UNIT 3

FIXED INCOME SECURITIES

Dr Suresha B
School of Business and Management

MISSION VISION CORE VALUES

CHRIST is a nurturing ground for an individual’s Excellence and Service Faith in God | Moral Uprightness
holistic development to make effective contribution to Love of Fellow Beings
the society in a dynamic environment Social Responsibility | Pursuit of Excellence
 CHRIST
Deemed to be University

Welcome!
Session Guidelines
● KINDLY LOG IN WITH YOUR CHRIST UNIVERSITY EMAIL
(NOT PERSONAL EMAIL)
● Please mute your microphones
● If you would like to say something or ask a question please use the
chat box.
● Switching off your video will help with better connectivity for all
● If there is a delay in the presentation please wait online and I will get
back to you.
● If you need any help or support please reach out to my email
suresh.b@christuniversity.in

Excellence and Service

 CHRIST
Deemed to be University

Unit Outline
● Overview of Bond Sectors and Instruments (2 Hrs)
● Types, features, credit risk characteristics and distribution
methods for government securities; coupon and principal strips
for stripped Treasury securities;
● Mortgage-backed securities; collateralized mortgage
obligation; tax-backed debt and revenue bonds;
● Corporate Bonds, medium-term notes, structured notes,
commercial paper, negotiable CDs and bankers acceptances;
asset backed securities, motivation for issuance and external
credit enhancements; collateralized debt obligations; primary
and secondary markets for bonds.

Excellence and Service

5
6
 Participants and Products in DM
Issuer Instrument Maturity Investors
Central Dated 2-30years RBI, Banks, Insurance
Government Securities Companies, Provident
Funds, Mutual Funds,
PDs, Individuals
Central T-Bills 91/182/364 RBI, Banks, Insurance
Government days Companies, Provident
Funds, PDs, Mutual
Funds, Individuals
State Dated 5-13 years Banks, Insurance
Government Securities Companies, Provident
Funds, RBI, Mutual Funds,
Individuals, PDs.
PSUs Bonds, 5-10 years Banks, Insurance
Structured Companies, Corporate,
Obligations Provident Funds, Mutual
Funds, Individuals
Corporates Debentures 1-12 years Banks, Mutual Funds,
Corporates, Individuals
Corporates, Commercial 7 days to 1 Banks, Corporate,
PDs paper year Financial institutions,
Mutual Funds, Individuals,
FIIs 7
Scheduled 7 days to 1
Commercial Year
Banks, Corporations,
Banks Certificates
Individuals, Companies,
of Deposit
Trusts, Funds,
Financial (CDs) 1 year to 3 Associations, FIs, NRIs
Institutions Years

Scheduled Bank Bonds 1-10 years

Commercial Corporations, Individual
Banks Companies, Trusts, Funds,
Associations, FIs,
NRIs

Municipal Municipal 0-7 years Banks, Corporations,

Corporation Bonds Individuals, Companies,
Trusts, Funds,
Associations, FIs, NRIs

The issue and trading of fixed income securities by each of these entities are
regulated by different bodies in India.

Government securities and issues by Banks, Institutions are regulated by the RBI.
The issue of non-government securities comprising basically issues of Corporate
Debt is regulated by SEBI.

8
 The Government Securities
• The Government Securities are referred to as Statutory Liquid
Ratio (SLR) securities, as they are eligible securities for the
maintenance of the SLR by the Banks.
•In India, the Central Government issues both, treasury bills and
bonds or dated securities while the State Governments issue
only bonds or dated securities, which are called the State
Development Loans (SDLs).
• G-Secs carry practically no risk of default and,hence, are called
Risk-free GILT-EDGED instruments.

9
 Features of Government Securities
• Issued at face value
• No default risk as the securities carry sovereign guarantee.
• Ample liquidity as the investor can sell the security in the
secondary market
• Interest payment on a half yearly basis on face value
• No tax deducted at source
• Can be held in D-mat form.
• Rate of interest and tenor of the security is fixed at the time
of issuance and is not subject to change (unless intrinsic to
the security like FRBs).
• Redeemed at face value on maturity
• Maturity ranges from of 2-30 years.
• Securities qualify as SLR investments (unless otherwise
stated).
10
 Issue of G-Secs
• G-Secs are issued through auctions conducted by RBI.
• Auctions are conducted on the electronic platform called the
E-Kuber, the Core Banking Solution (CBS) platform of RBI.
• The Public Debt Office (PDO) of the Reserve Bank of India acts
as the registry / depository of G-Secs and deals with the issue,
interest payment and repayment of principal at maturity.
• Most of the dated securities are fixed coupon securities.
 Issue process of G-secs

• G-secs are issued through auction basis by RBI in either a

– Yield-based
• Participants bid for the coupon payable
– Price-based
• Participants bid a price for a bond with a fixed coupon)
• It can be also termed in the following ways for treasury auctions, which
are widely known and used in real markets:
• Discriminatory Price Auctions (French Auction)
• Uniform Price Auctions (Dutch Auction)

12
 Issue process of G-secs
• If all the successful bidders have to pay the cut-off price the
auction is called a Dutch auction, or a uniform price auction.
• If the successful bidders have to pay the prices they have
actually bid, the auction fills up the notified amounts, in various
prices at which each of the successful bidders bid. This is called
a French auction, or a discriminatory price auction. Each
successful bidder pays the actual price bid by him.

