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

A Government security is a tradable instrument issued by the Central Government or the State Governments. It acknowledges the Governments 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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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

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

Fixed Income - return in the form of coupons (interest) Maximum safety - as they carry the Sovereigns commitment for payment of interest and repayment of principal. Wide range of maturities - 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 - Government securities can be sold easily in the secondary market to meet cash requirements. Used as collateral - Government securities can also be used as collateral to borrow funds in the repo market.

No Settlement Risk - Delivery versus Payment (DvP) mechanism which is a very simple, safe and efficient system of settlement. It ensures transfer of securities by the seller simultaneously with transfer of funds from the buyer, thereby mitigating the settlement risk. 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. Besides banks, insurance companies and other large investors, smaller investors like Co-operative banks, Regional Rural Banks, Provident Funds are also required to hold Government securities.

Market Capitalisation - NSE-WDM Segment as on March 31, 2008

The market for government securities is the oldest and most dominant in terms of market capitalisation,trading volume and number of participants.

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, at which point the issuer repays you the principal. 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. For example a GS CG2008 11.40% bond refers to a Central Government bond maturing in the year 2008, and paying a coupon of 11.40%.

 Typically,

higher interest rates mean lower prices, and vice versa.

 The

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

Treasury Bills (T-Bills):-Treasury Bills are zero coupon securities and pay no coupon. They are issued at a discount and redeemed at the face value at maturity. Dated Government Securities:-Dated Government securities are longer term securities and carry a fixed or floating coupon (interest rate) paid on the face value, payable at fixed time periods (usually half-yearly). The tenor of dated securities can be up to 30 years. 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.

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

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

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.

3 Zero Coupon Bonds Zero coupon bonds are bonds with no coupon payments. Like Treasury Bills, they are issued at a discount to face value

4. Capital Indexed Bonds These are bonds, the principal of which is linked to an accepted index of inflation with a view to protecting the holder from inflation. 5.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.

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

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

An auction sale is conducted by the RBI who permit buyers one against other, the securities going to the highest bidder. The auction system of government securities is relatively new in India starting from June 2,1992

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

Notified Amount: Rs.1000 crore

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

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

The Public Debt Office (PDO) of the Reserve Bank of India, Mumbai acts as the registry and central depository for the Government securities. 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.

SGL Account Gilt Account

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is an active secondary market in Government securities. 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).

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.

 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.

Sensex, Bonds Drop as Rupee Strengthens on Bigger-ThanExpected Rate Gain

26 jul 2011

Indias 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. Yields on 10-year debt surged to an eight-week high after the Reserve Bank of India raised its repurchase rate by 0.5 percentage point to 8 percent in the 11th increase since March 2010, The yield on the 7.8 percent government bond due April 2021 rose 15 basis points, or 0.15 percentage point, to 8.44 percent is the biggest jump since April 2010.

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.

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

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

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

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

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

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

 Market

risk risk

Reinvestment

Liquidity

risk

 The

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

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main benefits derived by the market through CCIL settlement are: Counterparty Risk Settlement Risk Reduction in Intraday Liquidity requirement Multilateral Netting Increase Operational efficiency

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 'When

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

Treasuries surged, pushing yields on five-, seven- and 10-year notes to historic lows, as investors sought a refuge on concern U.S. growth is slowing and Europes sovereign-debt crisis is getting worse. 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 & Poors lowered the top U.S. credit rating. Treasuries have returned 2.3 percent since S&P lowered the U.S. credit rating on Aug. 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