Mr.Boyagoda

8/8/2019 Mr.Boyagoda

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Planning Your Financial Future

Mangala Boyagoda26 th October 2010


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Wealth Lanka Management (Pvt.) Ltd

Why do we save money?


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Wealth Lanka Management (Pvt.) LtdWealthTrust Corporation (pvt) Ltd


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Sri Lanka Savings- Domestic & National


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Factors Influencing Investment Decisions

Credit Risk

Liquidity

Return


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Risk Reward

High Risk = High Return

Low Risk = Low Return


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Movements in Selected Interest RatesMovements in Selected Interest Rates

4 .50

6 .50

8 .50

10 .50

12 .50

14 .50

16 .50

18 .50

20 .50

22 .50

J a n

- 0 0

J u n

- 0 0

N o v

- 0 0

A p r

- 0 1

S e p

- 0 1

F e b

- 0 2

J u l

- 0 2

D e c

- 0 2

M a y

- 0 3

O c t

- 0 3

M a r

- 0 4

A u g

- 0 4

J a n

- 0 5

J u n

- 0 5

N o v

- 0 5

A p r

- 0 6

S e p

- 0 6

F e b

- 0 7

J u l

- 0 7

D e c

- 0 7

M a y

- 0 8

O c t

- 0 8

M a r

- 0 9

A u g

- 0 9

J a n

- 1 0

J u n

- 1 0

% Depos i t Ra tes o f Commerc ia l BTreasury b i l l y i e ld and M onth ly

M o n th ly A W A W D R A W F D T-B ill y ie ld (9 1-day)


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Real Return


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Wealth Lanka Management (Pvt.)


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Wealth Lanka Management (Pvt.)


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NONTANG

IBLE

INVESTMENTS

Treasury Bills

CBSL Securities

Government Loans

Treasury Bonds

Commercial Papers

Pro Notes

Bankers Acceptance

Debentures

Asset Backed Notes

Corporate Bonds

Mortgage-Backed Securities

Investments in Unit TrustsShares


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Why Capital Market !

High Intermediation Cost

Assets and Liability Mismatch

Negative Real Return to Savers


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Market Overview -Rs billion

Banking Sector Deposits - 1,672 Banking Sector Loans - 1,137 Govt: Securities - 4,161 Listed Entities - 235 Stock Exchange MktCap: - 1,691 Listed Debt MktCap: - 22 Unlisted Corp Debt Est - 45 Lease Securisation Est- 15


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Capital Market

Debt Market Equity Market


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TRADITONAL LOAN

Borrower Lender (Bank)

Collateral/Security

Cash

Issuer Purchaser (Bank)

Issue of Debt.Security.

Cash

Debt SECURITIES


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Debt Market Overview

Government Debt Short term paper Medium term paper Long term paper

Corporate Debt Short term paper Medium term paper Long term paper


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Government Securities

Treasury Bills Treasury Notes Treasury Bonds Government Agency Securities


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C t D bt I t t


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Corporate Debt InstrumentsShort-term Instruments

Commercial Papers Bankers Acceptance

Short-Term Pro NotesMedium-term Instruments

Debentures Medium-Term Pro Notes Asset Backed Notes Floating Rate Notes Preference Shares of Listed Companies Lease Securitisation Certificates

Long-term Instruments Corporate Bonds Mortgage Backed Securities Municipal and Infrastructure Bonds


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Debt Market Players

Issuers Investors

Intermediaries


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Security: Unsecured

Unsecured Debentures

Debt is not secured by any specific asset

-Issuer: Assets are not tied up More future borrowing capacity Higher interest cost

-Investor No claims to specific assets in the event of default. Demand higher coupon.


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Security: Secured

Secured Debentures

Debt is secured by specific assets

Issuer: Assets are tied up

Reduces future borrowing capacity Lower interest cost

Investor :

Claim to specific assets in the event of default. Accept lower coupon.


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Security: Guaranteed

Guaranteed Debentures

Payment of interest and principal is guaranteed by athird party (guarantor) in the event the issuer is unable tohonor obligation.