13
 Methods of Distributing Government Securities
The central governments use one of the following four methods
to distribute a new issue of securities:
• Regular calendar auction / Dutch style auction
– The winning bidders are allocated securities at yield (price)
they bid. This is also called multiple-price method.
• Regular Calendar Auction / MINIMUM-PRICE offering system
– This is also a regular auction but all the winning bidders are
awarded securities at highest yield accepted by government
(stop-out yield). This is also called single price method.
• Ad hoc auction - NO fixed schedule for sale
• Tap system-
– Tap system is where the additional bonds of previously
outstanding issues are auctioned.
 Segments in the Secondary Debt Market
•The segments in the secondary debt market based on the characteristics
of the investors and the structure of the market are:
– Wholesale Debt Market - Where the investors are mostly Banks,
Financial Institutions, the RBI, Primary Dealers, Insurance
companies, MFs, Corporates and FIIs.
– Retail Debt Market - involving participation by individual investors,
Provident funds, pension funds, private trusts, NBFCs and other
legal entities in addition to the wholesale investor classes.
• Types of trades in the Wholesale Debt Market
– There are normally two types of transactions, which are executed in
the Wholesale Debt Market :
• An outright sale or purchase and
• A Repo trade

15
STRIPS- Separate Trading of Registered Interest and Principal of
Securities
• STRIPS are the securities created by way of separating the cash
flows associated with a regular G-Sec i.e. each semi-annual
coupon payment and the final principal payment to be received
from the issuer, into separate securities.
• They are essentially Zero Coupon Bonds (ZCBs).
• However, they are created out of existing securities only and
unlike other securities, are not issued through auctions.
• Securities represent future cash flows (periodic interest and
principal repayment) of an underlying coupon bearing bond.
• Being G-Secs, STRIPS are eligible for SLR.
STRIPS- Separate Trading of Registered Interest and Principal of
Securities
• In India, currently dated securities (other than FRBs, IIBs and special
securities) having their coupon due on Jan 2 and Jul 2 are eligible for
STRIPPING.
• Guidelines for stripping and reconstitution of G-Secs have already been
issued (IDMD circular dated March 25, 2010).
• For example, when ₹100 of the 8.24%GS2018 is stripped, each cash flow of
coupon (₹ 4.12 each half year) will become a coupon STRIP and the
principal payment (₹100 at maturity) will become a principal STRIP.
• These cash flows are traded separately as independent securities in the
secondary market.
• STRIPS in G-Secs ensure availability of sovereign zero coupon bonds, which
facilitate the development of a market determined zero coupon yield curve
(ZCYC).
STRIPS- Separate Trading of Registered Interest and Principal of
Securities
• STRIPS also provide institutional investors with an additional instrument for
their asset liability management (ALM).
• Further, as STRIPS have zero reinvestment risk, being zero coupon bonds, they
can be attractive to retail/non-institutional investors.
• The process of stripping/ reconstitution of G-Secs is carried out at RBI, Public
Debt Office (PDO) in the CBS package of RBI i.e. E-Kuber through any of the
Primary Dealer at the option of the holder at any time from the date of
issuance of a G-Sec till its maturity.
• Physical securities are not eligible for stripping/reconstitution.
• Minimum amount of securities that needs to be submitted for
stripping/reconstitution is ₹ 1 crore (Face Value) and in multiples thereof.
• They are currently tradable in both OTC market and on NDS-OM.
 Mortgage-backed Security
• A mortgage-backed security (MBS) is an investment similar to a bond that is
made up of a bundle of home loans bought from the banks that issued
them.
• Investors in MBS receive periodic payments similar to bond coupon
payments.
• The MBS is a type of asset-backed security.
 A collateralized mortgage obligation (CMO)
• A collateralized mortgage obligation (CMO) refers to a type of mortgage-
backed security that contains a pool of mortgages bundled together and
sold as an investment.
• Organized by maturity and level of risk,
• CMOs receive cash flows as borrowers repay the mortgages that act
as collateral on these securities.
 Tax bond V/s Revenue Bond
Tax bond Revenue Bond
• It is a municipal bond whose • A revenue bond is a category
primary repayment method is of municipal bond supported by
the revenue from a specific
secured by government tax or fee
project, such as a toll bridge,
revenues. highway or local stadium.
• So long as a municipality • Revenue bonds that finance
generates tax and other forms of income-producing projects are
revenue, bondholders can feel thus secured by a specified
certain that they will be repaid. revenue source.
• The majority of debt issuers are • Typically, revenue bonds can be
issued by any government
supported by income tax, sales tax
agency or fund that is managed
or gas tax, among others. in the manner of a business,
• The projects usually financed by such as entities having
this type of debt include both operating revenues and
economic growth initiatives. expenses.
 Structured Notes
• A structured note is a debt product whose return is linked to the
performance of one or more underlying assets or benchmarks.
• It may be the interest that is payable on the structured note and/or the
principal repayment, that is linked to the performance of the asset or
benchmark.
 Commercial Paper
• Commercial Paper (CP) is an unsecured money market instrument issued in the
form of a promissory note.
• It was introduced in India in 1990 with a view to enabling highly rated corporate
borrowers to diversify their sources of short-term borrowings and to provide an
additional instrument to investors.
• Corporates, primary dealers (PDs) and the All-India Financial Institutions (FIs) are
eligible to issue CP.
• No. A corporate would be eligible to issue CP provided –
– The tangible net worth of the company, as per the latest audited balance sheet, is not less than Rs.
4 crore
– Company has been sanctioned working capital limit by bank/s or all-India financial institution/s; and
– The borrowable account of the company is classified as a Standard Asset by the financing bank/s/
institution/s.
Commercial Paper
Negotiable CDs
 CHRIST
Deemed to be University

End of Unit 3

Excellence and Service