value) + Rs. 90 (Coupon Income) = Rs. 1,040
- Initial Value = Rs. 920
- Calculation: HPR = (Rs. 1,040 - Rs. 920) / Rs. 920 = Rs. 120 / Rs. 920 = 0.1304
- Expressed as a percentage: 13.04%
Section 5: Key Takeaways & Exam-Relevant Terms
- Large, Mid, and Small Cap Categorization: The market does not enforce static size cut-offs. In standard market practice, the top 50 to 100 stocks by market capitalization are considered large-cap, the next 200 to 500 are mid-cap, and the remaining listed stocks are categorized as small-cap.
- Voting Control and Raising Capital: Companies that want to raise capital from public markets without diluting voting control or risking promoter management takeovers often choose to issue Differential Voting Rights (DVR) shares instead of ordinary common shares.
- Bond Price Sensitivities (Modified Duration vs. Convexity): Modified Duration measures the exact magnitude of a bond's price change in response to a 1% change in interest rates. Convexity accounts for the non-linear relationship between interest rates and bond prices, showing that bond prices rise more when rates drop than they fall when rates rise by the same percentage.
- Structured Debt Products: A Principal Protected Note (PPN) uses a split-investment approach: a major portion of the principal is invested in low-risk debt to secure the original investment amount upon maturity, while the remainder is placed in high-risk assets like derivatives or commodities to generate excess returns.