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BONDS AND FIXED INCOME

SECURITIES
• GOVERNMETN OF INDIA SECURITIES
• These are the vehicles through which the GOI
borrows money from the public and institutions for
more than one year.
• Yields at the time of issue are either marketdetermined through an auction, or predetermined by
the RBI.
• Local currency borrowings of any Government are
considered risk free, since the Government can
always print notes to redeem its obligations.
• On account of the lack of default risk (credit risk),
Government securities tend to offer lower yields
than other comparable bonds and debentures.

• Although there is no default risk, there is always a
risk that the market value will fall if interest rates
rise.
• INDEXED BONDS
• Also called inflation-linked securities, the interest
payments or the capital outstanding on these
indexed bonds is linked to an inflation index such as
the consumer price index (CPI).
• The interest rate is fixed at a certain percentage
above inflation.
• Indexed bonds can be very attractive to long-term
investors as they provide a guaranteed hedge
against inflation.

• The problem with indexed bonds, as with other
bonds, is that the capital value of the bonds can
fluctuate as interest rates an perceptions about
inflation change.
• At times, ordinary bonds might be more attractive.
Indexed bonds must be valued at market prices,
which can lead to some bumpy returns in spite of
the assured real nature of the income stream.
• In 2002, the RBI mobilized over Rs 7 billion through
the first ever five-year capital indexed bonds issued
by the GOI.
• SECURITIES ISSUED GUARANTEED BY STATE
GOVERNMENT

• Interest rates offered on securities issued by State
Governments are normally higher than those offered
by the GOI.
• The rates vary according to the credit rating of
individual states.
• The credit rating is determined by independent credit
rating agencies such as the Credit Rating
Information Services of India Ltd (CRISIL), ICRA
(formerly Investment Information and Credit Rating
Agency of India Ltd), Credit Analysis and Research
Ltd (CARE) and Duff & Phelps Credit Rating (DCR).
• There are many State Governments for which the
major credit rating agencies have ‘shadow ratings.

• BONDS AND DEBENTURES
• Bonds are generally issued by public sector
companies and financial institutions in the form of
promissory notes.
• Private sector companies issue debentures.
• When issued as a promissory note, the instrument
becomes transferable by endorsement and delivery.
This increases convenience and the risk factor.
• Debentures require a formal noting of transfer by
the issuer, thus increasing the procedural
requirement.

• The interest rate depends on the term and the credit
rating of the issuer.
• Debentures can be secured against a fixed charge, i.e.
specific assets are mortgaged as security, or against
floating charge, where a pool of movable assets is
offered as the security.
• Debentures may also be unsecured.
• Compared with large Government security market,
both in terms of primary market as well as secondary
market, the corporate bond market is not very big.
• The most important recent development in the
corporate bond market is the migration away from
physical certificates into denaturalized holdings at the
depository.

• COMMERCIAL PAPERS.
• BANK DEPOSITS AND OTHER FIXED DEPOSIT
INVESTMENTS.
• Fixed deposits can also be issued by non-bank
manufacturing or finance companies.
• These are generally for one to three years.
• PUBLIC PROVIDENT SCHEME (PPF)
• Investment with a view to saving on tax is a well
known practice in India.
• PPF is viewed as a low risk and excellent return
vehicle.

• It is also seen as the right avenue for retirement
planning for sunset years.
• PPF has 15-year tenure, extendable by blocks of five
years at a time, up to a maximum of 30 years.
• Interest rates on PPF are revised by the Govt. from
time to time.
• With effect from Sept 2010, the interest rate has been
revised to 9.5%.
• The interest income is completely tax free, and the
amount in the account is not included for wealth tax
purposes.
• Withdrawals are not taxed either.

• A PPF investor has flexibility to decide how much to
invest each year.
• A PPF account can be opened in any head post office
or specified branches of the SBI, nationalized banks
and also in post offices.
• PPF account holders can also avail loan against it.
• It offers the facility of partial withdrawal from the
seventh financial year onwards.
• It can not be terminated before its completion. It is
free from any attachment under any order or decree of
a court in respect of any debt or other liability incurred
by the subscriber.
• It can only be attached by the income tax and estate
duty authorities.

• NATIONAL SAVING CERTIFICATESN
• NSCs are popular investment option.
• They can be purchased by all classes of investors.
• Post offices across India are authorized to issue the
certificates.
• The minimum investment in NSCs is Rs 100.
• There is no maximum limit. Nomination facility is
available.
• NSCs have maturity tenure of six years from the date
they were bought.
• The rate of interest they earn is 8% as on date which
compounded half yearly.

• Premature encashment is not allowed except
few exception cases like death of the holder
or a court order.
• NSC holders can pledge their certificates with
banks and other lending institutions to get a
loan of 75% of the value of the certificates.
• The amount invested in the NSC-VII issue
qualifies for a tax rebate under Income tax.
• The interest accrues during the year is
deemed reinvested and qualifies for a rebate
under INCOME TAX ACT.










KISAN VIKAS PATRA (KVP)
KVP scheme doubles money in 8 years and 7 months.
It offers a rate of interest of 8.25% compounded half yearly.
No tax benefit is available under the Income tax act.
RBI RELIEF BONDS
RBI relief bonds were introduced in April 1997 to tide over
drought conditions then prevalent in India.
These bonds continue to b available fore sale t all branches of
RBI and specified branches of SBI and other nationalized
banks.
The maturity of these bonds is 5 years.
They earn a tax free rate of interest of 8%. The Govt;. has more
recently announced a new six year relief bond.
The interest rate is 7% tax free is less attractive than the
original 8% scheme.

• Yield curve
• The normal or positive yield curve is the upwardsloping yield curve where short-term rates are lower
than long-term rates.
• Inverse or negative yield curve.
• There are often periods when normal conditions do
not apply and different yield curves might result.
• Some times short term rates are higher then longer
term rates.
• This produces a downward, negative, inverse yield
curve.

• Advantages of interest bearing securities:
• Assured income.
• The interest rate is usually agreed at the outset and
so investors know what income stream they will
receive in coupon payments.
• This does not mean that income is absolutely
assured.
• he investors face the risk that interest payments will
not be met and or the investment will not be repaid
by the borrower.
• The risk can be reduced by investing in Govt.
securities.










Stable capital value.
Low risk.
Liquidity.
Disadvantages:
Lower returns.
Little scope for capital gain
Risk associated with fixed interest securities.
Market risk/interest rate risk.
Reinvestment risk
Credit/default risk.