An Overview of the Indian

Debt Market

Prakash Wadhwani
Constituents of the Debt Market

Lenders
Lenders
Constituents of the Debt Market

Lenders
Lenders Borrowers
Borrowers
(Investors)
(Investors) (Issuers)
(Issuers)
Constituents of the Debt Market

Instruments
Instruments
(Bonds)
(Bonds)

Lenders
Lenders Borrowers
Borrowers
(Investors)
(Investors) (Issuers)
(Issuers)
 Constituents of the Debt Market

Instruments
Instruments
(Bonds)
(Bonds)

Lenders
Lenders Borrowers
Borrowers
(Investors)
(Investors) (Issuers)
(Issuers)

Institutions
Institutions
 Debt Market Instruments

Bond

A bond is a loan you give to a borrower.

Features of a Bond

Maturity or Tenor

Call Provision

Put Provision

Convertibility

Security

Coupon
Features of a Bond

Maturity
Maturityor
orTenor
Tenor

Call Short
CallProvision
Provision Tenor

Put
PutProvision
Provision

Convertibility
Convertibility Long
Tenor
Security
Security

Coupon
Coupon Medium
Tenor
Features of a Bond

Maturity
MaturityororTenor
Tenor

Call
CallProvision
Provision

Put
PutProvision
Provision

Convertibility
Convertibility

Security
Security

Coupon
Coupon
Features of a Bond
Maturity
MaturityororTenor
Tenor

Call
CallProvision
Provision

Put
PutProvision
Provision

Convertibility
Convertibility

Security
Security

Coupon
Coupon
Features of a Bond
Maturity
MaturityororTenor
Tenor

Call
CallProvision
Provision Fully
Convertible
Put Bonds
PutProvision
Provision

Partly
Convertibility
Convertibility Convertible
Bonds
Security
Security
Non-
Convertible
Coupon
Coupon Bonds
Features of a Bond
Maturity
MaturityororTenor
Tenor

Call
CallProvision
Provision

Put
PutProvision
Provision Secured
Bonds
Convertibility
Convertibility

Security
Security Unsecured
Bonds
Coupon
Coupon
Features of a Bond
Maturity
MaturityororTenor
Tenor

Call
CallProvision
Provision
Fixed
Put
PutProvision
Provision Rate

Convertibility
Convertibility Floating
Rate
Security
Security
Zero
Coupon
Coupon Coupon
Features of a Bond

Par
Par Value
Value

Discount
Discount

Premium
Premium
Why Invest in Bonds?
Higher
HigherReturns
ReturnsThan
ThanBanks
Banks

Relatively
RelativelySafe
Safe

Less
LessPrice
PriceFluctuations
Fluctuations

Regular
RegularPredictable
PredictableReturns
Returns

Needs
NeedsLess
LessTracking
Tracking

Tax
TaxBenefits
Benefits
 Yield

Current
CurrentYield
Yield

Yield
Yieldto
toMaturity
Maturity

Yield
Yieldto
toCall
Call
Risks of Investing in a Bond
Default
DefaultRisk
Risk

Interest
InterestRate
RateRisk
Risk

Reinvestment
ReinvestmentRisk
Risk

Counter-party
Counter-partyRisk
Risk

Price
PriceRisk
Risk
Risks of Investing in a Bond
Default
DefaultRisk
Risk

Interest Rate Risk

Reinvestment Risk

Counter-party Risk

Price Risk
Risks of Investing in a Bond
Default Risk

Interest
InterestRate
RateRisk
Risk

Reinvestment Risk

Counter-party Risk

Price Risk
Risks of Investing in a Bond
Default Risk

Interest Rate Risk

Reinvestment
ReinvestmentRisk
Risk

Counter-party Risk

Price Risk
Risks of Investing in a Bond
Default Risk

Interest Rate Risk

Reinvestment Risk

Counter-party
Counter-partyRisk
Risk

Price Risk
Risks of Investing in a Bond
Default Risk

Interest Rate Risk

Reinvestment Risk

Counter-Party Risk

Price
PriceRisk
Risk
 Credit Rating

Credit rating is an opinion on the relative

ability and willingness of an issuer to make
timely payments on specific debt or related
obligations over the life of the instrument.
Credit Analysis Factors

Capacity
Capacityto
toPay
Pay

Capital
Capital

Collateral
Collateral

Condition
Condition

Character
Character
Benefits of Credit Rating
Independent
Professional
Judgment

Establish Link
Between
Risk and Return

Standard
Rating
Scale
Credit Rating Agencies

CRISIL

CARE

ICRA

FITCH
 Credit Rating Symbols
Ratings CRISIL CARE ICRA
Highest safety AAA C-AAA LAAA
High Safety AA C-AA LAA
Adequate safety A C-A LA
Moderate Safety BBB C-BBB LBBB
Inadequate Safety BB C-BB LBB
High Risk B C-B LB
Substantial Risk C C-C LC
Likely to default D C-D LD
Factors Considered in Credit Rating

Business Risk

Financial Risk

Assessment of
Management

Evaluation
Evaluation of
of
the
the Bond
Bond
Who Issues Bonds?
GOI
State Governments
Quasi-Government

PSUs
Banks
Financial Insts

Corporates
 How Bonds Are Issued?