Issuer :

Assets are not tied up Leaves future borrowing capacity Pays guarantee commission

Investor: Minimal default risk Accept lower coupon


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Subordination Subordinated Debentures

In the event of winding up, claims of the debtholders rank after all claims of secured andunsecured creditors but in priority to the claimsand rights of shareholders.

Unsubordinated DebenturesIn the event of winding up, claims of the debt

holders rank pari passu with all other unsecuredcreditors but in the priority to the claims and rights of shareholders.

Subordinated debt must pay a higher couponthan comparable unsubordinated debt.


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Term to Maturity Issuer considerations

Maturity / timing of cash flows of investment Interest rate expectations Investors appetite

Investor considerations

Maturity of liabilities Interest rate expectations Tolerance for interest rate risk

Longer maturity debt must offer a higher coupon than a

comparable shorter maturity debt


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Coupon rate: fixed or variable

Fixed rate

Rate fixed over the maturity of the bond Issuer & investor locked into a rate

Variable/Floating rate Rate linked to some benchmark rate Future coupon rate is uncertain

If the interest rates are expected to go up during the term tomaturity, issuer better off with a fixed rate and investor isbetter of with a variable rate.

If interest rates are expected to decline during the term tomaturity, issuer is better off with a variable rate and investor is better of with a fixed rate.


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Coupon rate: frequency of paymentPayment options: Monthly, quarterly, semi-annually

Issuer Considerations Cash flow patterns of business Investor appetite

Investor considerations Frequency if income requirements Compare annualized (effective) rate of interest.


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Cash flows to a coupon to a corporate bond

Two types of cash flows- Periodic interest payments- Principal at maturity

Example:13.5% Rs.100/- = 3 year ABC Glass Co. debentures paying semi-annual interest, purchased in the primary market.

Period(Months)

0 6 12 18 24 30 36

CF -100 6.75 6.75 6.75 6.75 6.75 106.75


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Call Option Gives the issuer right to redeem bonds before maturity

Issuer : Has the ability to redeem and re-issue at a lower coupon

if rate interest falls

Must pay a higher coupon than comparable non-callablebonds.

Must pay a call premium at the time call.

Investor : Faces the call risk


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Put option

Gives the bond holder the right to sell to the issuer at a pre-specified price before maturity.

Issuer : May be able to sell at a lower coupon rate than comparable non-

puttable bonds. Faces uncertainty regarding cash flow needs for redemption.

Investor : Has value if puttable price >market price at the time of exercise Has the ability to exploit reinvestment opportunities at higher

coupon rates.


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Conversion optionGives the bond holder the right to convert

into common sharesIssuer : No need to have cash for principal payment if

converted.

Can sell bonds at a lower coupon rate thancomparable non-convertible bonds. Earnings dilution and higher costs of servicing

equity after conversion.

Investor :Upward potential if the share price goes up.Lower coupon rate.


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WHAT ARE COMMERCIAL PAPERS ?

Commercial Papers are an unsecured promissory notesissued by an issuer for specific amount payable to theorder of a specified person or bearer, on a specific date.

The word bearer indicates that CPs are negotiablesecurities while anybody holding them has the option tohold them to maturity. This aspect of negotiability givesthe necessary flexibility for these instruments to be readily

discountable in the secondary market.

INTERMEDIATION COST


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INTERMEDIATION COST

Deposit Rate Cost of Funds Lending Rate Cost of Funds for Borrowers (11.00 %) (12.35) (15.00%) ( 16.275 %)

2.65%

5.275%11.50% 14.50%

3..00%

0.00 %


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Equity Market


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Wealth Lanka Management (Pvt.) LtdSource : Bloomberg


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Movements in Capital Markets


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Types of Equity Securities Traded

1 Ordinary Shares Voting Shares Non Voting Shares

2 Preference Shares

3 Warrants


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Ordinary Shares

Shares that gives the ownership of a Company

is called an ordinary Share . An ordinary share

holders encounters the Market Risk .Companiesnot obligated to pay dividends to theshareholder. In the even the Companyannounces Bankruptcy the ordinary share

holders claim will be only settle after all other liabilities are settled. Ordinary Shares areissued with and with out voting rights.


