Types of instruments

traded in the debt

market
 The debt
Market
segments

Govt. securities Private sector bonds

Public sector bonds
market

Govt. guaranteed bonds Debentures

Coupon bearing bonds
Debentures Commercial papers
Zero coupon bonds
PSU bonds Floating rate bonds
Treasury bills
Commercial papers Zero coupon bonds
Floating rate bonds
Deep discount bonds Certificate of deposits
 Zero coupon bonds: Also known as zero interest bonds. They are sold at
a discount from their face value. The difference between the face value
and the acquisition cost is the gain/return to the investor. For example: a
bond of the face value of Rs 1000 may be sold at discounted value of Rs
300 and repayable at its face value of Rs 1000 after 6 years. Thus the
difference between the face value and discounted value is the interest for
that period.
 Deep discount bonds: these are also of the nature of zero coupon bonds.
They are issued at a heavy discount and are repayable at face value. At
present these are issued by the public financial institutions like IDBI and
SIDBI etc.
 For example in 1992, IDBI issued deep discount bond at Rs 2700 which
was payable after 25 years at the face value of Rs 1,00,000.
 Treasury bills: A treasury bill is a promissory note issued
by the Government for a specified period, usually for the
year. The govt. promises to pay the amount, mentioned in
the treasury bill, to the bearer of the instrument on the due
date. Treasury bills are issued by the RBI on behalf of
central govt. to meet the temporary deficits of the govt. the
rate of discount is fixed by RBI from time to time.
 Commercial papers: a commercial paper is a short term
loan of fixed maturity, bearing interest or issued at a
discount, given to a company in exchange of a promissory
note, which is negotiable. Commercial papers are issued as
per the RBI guidelines.
The CP can be issued for maturities between 7 days and not
more than I year.
The CP has to be issued in the form of promissory note and in
the format prescribed by the RBI. The company must get
the credit rating from the agency.

Certificate of Deposit: The certificate of deposit is a document

of title similar to a time deposit receipt issued by a bank.
However, there is no need of prescribed interest rate on
such funds and the banks have the freedom to issue at a
discount or face value. Advantages:
The banker is not required to en cash the deposit before the
date of maturity. Hence it is assured of funds for a
minimum period.
 Debentures: Debentures are issued by the public sector
and private sector market segment of the debt market. Like
a promissory note, debentures represents creditor ship
securities and debenture holders are long term creditors of
the company. As a secured instruments, it is a promise to
pay interest and repay principal at stipulated times.
 Government guaranteed bonds: These bonds are issued
by public sector bonds market segment of the debt market.
Such bonds have government backing as regards to the
payment of interest and repayment of the principal amount.
Primary and secondary segment of the debt market

Primary segment of the debt market: In the primary

market, new debts are issued through;
 A) Public prospectus

 B) right Issues

 C) Private placement
 Public prospectus: Public issue through prospectus is the
most popular method of raising funds. This involves
inviting public subscription through advertising and issue of
prospectus.
 Right issue: Right issue is offered to the existing investors
only. Such an issue is offered as per the guidelines of RBI
and SEBI.
 Private placement: The private placement market for the
debt issues is popular because the cost of raising funds is
low. Under this method, the issuer arranges with some
issuing house, broker or underwriter to purchase the debts
from the issuer and to privately place them with its clients.
Such as sale is described as “private placing”.
Secondary segment of the debt market
 The debt instruments are traded on the OTCEI, BSE, NSE
(WHOLESALE DEBT MARKET SEGMENT. The NSE
has set up a separate segment for trading in debt securities
known as Wholesale debt market segment of the exchange.
The NSE commenced its operations in June 1994 with the
WDM segment of the exchange.
 Whole sale Debt market segment: The WDM segment
provides facility for corporate and institutional investors to
trade in instruments such as Government securities, treasury
bills, public sector undertaking bonds, units of mutual
funds, certificate of deposits, commercial papers and so on.
 Trading member of WDM: These are the recognized
members of the National Stock Exchange Ltd (NSE), body
corporate, subsidiaries of banks, and financial institutions
can become trading members. They must have a minimum
net worth of Rupees 2 crore.