Debt Market

Story time
ABC Ltd. Become a renowned organization and now expanded its business throughout the world. Now,
it require further fund for expansion. But, this time Mr. A planned to not issue further shares and
dilute his ownership but to launch an investment option called Bonds, in which it has planned to take
investors money for tenure of 5 years and after that ABC ltd will return back the invested money of
investor. And, during this 5 years, company will pay 10% interest/coupon to each of its investor who
has invested in this bond.

If you have invested Rs. 50,000 at Rs. 1000 of each bonds in this bond. (Face value will be Rs. 1000) on
1st March 2013. You will get 50 bonds, Yearly interest of Rs. 5000 (1,000X10%=Rs. 100 per bond &
100X50 no. of bonds = Rs. 5,000 as interest amount)

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 WHAT IS DEBT?
In English the meaning of debt is loan, the same is the meaning of Debt in investment.

It is a contract between issuer and investor on pre-determined rate of interest, maturity and the
repayment of the principal amount.

The investor in Debt market is a lender for the issuer.

The major investor in this are institutional investor (corporate, Banks, Insurance etc.)

Instrument Features:

 Maturity: The period of bonds, it is life spam of bond, after this bond doesn’t exist in the market.

 Interest/Coupon: This is a amount that issuer pays to investor to on

daily/weekly/monthly/quarterly/annually. This measures in percentage and it is paid on face value.

 Principal Amount: This is a money that an investor invest.

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 Debt Market

Organized Unorganized
Debt Market Debt Market

Bonds & Money

Fixed Deposits
NCDs lenders

Primary Secondary Primary Non-traded on

Market Market Market exchange

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 Debt Market:
 Bonds: The major issuer is corporate, It issue at a price and pay regular interest amount

and at the maturity it pays back the investors’ capital. After the issue of a bond, it can be

traded in the secondary market (as like as equity).

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 Debentures: Basic feature of NCDs is as same as Bonds, the only difference is
there are two types of debentures.

 Convertible: this gets converted in shares after some period of time.

 Non-Convertible: Debentures cannot be converted into shares, it has a

maturity value and investor gets the regular interest and get back the capital
after the maturity.

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 Debt Market
 Fixed Deposit: There are two types of FD (Fixed Deposit)

 Bank FD: In this issuer is a bank, t has a fix tenure, and a fix interest rate, (it is perceive
as safer investment option).

 Corporate FD: In this issuer is a corporate (a company), the rest feature is as same as
bank FD. It offers higher interest rate then Bank FD.

Bank FD
• Issuer is a bank
• It has a fix tenure
• It has fix interest rate
• It is perceive safer than Corporate FD
• Current Average rate of Interest in 9%
• Has insurance of upto Rs. 1 lac of FD
Corporate FD
• Issuer is a Corporate
• It has a fix tenure
• It has fix interest rate
• It is perceive as riskier than Bank FD
• Current Average rate of Interest in 10.50%
• Has no insurance of investment. Max. you
can file a complaint against the company in
SEBI or RBI

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 FD v/s Bonds & FDs
• Fixed Deposits
• Issuer is a bank & Corporate
• It has a fix tenure
• It has fix interest rate
• It is non-traded in exchange
• Investor have to hold it till maturity
• Penalty on pre-matural
• Bonds & NCD’s NCDs
• Issuer is a Corporate
• It has a fix tenure
• It has fix interest rate
• It is traded in exchange
• Investor can sell in exchange before
Maturity
• No penalty on pr-matural, because
one can trade in the market
 Risk Associated:
One of a major risk in Debt market is a default risk; it means a company unable to pay back capital or/and

interest amount.

To reduce that risk, there are few agencies who tracks the fundamental situation of the company and give

rating the particular company. (One of the famous credit rating agencies is CRISIL). These agencies are

known as Credit Rating Agency.

The ratings describes like;

AAA- Most fundamental company safest company8 to invest, and it gradually reduces its quality with AA,

A, BBB, BB, B CCC, CC, C, and is default company.

Lower the credit rating, higher the interest rate that a company offers to its client.
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 Interest Rate Risk
• Something which we can earn but not able to earn, because we have blocked our funds
somewhere else. This is known as interest rate risk.

• Means, the interest rate is keep on changing, so if an investor invested at 10% interest
rate FD/Bond, and there is a new bond launched with 12% interest rate, so this investor
is loosing this 2% extra benefit, this is known as interest rate risk.

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 How secondary markets function in Debt Market

• The function of secondary market is as same as equity market. However, Debt

market is not that volatile then equity market.

• The prices fluctuates in Debt market due to interest rate fluctuations.

If interest rate comes down, the price of bonds goes up and vice a versa.

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 Pariksha 2
1. Who can invest in Bonds?

1. Individual

2. Insurance, Banks etc.

3. NRI

4. All of the above

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2. Which of the following feature is not available in Bonds?

1. Regular Interest Payment

2. Maturity

3. Can be tradable in stock exchange

4. Can be converted in equity

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3. Coupon rate and interest rates are two different concepts.

1. True

2. False

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4. What is Coupon?

1. A piece of paper

2. Rate of return.

3. Interest rate

4. 2nd & 3rd

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5. If a company is paying interest of Rs. 250 every month and rate of interest is 25%.

What is the face value of bond?

1. Rs. 100

2. Rs. 1000

3. Rs. 10

4. Cannot say

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6. Fixed Deposit is tradable in secondary market

1. True

2. False

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7. Corporate FD offers higher rate than Bank FD.

1. True

2. False

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8. It’s safe to invest in 20% interest rate corporate FD

1. True

2. False

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 DISCLOSURE
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