The price that has to end at a number

Two years ago you put money into a public issue of debentures from a non-banking lender — a five-year NCD with a nine per cent Coupon on a Face value of ₹1,000, listed on the exchange, sitting in the same demat account as your shares. This morning, for the first time, you open its chart. The line falls steadily from about ₹1,043 to ₹968 over the last four months. There is one bar in which it drops ₹45 with no announcement of any kind attached to it. And across the two years of history, the daily bars keep getting smaller as you read left to right. Read as a share chart, that is a stock in a downtrend that has had one bad session and then gone quiet. Not one of the three things you have just described was done by a buyer or a seller.

A share has no obligation to be at any particular price on any particular day. A bond does. On a stated date the issuer repays the face value and stops paying, and everything the chart does between now and then is happening inside that constraint. That single fact changes the meaning of a trend line, a stop, an average and a volatility measure, and it does so in a direction you can work out in advance.

Think of it like this

Selling your fixed deposit receipt to a neighbour

You have a three-year deposit paying nine per cent, and a year in you need the money. A neighbour offers to take it over. Meanwhile the bank has started offering eleven per cent on new deposits, so he will not pay you the full amount — nobody buys a nine per cent deposit at the same price as an eleven per cent one. He offers a shade less. Two things then follow on their own. As the maturity date gets closer his discount shrinks, because the bank is going to hand over the full amount on a day that is now nearer. And on the morning after the annual interest is credited, the receipt is worth less than it was the evening before, because that interest has left it and gone into somebody’s account.

In the market

That is a bond chart, and both movements are on it. The line drifts towards the face value because the repayment date is approaching, and it steps down when interest leaves the instrument. Neither is a participant changing their mind about the borrower. A share chart has nothing in it that behaves this way, which is why the habits you bring from one produce nonsense on the other.

Three features, and what each one actually is

What the chart shows	What a share-chart reading says	What it actually is
A vertical drop of roughly one coupon, on no news	A large seller, or something the market knows and you do not	The interest entitlement leaving on the Record date. If the number quoted on your screen includes the interest that has built up since the last payment, the series climbs gently between payments and drops the whole coupon at each one. That sawtooth is a calendar, and it repeats on dates fixed at issue. Check the size before looking for a cause: ₹45 on a nine per cent debenture of ₹1,000 face value is exactly one half-yearly payment
A slow, persistent drift towards ₹1,000	A trend, to be traded in its direction	[[Pull to par]] — the price converging on the amount that will be repaid, because the date on which it is repaid is getting nearer. It happens with the yield completely unchanged, and its sign is decided by whether the bond sits above or below face value, not by sentiment
Daily ranges that keep getting smaller	Volatility contracting — a squeeze, and a set-up	[[Modified duration]] falling as the maturity date approaches. The same movement in yields produces a smaller price move every year, by arithmetic. An ATR stop on a bond is therefore sized against a number that is shrinking on its own

The arithmetic, on one debenture

Worked example

Nine per cent, three years left, and yields go to eleven

A listed NCD, ₹1,000 face value, ₹90 of interest a year, three years to maturity

Where it startsA nine per cent coupon valued at a nine per cent yield sits exactly at face value. Nothing to explain yet₹1,000 — priced at a nine per cent yield

Yields on that lender’s paper move to eleven per centThree coupons of ₹90 and the ₹1,000 repayment, each discounted at eleven per cent: ₹81.08 + ₹73.05 + ₹65.81 + ₹731.19 = ₹951.13Price falls to about ₹951

What the chart shows for those weeksOn an instrument where nothing has happened to the borrower and no payment has been missed. This is the whole of the "downtrend" in the opening paragraphA fall of about 4.9%

A year later, with yields still at eleven per centTwo coupons and the repayment, discounted at eleven per cent: ₹81.08 + ₹73.05 + ₹811.62 = ₹965.75. The price rose 1.5% while absolutely nothing changedPrice is about ₹966

What the holder actually earned across that year₹90 of interest plus ₹14.62 of price recovery, on ₹951.13 — which is 11.0%, being the yield. At a constant yield you earn the yield, and part of it arrives on the chart as an uptrend11.0%

Sensitivity at the start of the yearModified duration with three years to run: a one percentage point move in yields moves the price about 2.5%About 2.48

Sensitivity at the end of itTwo years to run. The same yield move now moves the price 1.7%. The instrument became 30% less volatile in twelve months, with no change in the market and no change in the borrowerAbout 1.73

One line, three mechanisms, none of them behavioural. The four-month fall was a repricing to a higher yield; the recovery that follows it is the pull to par and would have happened even if the yield never moved again; and the quietening bars are duration running down. Notice what a stop and a position size do inside this. A stop placed at a multiple of recent range gets tighter every year on its own, so an identical rule takes a progressively larger position in the same instrument as it ages. That is not a judgement anybody made. It is the measurement shrinking underneath a rule that was written as though it would not.

