Equity Linked Debentures


This is a kind of fixed income product. The principal is generally safe and you get the upside of the equities. Such bonds are linked to a market index (say Nifty) or any group of equity shares. A (pre-decided) portion of the principal collected is invested in fixed income securites. This makes way for principal protection. The remaining amount is placed in call options(is it so?) which provide exposure to equity or stock index. This is how we calculate returns in such a product: Determination of the initial value: It is the average of the first three months (M1, M2, M3) or a value higher than 96 per cent of the “Start level of Nifty”. (Start level of Nifty = the value of Nifty at the time of allotment.) .

  • Assuming that the “Start level of Nifty” is 5,000
  • Say the level of Nifty at the end of Month 1, Month 2 and Month 3 are 5,250, 5,000 and 4,750 respectively.
  • The initial value is computed as follows Month 1 = Higher of month 1 value (5,250) or 96 per cent of start level (96% of 5,000) = 5,250
  • Month 2 = Higher of month 2 value (5,000) or 96% of start level (96% of 5000) = 5,000
  • Month 3 = Higher of month 3 value (4,750) or 96% of start level (96% 0f 5000) = 4,800 Initial Index Reference Value = 5,250+ 5,000+ 4,800/3 = 5,016.66 Determination of the final value: It is the average of 31st, 32nd and 33rd months (M31, M32, M33) or a value up to two times of the “Start level of Nifty” or whichever is lower. The Final value is computed as follows # Assuming that the level of Nifty at the end of Month 31, Month 32 and Month 33 are 9,500, 10,000 and 10,500 respectively.
  • The values considered as follows; Month 31 = Lower of month 31 value (9,500) or 2 times of start level (2 times of 5,000) = 9,500
  • Month 32 = Lower of month 32 value (10,000) or 2 times of start level (2 times of 5,000) = 10,000
  • Month 33 = Lower of month 33 value (10,500) or 2 times of start level (2 times 0f 5,000) = 10,000 The, Final Index Reference Value = 9,500+ 10,000+ 10,000/3 = 9,833.33 Multiply participation factor, with the difference between final and initial value as above.

*Participation Factor is the ratio at which ELD participates in the appreciation of the market index. Eg: If Partcipation ratio is 100% it means 10% increase in the market index will result in 10% increase in the equity linked coupon rate. # Computation of Nifty returns

  • Nifty Returns = (Final Value- Initial Value) * 100/ Initial Value = ( 9,833.33 – 5,016.66) * 100 = 96.01% / 5,016.66 Return under the product = Nifty return * Participation factor 96.01 * 105% = 100.81%
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