PREPARED BYSumit kumar Akhil kalra Gautam purswani Tushar sinha Varun vats Ankit mohania

Capital Market
Long Term Securities

Money Market
Short Term Debt Instruments

Equity Market

Debt Market

Treasury Bills CDs CPs

Government Bonds
Government Bonds PSU Bonds Corporate Bonds

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A Government security is a tradable instrument issued by the Central Government or the State Governments. It acknowledges the Government¶s debt obligation. Such securities are short term (usually called treasury bills, with original maturities of less than one year) or long term (usually called Government bonds or dated securities with original maturity of one year or more).

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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 2. Issued at face value No default risk as the securities carry sovereign guarantee.1. 3. 4. . 5.

.Redeemed at face value on maturity 9. 10. 8.Maturity ranges from of 2-30 years.Can be held in D-mat form.6.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). 7.Securities qualify as SLR investments (unless otherwise stated).

return in the form of coupons (interest) Maximum safety .Government securities can also be used as collateral to borrow funds in the repo market. Wide range of maturities . Used as collateral .€ Fixed Income .Government securities are available in a from 91 days to as long as 30 years to suit the duration of a bank's liabilities. € € € € . Highly Liquid .as they carry the Sovereign¶s commitment for payment of interest and repayment of principal.Government securities can be sold easily in the secondary market to meet cash requirements.

Besides banks. smaller investors like Co-operative banks. Transparent price dissemination mechanism Statutory Requirement ± banks are required to invest a certain minimum level of their SLR holdings in the form of Government and other approved securities. safe and efficient system of settlement. It ensures transfer of securities by the seller simultaneously with transfer of funds from the buyer.Delivery versus Payment (DvP) mechanism which is a very simple. Provident Funds are also required to hold Government securities. insurance companies and other large investors.€ No Settlement Risk . thereby mitigating the settlement risk. € € € . Regional Rural Banks.

. 2008 The market for government securities is the oldest and most dominant in terms of market capitalisation.Market Capitalisation .trading volume and number of participants.NSE-WDM Segment as on March 31.

40%.€ € A bond is essentially a loan an investor lends to the bonds¶ issuer. The investor generally receives regular interest payments on the loan until the bond matures or is called. For example a GS CG2008 11. . 3 main components of a bond ± Face Value Coupon Rate Maturity Period € € The name of the bond itself conveys the key features of a bond. at which point the issuer repays you the principal.40% bond refers to a Central Government bond maturing in the year 2008. and paying a coupon of 11.

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€ Typically. higher interest rates mean lower prices. and vice versa. .

€ The higher the price you pay for a bond. and vice versa. . the lower the yield.

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€ € . The tenor of dated securities can be up to 30 years. payable at fixed time periods (usually half-yearly). State Development Loans (SDLs):-SDLs are dated securities issued through an auction similar to the auctions conducted for dated securities issued by the Central Government. Dated Government Securities:-Dated Government securities are longer term securities and carry a fixed or floating coupon (interest rate) paid on the face value. They are issued at a discount and redeemed at the face value at maturity.€ Treasury Bills (T-Bills):-Treasury Bills are zero coupon securities and pay no coupon.

€ Municipal Bond A municipal bond is a bond issued by a city or other local government. or their agencies i. bridges or schools. Municipal bonds are exempt from federal taxes and from most state and local taxes. .e. and are popular with people in high income tax brackets. They are bought for their favorable tax implications. especially if you live in the state in which the bond is issued. any governmental entity below the state level They are used to fund expenditures such as the construction of highways.

. Fixed Rate Bonds ± These are bonds on which the coupon rate is fixed for the entire life of the bond.1.

2 Floating Rate Bonds ± Floating Rate bonds are securities which do not have a fixed coupon rate and the coupon is re-set at pre-announced intervals based on a specified methodology. they are issued at a discount to face value . Like Treasury Bills. 3 Zero Coupon Bonds ± Zero coupon bonds are bonds with no coupon payments.

. Capital Indexed Bonds ± These are bonds.Bonds with Call/ Put Options-± Bonds can also be issued with features of optionality wherein the issuer can have the option to buyback (call option) or the investor can have the option to sell the bond (put option) to the issuer during the currency of the bond. the principal of which is linked to an accepted index of inflation with a view to protecting the holder from inflation.4. 5.

Fertilizer Companies.Special Securities ± In addition to Treasury Bills and dated securities issued by the Government of India under the market borrowing programme. as compensation to these companies in lieu of cash subsidies.6. . special securities to entities like Oil Marketing Companies. the Food Corporation of India. etc. the Government of India also issues. from time to time.

€ STRIPS are instruments wherein each cash flow of the fixed coupon security is converted into a separate tradable Zero Coupon Bond and traded. € .Steps are being taken to introduce new types of instruments like STRIPS (Separate Trading of Registered Interest and Principal of Securities).

€ An auction sale is conducted by the RBI who permit buyers one against other.1992 € An auction may either be yield based .Bids are arranged in ascending order and the cut-off yield is arrived at the yield corresponding to the notified amount of the auction . the securities going to the highest bidder. The auction system of government securities is relatively new in India starting from June 2.

Notified Amount: Rs.1000 crore .

Bids which are below the cut-off price are rejected .€ price based-Bids are arranged in descending order and the successful bidders are those who have bid at or above the cut-off price.

auction could be classified as € Uniform Price based and € Multiple Price based. € .Depending upon the method of allocation to successful bidders.

