Debt market refers to the financial market where investors buy and sell debt securities, mostly in the form of bonds. These markets are important source of funds, especially in a developing economy like India. India debt market is one of the largest in Asia. Like all other countries.
there are Treasury Bills or T-Bills. These securities have a maturity period of 1 to 30 years. which are issued by the RBI for 91 days. GSecs offer fixed interest rate. 182 days and 364 days. where interests are payable semi-annually.Debt Instruments
Government Securities It is the Reserve Bank of India that issues Government Securities or G-Secs on behalf of the Government of India.
. For shorter term.
However. the industry where the corporation is currently operating. Comparing to G-Secs.Corporate
These bonds come from PSUs and private corporations and are offered for an extensive range of tenures up to 15 years. and the rating of the corporation. the current market conditions. which depend upon the corporation. these bonds also give higher returns than the G-Secs. There are also some perpetual bonds.
. corporate bonds carry higher risks.
that offer ratings of CDs. CRISIL etc.
. Banks can offer CDs which have maturity between 7 days and 1 year. There are some agencies like ICRA. which usually offer higher returns than Bank term deposits. are issued in demat form and also as a Usance Promissory Notes. FITCH.Certificate of Deposit These are negotiable money market instruments. CARE. There are several institutions that can issue CDs. Certificate of Deposits (CDs).
Treasury Bills. Treasury STRIPS are fixed-income securities sold at a significant discount to face value and offer no interest payments because they mature at par. STRIPS State Governments Coupon Bearing Bonds.
An acronym for 'separate trading of registered interest and principal securities'.Government Securities
Central Zero Coupon Bonds. Government Coupon Bearing Bonds.Market Segment Issuer
Debentures. Debentures Public Sector Units PSU Bonds.Public Sector Bonds
Government Agencies/ Govt. Zero Coupon Bonds. Statutory Bodies Guaranteed Bonds. Commercial Paper.
. Inter-Corporate Deposits
3. Floating Rate Bonds.Debentures. Commercial Paper Corporates Bonds.2. Private Sector Bonds.
Certificates of Deposits. Bonds
Financial Institutions Certificates of Deposits. Bonds
quarterly." A spread is a percentage point example 0. The amount of these variable payments are determined by the current market interest rates such as the LIBOR (London Interbank Offered Rate) or Federal Funds Rate (FFR) + a "spread.
.2 that remains constant.Floating Rate Notes Floating Rate Notes are different than fixed rate notes because they pay out variable coupon interest payments at each period (monthly. semi-annually or annually).
Callable bonds have call provisions. or at all. This is usually done when interest rates have fallen substantially since the issue date.
. high-rate bonds and sell low-rate bonds in a bid to lower debt costs. Call provisions allow the issuer to retire the old. which allow the bond issuer to purchase the bond back from the bondholders and retire the issue. Call Risk The risk that a bond will be called by its issuer.Types of risk
Default Risk The risk that the bond's issuer will be unable to pay the contractual interest or principal on the bond in a timely manner.
interest rate risk . By buying a bond. Should the market interest rate rise from the date of the bond's purchase. the bond's price will fall accordingly. the bondholder has committed to receiving a fixed rate of return for a fixed period.
.the risk that bond prices will fall as interest rates rise.
000 bond that had an annual coupon of 12%. Suddenly. Each year the investor receives $120 (12%*$1. For example.000). But imagine that over time the market rate falls to 1%. imagine that an investor bought a $1. that $120 received from the bond can only be reinvested at 1%.
. instead of the 12% rate of the original bond. Reinvestment Risk The risk that the proceeds from a bond will be reinvested at a lower rate than the bond originally provided. which can be reinvested back into another bond.
The key role of the debt markets in the Indian Economy stems from the following reasons: Efficient mobilization and allocation of resources in the economy Financing the development activities of the Government Transmitting signals for implementation of the monetary policy Facilitating liquidity management in tune with overall short term and long term objectives.
92 and it paid a coupon rate of 5%.Current yield
So. if you purchased a bond with a par value of $100 for $95. this is how you'd calculate its current yield:
Yield to maturity
c = annual coupon payment (in dollars. not a percent) Y = number of years to maturity B = par value P = purchase price
Suppose your bond is selling for $950. so the equation to satisfy is 70(1 + r)-1 + 70(1 + r)-2 + 70(1 + r)-3 + 70(1 + r)-4 + 1000(1 + r)-4 = 950 r is 8.53%
. and has a coupon rate of 7%. and the par value is $1000. it matures in 4 years. What is the YTM? The coupon payment is $70 (that's 7% of $1000).
Bond Selling At . . .Satisfies This Condition Discount Coupon Rate < Current Yield < YTM Premium Coupon Rate > Current Yield > YTM Par Value Coupon Rate = Current Yield = YTM
Primary Dealers.Segments in the secondary debt market
Wholesale Debt Market . private trusts. Financial Institutions.
.involving participation by individual investors. Insurance companies. the RBI.where the investors are mostly Banks. pension funds. NBFCs and other legal entities in addition to the wholesale investor classes. Corporates and FIIs. provident funds. MFs. Retail 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
An outright Buy or sell transaction is a one where there is no intended reversal of the trade at the point of execution of the trade.
. The Buy or sell transaction is an independent trade and is in no way connected with any other trade at the same or a later point of time.
The trade is called a Repo transaction from the point of view of the seller and it is called a Reverse Repo transaction from point of view of the buyer.
. A Ready Forward Trade (which is normally referred to as a Repo trade or a Repurchase Agreement ) is a transaction where the said trade is intended to be reversed at a later point of time at a rate which will include the interest component for the period between the two opposite legs of the transactions. So in such a transaction. one participant sells securities to other with an agreement to purchase them back at a later date.
How is the settlement carried out in the Wholesale Debt Market?
The settlement for the various trades is finally carried out through the SGL of the RBI except for transfers between the holders of Constituent SGL A/cs in a particular Bank or Institution like intra-a/c transfers of securities held at the Banks and CCIL. the market participants and the broker has no role to play in the same. As far as the Broker Intermediated transactions are concerned. The Exchange reports the trades to RBI regularly and monitors the settlement of these trades
. the settlement responsibility for the trades in the Wholesale market is primarily on the clients i. The member only has to report the settlement details to the Exchange for monitoring purposes.e.
which provides for active interaction between the market participants in keeping with the negotiated deal structure of the market. Cross Deal Module . Negotiated Deal Module .which permits the reporting of trades undertaken by the market participants through the members of the Exchange.What are the three trading modules in the GILT system? GILT permits trading in the Wholesale Debt Market through the three following avenues: Order Grabbing System .permitting reporting of trades undertaken by two different market participants through a single member of the Exchange.
Guidelines for Issue of Debt Instruments
Requirement of credit rating Requirement in respect of Debenture Trustee Creation of Debenture Redemption Reserves (DRR) Distribution of Dividends (any distribution of dividend shall require approval of the Debenture Trustees) Redemption The issuer company shall redeem the debentures as per the offer document. Disclosure and Creation of Charge