Price change ≈ −Modified duration × change in yield

Modified duration: the sensitivity measure, in years, which falls as the maturity date approaches
change in yield: in percentage points — a move from 9% to 11% is 2

Example: The bond above, at 2.53 when it sat at face value: 2.53 × 2 = about 5.1% of expected fall, against the 4.9% that the full calculation gives. The estimate errs the same way every time, because the true relationship curves rather than running straight: the straight-line figure always sits below the real price, so it overstates a fall and understates a rise. Both halves matter if you use it on a bond that has moved in your favour. For a chart reader the useful part is not the second decimal — it is that the multiplier is not a constant of the instrument. It shrinks as the bond ages, so an unchanged rule is being applied to a steadily less sensitive series.

Careful

Before any of this can be read, settle one thing about the number on your screen: does it include the interest that has accrued since the last payment? A quoted Clean price does not, and the Accrued interest is then added to what the buyer actually pays, so the cash leaving your account is more than the chart says and the chart shows no sawtooth. A quoted price that includes the accrual does show the sawtooth, and each step down is a payment rather than a fall. You do not need to look up the convention — the chart answers it. Find two consecutive interest record dates and see whether there is a step of roughly one coupon at each. Whichever way it comes out, one of the two numbers that matter to you is not on the line, and reading the line as though it were the whole price is the error underneath most confused NCD questions.

The same fall, two completely different things

A bond chart falling from ₹980 to ₹640 has two candidate explanations, they look identical on the line, and the distinction is the whole of what you needed to know. Interest rates moving is a fact about the price of money and it reverses with time, because the repayment amount has not changed. The borrower’s ability to pay weakening is a fact about the anchor itself, and it does not reverse: a bond that will not be repaid in full converges on whatever is recovered, not on ₹1,000.

Telling a rate move from a credit move, from public information

It was rates

Comparable paper of similar maturity moved with it — other listed bonds, and government securities of the same tenor
The move is roughly what modified duration predicts for the yield change, rather than several times it
The longer-dated bonds of the same issuer moved more than the shorter-dated ones, in about the ratio of their durations
The conclusion that follows: the price is expected to recover towards face value as the maturity date approaches, and the loss on the chart is unrealised unless you sell

It was credit

Only this issuer’s paper moved, and its short-dated bonds fell as hard as its long-dated ones — which duration cannot explain
A rating action, a watch placement, or a Debenture trustee filing on security cover or a covenant breach
The equity of the same borrower, where it is listed, moved in the same days and by much more
The conclusion that follows: Credit risk is usually sudden and usually permanent, and there is no arithmetic pulling the price back to ₹1,000 because the amount that will be repaid is now in question

Four cases where the anchor is not where you assume

No maturity date at all. A perpetual instrument — an AT1 bond is the one Indian retail investors have actually been sold — has no repayment date, so there is no pull to par and nothing for the price to converge on. It is the case where the intuition in this lesson is not merely weakened but absent, and it is attached to the instruments most often bought on the strength of a headline yield.
Principal repaid in instalments. Many NCDs amortise, returning part of the face value on scheduled dates rather than all of it at the end. The outstanding amount per unit falls, so the quoted price steps down by a large fraction on a known date. A one-third drop of that kind is a repayment reaching your bank account, and on the chart it is indistinguishable from a collapse.
A call or put date before maturity. Where the issuer may redeem early, or the holder may require redemption, the date the price converges on may be that date and not the maturity date — and which one it is depends on whether exercising is worth it to whoever holds the option. The chart cannot tell you; the issue terms can.
The anchor is a promise, not a law. Everything above assumes the money arrives. The convergence is only as good as the issuer, which is why the same discount means something quite different on a government security and on a high-yield NCD sold at a rate that was itself the warning.