Private Public
Auction
Placement Offers
 How Bonds Are Issued?

Private Public
Auction
Placement Offers

Yield-Based
Yield-BasedAuction
Auction Price-Based
Price-BasedAuction
Auction
 How Bonds Are Issued?

Private Public
Auction
Placement Offers

Uniform
UniformPrice
PriceAuction
Auction Multiple
MultiplePrice
PriceAuction
Auction
Types of Bonds

Based on Issuer

Based on Coupon

Based on Callability

Based
Based onon Terms
Terms
of
of the
the Issue
Issue

Based
Based on
on Structure
Structure
 Types of Bonds

Based on
Based on Issuer
Issuer

State
Based on Coupon SPV
GOISECs Govt.
Bonds
Bonds
Based on Callability
Dated PSU PFI
Based
Based onon Terms
Terms Securities Bonds Bonds
of
of the
the Issue
Issue

Based
Based on
on Structure
Structure Treasury Municipal Corporate
Bills Bonds Bonds
 Types of Bonds

Based on Issuer
Fixed Floating
Based on Coupon Interest Rate
Bonds Bonds
Based on Callability

Based
Based onon Terms
Terms Inflation Zero
of
of the
the Issue
Issue Indexed Coupon
Bonds Bonds
Based
Based on
on Structure
Structure
 Types of Bonds

Based on Issuer

Based on Coupon

Freely
Based on Callability Deferred
Callable
Call Bond
Bonds
Based
Based onon Terms
Terms
of
of the
the Issue
Issue

Based
Based on
on Structure
Structure
 Types of Bonds

Based on
Based on Issuer
Issuer

Based on Coupon Bearer Registered Secured

Bonds Bonds Bonds

Based on Callability
Unsecured Senior Subordinate
Based
Based onon Terms
Terms Bonds Bonds Bonds

of
of the
the Issue
Issue
Convert-
Based
Based on
on Structure
Structure ible
SPN with Perpetual
Warrants Bonds
Bonds
 Types of Bonds

Based on
Based on Issuer
Issuer

Based on Coupon Mortgage Asset

Backed Backed
Based on Callability Securities Securities

Based
Based onon Terms
Terms
of
of the
the Issue
Issue Pass Thru’ Collatarized STRIPs
or Mortgage
Based
Based on
on Structure
Structure Participation Obligation
Certificates
Bonds Investing Strategies

Bond
Diversification
Laddering

Bond
Barbell
Swapping
Bonds Investing Strategies

Diversification
Diversification
Bond
Laddering

Bond
Barbell
Swapping
Bonds Investing Strategies

Bond
Bond
Diversification
Laddering
Laddering

Bond
Barbell
Swapping
Bonds Investing Strategies

Bond
Diversification
Laddering

Bond
Swapping
Barbell
Barbell
Bonds Investing Strategies

Bond
Diversification
Laddering

Barbell
Bond
Bond
Swapping
Swapping
 Secondary Market for Bonds
Process of Trading

Placing an Order Order Execution Clearing and

Settlement
 Secondary Market for Bonds

Wholesale Retail Negotiated

Debt Debt Dealing
Market Market System
 Secondary Market for Bonds

Retail Negotiated
Wholesale
Wholesale Debt Dealing
Debt
Debt Market System
Market
Market

Ready
Outright
Forward
Buy or Sell
Trades
 Secondary Market for Bonds

Wholesale Negotiated
Debt Retail
Retail Dealing
Market Debt
Debt System
Market
Market
 Secondary Market for Bonds

Wholesale Retail
Debt Debt Negotiated
Negotiated
Market Market Dealing
Dealing
System
System
 Market Price of Bonds

Prevailing
Time Credit
Market
to Rating
Rates of
Maturity Revision
Interest
 Valuation Concepts

Book Value

Liquidation Value

Market Value

Intrinsic Value
 Valuation Concepts

Book Value

Liquidation Value
Book value is the
amount shown in
Market Value
the company’s
balance sheet.
Intrinsic Value
 Valuation Concepts

Book Value

Liquidation Value
Liquidation value
is the amount that
Market Value can be obtained
by selling an
asset.
Intrinsic Value
 Valuation Concepts

Book Value

Liquidation Value Market value is the

value observed in
the marketplace
where buyers and
Market Value sellers
negotiate an
acceptable
Intrinsic Value price for the asset.
 Valuation Concepts

Book Value

Liquidation Value Intrinsic value is the value in the

eyes of the investor and is the
present value of expected
future cash flows to be
received from the investment.
Market Value It is the value based upon:

• Expected cash flows

• Riskiness of the investment
Intrinsic
IntrinsicValue
Value • Investor's required rate of return
Bond Valuation
 Bond Valuation

Bondholder’s Expected Rate of Return

 Bond Valuation

Relation of Coupon with YTM

YTM > Coupon: Bond Sells at Discount

YTM = Coupon: Bond Sells at Par Value
YTM < Coupon: Bond Sells at Premium
 PRAKASH WADHWANI

eMail prakash@rkinvestments.co.in

Telephone 39282504

Cell 9322241253