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The debt market is a bigger source of borrowed funds than the banking system. The market for
debt is larger than the market for equities (i.e., is larger than the stock market). The debt market
is commonly divided into the so-called money market (short-term debt, maturity of one year or
less) and the so-called capital market (long-term debt). Both of these terms are misnomers. All
productive assets are capital (including equities). The terminology may be rationalized by the
convention that capitalized expenses are amortized over periods in excess of one year. "Money
market" instruments are debt and although they can be used as a store of value they can only
be regarded as a medium of exchange in the sense that they are readily sold at a price which is
usually predictable within a short time frame. Moreover, it is hard to base a conceptual
distinction between money & non-money based on a one-year maturity dividing line.
Most debt instruments are not traded through exchanges, but are traded over-the-counter
(OTC) in a telephone/electronic network market where dealers or brokers frequently act as
direct intermediaries. Money-market instruments usually have such large denominations that
they are not accessible to small investors except through mutual funds.
The market for debt can be viewed as a market for money in the sense that sellers of debt
(lenders) have a supply of money which is demanded by would-be buyers (borrowers). In this
model, interest rates are the "price" of money. An increase in demand to borrow money due to
increased economic opportunity increases interest rates (everything else being equal). The
market for debt is influenced by term-to-maturity, credit-worthiness of borrowers, security for
loan and many other factors. By their control of money supply, government central banks try to
manipulate interest rates to stimulate their economies without causing inflation.
In most of the countries, the debt market is more popular than the equity market. This is due to
the sophisticated bond instruments that have return-reaping assets as their underlying. In the
US, for instance, the corporate bonds (like mortgage bonds) became popular in the 1980s.
However, in India, equity markets are more popular than the debt markets due to the dominance
of the government securities in the debt markets.
Moreover, the government is borrowing at a pre-announced coupon rate targeting a captive
group of investors, such as banks. This, coupled with the automatic monetization of fiscal deficit,
prevented the emergence of a deep and vibrant government securities market.
The bond markets exhibit a much lower volatility than equities, and all bonds are priced based
on the same macroeconomic information. The bond market liquidity is normally much higher
than the stock market liquidity in most of the countries. The performance of the market for debt
is directly related to the interest rate movement as it is reflected in the
yields of government bonds, corporate debentures, MIBOR-related commercial papers,and non-
convertible debentures.
The debt market is a market where fixed income securities issued by the Central and state
governments, municipal corporations, government bodies, and commercial entities like financial
institutions, banks, public sector units, and public limited companies. Therefore, it is also called
fixed income market.
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.
Since the Government Securities are issued to meet the short term and long term financial
needs of the government, they are not only used as instruments for raising debt, but have
emerged as key instruments for internal debt management, monetary management and short
term liquidity management.

The returns earned on the government securities are normally taken as the benchmark rates of
returns and are referred to as the risk free return in financial theory. The Risk Free rate obtained
from the G-sec rates are often used to price the other non-govt. securities in the financial
Advantages of debt instruments:
Reduction in the borrowing cost of the Government and enable mobilization of resources
at a reasonable cost.
Provide greater funding avenues to public-sector and private sector projects and reduce
the pressure on institutional financing.
Enhanced mobilization of resources by unlocking illiquid retail investments like gold.
Development of heterogeneity of market participants
Assist in development of a reliable yield curve and the term structure of interest rates.
Risks associated with debt securities

The debt market instrument is not entirely risk free. Specifically, two main types of risks are
involved, i.e., default risk and the interest rate risk. The following are the risks associated with
debt securities:
Default Risk: This can be defined as the risk that an issuer of a bond may be unable to
make timely payment of interest or principal on a debt security or to otherwise comply
with the provisions of a bond indenture and is also referred to as credit risk.
Interest Rate Risk: can be defined as the risk emerging from an adverse change in the
interest rate prevalent in the market so as to affect the yield on the existing instruments.
A good case would be an upswing in the prevailing interest rate scenario leading to a
situation where the investors' money is locked at lower rates whereas if he had waited
and invested in the changed interest rate scenario, he would have earned more.
Reinvestment Rate Risk: can be defined as the probability of a fall in the interest rate
resulting in a lack of options to invest the interest received at regular intervals at higher
rates at comparable rates in the market.