SGL Account Gilt Account . Mumbai acts as the registry and central depository for the Government securities.€ The Public Debt Office (PDO) of the Reserve Bank of India. Government securities may be held by investors either as € € Physical form : Demat form : The holders can maintain their securities in dematerialized form in either of the two ways: 1. 2.

. The securities can be bought / sold in the secondary market either € Over the Counter (OTC) € Negotiated Dealing System (NDS) € Negotiated Dealing System-Order Matching (NDS-OM).€ There is an active secondary market in Government securities.

.It is observed that the market is dominated by dated government securities (including state development loan).

€ Open Market Operations (OMOs) OMOs are the market operations conducted by the Reserve Bank of India by way of sale/ purchase of Government securities to/ from the market with an objective to adjust the rupee liquidity conditions in the market on a durable basis. .

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.€ Liquidity Adjustment Facility (LAF) LAF is a facility extended by the Reserve Bank of India to the scheduled commercial banks (excluding RRBs) and primary dealers to avail of liquidity in case of requirement or park excess funds with the RBI in case of excess liquidity on an overnight basis against the collateral of Government securities including State Government securities. Basically LAF enables liquidity management on a day to day basis.

€ € .5 percentage point to 8 percent in the 11th increase since March 2010. or 0. Bonds Drop as Rupee Strengthens on Bigger-ThanExpected Rate Gain 26 jul 2011 € € India·s government bonds tumbled the most in 15 months and stocks had the biggest slide in five weeks after the central bank boosted borrowing costs more than economists estimated to tackle inflation.€ Sensex.15 percentage point. Yields on 10-year debt surged to an eight-week high after the Reserve Bank of India raised its repurchase rate by 0. to 8.44 percent is the biggest jump since April 2010. The yield on the 7.8 percent government bond due April 2021 rose 15 basis points.

.Government securities recovered on fresh buying by banks and corporates and call rate also edged up on the overnight call money market here on Thursday on stray demand from borrowing banks ahead of long weekend holidays.

Bonds are exempt from state and local taxes. Examples include Fannie Mae. Some agency bonds like Fannie Mae and Freddie Mac are taxable.S. have access to sufficient credit at affordable rates. Others are exempt from state and local taxes. like farmers. and homeowners. and TVA. but considered low in risk if held until maturity.€ € € € € € Government (Treasury) The U. Freddie Mac. Yield is lowest among bonds. The yield is slightly higher than government bonds and still very low risk. .S. typically to ensure that various constituencies. Government agencies (also called Government Sponsored Enterprises) issue bonds to support their mandates. Treasury issues bonds to pay for government activities and pay off the national debt. students. Agency(GSE) U.

etc. state. cover expenses. Rating agencies help you assess the credit risk. and local taxes. € € € € . and finance other activities The yield and risk are generally higher than government and municipals. counties. depending on your tax bracket. The majority of munis are exempt from federal. Rating agencies help investors assess the credit risk. This can raise the effective yield of munis above other types of bonds. Corporate bonds are fully taxable.* Corporate Corporations issue bonds to expand. and towns issue bonds to pay for public projects (roads. cities.€ Municipal (´munisµ) States. modernize.) and finance other activities.

Mortgage-backed bonds are fully taxable.€ Mortgage-backed Banks and other lending institutions pool mortgages and offer them as a security to investors. € € . Examples include Ginnie Mae. Fannie Mae. This raises money so the institutions can offer more mortgages. Mortgage-backed bonds have a yield that typically exceeds high-grade corporate bonds with comparable maturity. which can result in lower interest payments to the investor. and have a low credit risk. if interest rates drop). The major risk of these bonds is if lenders repay their mortgages early (for example. and Freddie Mac.

. Primary Dealers play an important role in market making of securities. Other participants include co-operative banks. provident and pension funds. mutual funds.€ Major players in the Government securities market include commercial banks and primary dealers besides institutional investors like insurance companies. regional rural banks.

The major participants in the WDM are the Indian banks. foreign banks and primary dealers .

etc. Specifically. liquidity in the market. keeps fluctuating in the secondary market. such as..€ The price of a Government security. the prices of Government securities are influenced by the level and changes in interest rates in the economy and other macro-economic factors. expected rate of inflation. . The price is determined by demand and supply of the securities. like other financial instruments.

€ Market risk risk € Reinvestment € Liquidity risk .

2001 for providing exclusive clearing and settlement for transactions in Money. GSecs and Foreign Exchange. . (CCIL) was set up in April.€ The Clearing Corporation of India Ltd.

. v. ii.€ The main benefits derived by the market through CCIL settlement are: Counterparty Risk Settlement Risk Reduction in Intraday Liquidity requirement Multilateral Netting Increase Operational efficiency i. iii. iv.

All "When Issued´ transactions are on an "if" basis. indicates a conditional transaction in a security notified for issuance but not as yet actually issued.€ 'When Issued'. . to be settled if and when the actual security is issued. a short term of "when. as and if issued".

S.S.S. pushing yields on five-.and 10-year notes to historic lows. Treasuries have returned 2. as investors sought a refuge on concern U.€ Treasuries surged.3 percent since S&P lowered the U. credit rating on Aug. Yields on 30-year bonds dropped this week the most since 2008 after the Federal Reserve said earlier in August it would keep borrowing costs unchanged until at least mid-2013 and Standard & Poor¶s lowered the top U. credit rating. seven. growth is slowing and Europe¶s sovereign-debt crisis is getting worse. 5. .

€ RBI approves Goldman Sachs to trade in Indian government bonds € Underwriting Auctions for Government Securities € India's Government Bond Yield for 10 Year Notes rallies 40 basis points during the last 12 months € Indian bonds yields to remain ranged .

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