In the Indian market

Two practical features of the Indian bond screen. Most secondary trading in corporate bonds here is negotiated between institutions and reported, rather than matched in an order book, so the exchange chart of an NCD is drawn from the small residue that happens on-screen — often a handful of prints in a week, with the number on your terminal a Stale price carried forward from days ago. Every percentage you compute against it inherits that age, and volume-based technique has essentially nothing to attach to. The second is arithmetic and catches people once: the price is quoted per unit, so a figure of 1,024 on a ₹1,000 face value is a price and not a percentage of face value the way bonds are quoted in some other markets. Read it in that second sense and a bond standing two per cent above par appears to be standing at ten times it.

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Move the market yield and watch the price go the other way — then hold the yield still and shorten the years to maturity. The price walks towards ₹1,000 from whichever side it is on, and the sensitivity number falls as it goes. Both of those are the chart moving with nobody trading.

Four questions before you draw anything on a bond chart

1
When does it end, and at what amount
Maturity date and the face value outstanding per unit, from the issue terms. Without those two numbers you cannot say which way the built-in drift points, and everything else in this lesson is unavailable.
2
Which side of that amount is it trading on
Above face value the arithmetic drift is downward, below it is upward. Write the sign down before you look at the shape of the line, because the shape is partly that sign.
3
Mark the interest record dates on the chart
Steps at those dates are payments, not falls. Any gap rule, volatility measure or drawdown statistic computed across them is counting scheduled events as market movement, on dates that were known at issue.
4
Ask whether the last move was rates or credit
Compare against similar-maturity paper and against the issuer’s other bonds. The two look the same on the line and only one of them reverses with time, so the same chart supports opposite conclusions depending on an answer the chart does not hold.

Check yourself

A listed NCD with two years to maturity trades at ₹958 against a face value of ₹1,000, and the market yield on comparable paper does not change for the next twelve months. What does its price chart do, and why?

Simple bhasha mein

FD ki receipt padosi ko bechna

Aapke paas teen saal ki FD hai, 9% pe. Saal bhar baad paisa chahiye, toh padosi receipt le lene ko taiyaar hai — par bank ab nayi FD pe 11% de raha hai, toh woh poora paisa nahi dega. Do cheezein iske baad apne aap hoti hain. Jaise maturity ka din paas aata hai, uska discount chhota hota jaata hai, kyunki bank tay din pe poora ₹1,000 dene waala hai. Aur jis subah interest credit hota hai, receipt us se pichhli shaam se kam ki ho jaati hai — kyunki woh interest nikal ke kisi ke khaate mein chala gaya. Bond ka chart bilkul yahi dikhata hai, aur dono harkatein kisi ke khareedne-bechne se nahi hui. Ginti: ₹1,000 face value, ₹90 saalana, teen saal bache. Yield 9% se 11% hui toh daam ₹951 — 81.08 + 73.05 + 65.81 + 731.19. Chart pe 4.9% ki girawat, borrower ne ek kisht miss nahi ki. Ab ek saal baad, yield wahi 11%: daam ₹966 ho jaata hai (81.08 + 73.05 + 811.62). Kuch nahi badla aur line upar chali gayi. Us saal holder ne kamaya ₹90 interest + ₹15 daam — ₹951 pe 11.0%, yaani theek yield jitna. Sign yaad rakho, yahi asli baat hai: face value se neeche daam ho toh drift upar, upar ho toh drift neeche. Option premium mein decay hamesha ek hi taraf hoti hai; bond mein daam batata hai kaunsi taraf. Aur teesri baat — teen saal pe sensitivity 2.48 thi, do saal pe 1.73 ho gayi: bara saal mein instrument 30% kam volatile ho gaya, bazaar mein kuch badle bina. ATR ka multiple waala stop isi liye har saal apne aap tight hota jaata hai, aur wahi purana rule chupchaap bada position le leta hai.

What to remember

A bond has a date on which it is repaid at a stated amount, so its price has a built-in drift towards that amount at an unchanged yield.
The drift takes its sign from the price: upward below face value, downward above it — the mirror of an option premium, which only ever decays.
Modified duration falls as maturity approaches, so the chart quietens on its own and any range-based stop or position size drifts with it.
A step down of roughly one coupon on no news is the interest leaving, and whether the accrual is inside the quoted price is answered by looking at two record dates.
A rate-driven fall reverses with time and a credit-driven fall generally does not, they look identical on the line, and the discriminator is whether comparable paper moved.

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