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Preference SharesEquity Investment of a Company whereentitle to receive a Fixed dividend out of profit.In the event of a liquidation preferenceshareholders are given priority only over the ordinary shareholders.


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Share Warrants

The warrant is a mandate where theholder has the right to purchase shares of a company in a future date at a agreed

price.


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What is the Stock Exchange

Any corporate body incorporated either in SriLanka or overseas including statutorycorporations are eligible to seek a listing on thestock exchange to raise DEBT or Equity through

public offering.Companies desiring to be admitted to the officiallist of the exchange and to secure a quotation of their securities will be required to comply withthe relevant provision of the Company Act no 17

of 1982 and the Securities and ExchangeCommission Act No 36 of 1987 (as amended)and the listing rules of the Exchange.


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Structure

The Colombo Stock Exchange (CSE) is acompany limited by guaranteeestablished under the Company act NO

17of 1982 and is licensed by theSecurities & Exchange Commission(SEC) to operate as a Stock Exchangein Sri Lanka. It is the only StockExchange and also the member of International Federation of StockExchanges.


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Ownership and the OrganizationStructure (CSE)

The CSE is a member owned Exchange andcurrently has members of 15 .Each member islicensed to performed the duties as a stockbroker. All the members are corporate entities.Some are subsidiaries of large financialinstitutions such as commercial banks,merchant banks and investment banks.Foreign ownership in member firms ispermitted.

The main policy making body of the stockExchange is the Board of Directors, whichconsists of 9 persons. Four Directors areappointed by the ministry of Finance.


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CSE Regional Branch Network

Matara Kandy Kurunegala Jaffna


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Clearing and Settlement

Central Depository System (Pvt) Ltd(CDS) Incorporated in 1991 as a fullyowned subsidiary of the Colombo Stock

Exchange and registered with SEC As aMarket Intermediary


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CDS Facilities and Services

Opening of Client Accounts Deposit of Securities Withdrawal of Securities

Transfer of securities Clearing Settlement Record keeping

Handling of new and subsequent Issues Stock Borrowing & Lending


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Two Major Indices

All Share Price Index Milanka Price Index


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Sector Price Indices

20 sector indices are calculated on an ongoing basis and closing values arepublished at the end of each trading day.

The sector price indices will give the futuretrend of the market.


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UNIT TRUSTUNIT TRUST

A New Trend In Investment A New Trend In Investment


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UNIT

TRUSTA New Concept In Investment

UNIT TRUST Offers

q Convenience

q Simplicity

q Short cut to the Stock Market


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WHAT IS A UNIT TRUST?

A UNIT TRUST is a pooled investment planwhere the capital contributions of investors arecombined into a legally formed Trust Fund.

The money is then invested by professional fundmanagers, acting on behalf of the investors, in a

portfolio of marketable securities.


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UNIT TRUST ADVANTAGES

Diversification

Liquidity

Convenient

Lower Transaction cost

Professional Management


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B E N E F I T S O F I N V E S T I N G I N A U N I T

T R U S T

S Investments are diversified Less Risk

S Tax Benefits Available

S Access to Professional Investment Managers.

S Access to Investments that would not normally be accessible to small investors

S Easy Redemption


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Current Status

Five licensed Unit Trust managementcompanies

Eighteen Funds operating in the market

Fourteen open ended and four closeended funds

Total Assets Under management of Rs

13.5 billion as on 30 th June 2010

Capital Markets


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Capital Markets

Building Blocks

Macroeconomic Policies

Financial Sector Reforms

Regulatory Framework

Preconditions

Basic

Infra struct ure

Clearing & Settlement

Custody

Accounting

Information

Legal

Intermediaries

Facilitating

Infra structure

Bond Insurance

Liquidity

Benchmark

Taxes

Derivatives

Rating Agency


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