The following are the risks associated with trading in debt securities:
Counter Party Risk: is the normal risk associated with any transaction and refers to the
failure or inability of the opposite party to the contract to deliver either the promised
security or the sale-value at the time of settlement.
Price Risk: refers to the possibility of not being able to receive the expected price on any
order due to a adverse movement in the prices.
The Indian debt market is composed of government bonds and corporate bonds. However, the
Central government bonds are predominant and they form most liquid component of the bond
market. In 2003, the National Stock Exchange (NSE) introduced Interest Rate Derivatives.
The trading platforms for government securities are the Negotiated Dealing System and the
Wholesale Debt Market (WDM) segment of NSE and BSE. In the negotiated market, the trades
are normally decided by the seller and the buyer, and reported to the exchange through the
broker, whereas the WDM trading system, known as NEAT (National Exchange for Automated
Trading), is a fully automated screen-based trading system, which enables members across the
country to trade simultaneously with enormous ease
and efficiency.
Price determination of debt instruments
The price of a bond in the markets is determined by the forces of demand and supply, as is the
case in any market. The price of a bond also depends on the changes in:
Economic conditions
General money market conditions, including the state of money supply in the economy
Interest rates prevalent in the market and the rates of new issues
Future Interest Rate Expectations
Credit quality of the issuer

Debt Instruments are categorized as:
Government of India dated Securities (G Secs) are 100-rupee face-value units/ debt paper
issued by the Government of India in lieu of their borrowing from the market. They are referred
to as SLR securities in the Indian markets as they are eligible securities for the maintenance of
the SLR ratio by the banks.

Corporate debt market: The corporate debt market basically contains PSU bonds and private
sector bonds. The Indian primary Corporate Debt market is basically a private placement market
with most of the corporate bonds being privately placed among the wholesale investors, which
include banks, financial Institutions, mutual funds, large corporates & other large investors.

The following debt instruments are available in the corporate debt market:

Non-Convertible Debentures
Partly-Convertible Debentures/Fully-Convertible Debentures (convertible into Equity Shares)
Secured Premium Notes
Debentures with Warrants
Deep Discount Bonds
PSU Bonds/Tax-Free Bonds


There are various types of debt instruments available that one can find in Indian debt

Government Securities
It is the Reserve Bank of India that issues Government Securities or G-Secs on behalf of the
Government of India. These securities have a maturity period of 1 to 30 years. G-Secs offer
fixed interest rate, where interests are payable semi-annually. For shorter term, there are
Treasury Bills or T-Bills, which are issued by the RBI for 91 days, 182 days and 364 days.
Advantages of Government Securities
Greater safety and lower volatility as compared to other financial instruments.
Variations possible in the structure of instruments like Index linked Bonds, STRIPS
Higher leverage available in case of borrowings against G-Secs.
No TDS on interest payments
Tax exemption for interest earned on G-Secs. up to Rs.3000/- over and above the limit
of Rs.12000/- under Section 80L (as amended in the latest Budget).
Greater diversification opportunities
Adequate trading opportunities with continuing volatility expected in interest rates the
world over
Corporate Bonds
These bonds come from PSUs and private corporations and are offered for an extensive range
of tenures up to 15 years. There are also some perpetual bonds. Comparing to G-Secs,
corporate bonds carry higher risks, which depend upon the corporation, the industry where the
corporation is currently operating, the current market conditions, and the rating of the
corporation. However, these bonds also give higher returns than the G-Secs
Certificate of Deposit
These are negotiable money market instruments. Certificate of Deposits (CDs), which usually
offer higher returns than Bank term deposits, are issued in demat form and also as a Usance
Promissory Notes. There are several institutions that can issue CDs. Banks can offer CDs which
have maturity between 7 days and 1 year. CDs from financial institutions have maturity between
1 and 3 years. There are some agencies like ICRA, FITCH, CARE, CRISIL etc. that offer ratings
of CDs. CDs are available in the denominations of Rs. 1 Lac and in multiple of that.
Commercial Papers
In the global money market, commercial paper is a unsecured promissory note with a fixed
maturity of 1 to 270 days. Commercial Paper is a money-market security issued (sold) by large
banks and corporations to get money to meet short term debt obligations (for example, payroll),
and is only backed by an issuing bank or corporation's promise to pay the face amount on the
maturity date specified on the note. Since it is not backed by collateral, only firms with excellent
credit ratings from a recognized rating agency will be able to sell their commercial paper at a
reasonable price. Commercial paper is usually sold at a discount from face value, and carries
higher interest repayment dates than bonds. Typically, the longer the maturity on a note, the
higher the interest rate the issuing institution must pay. Interest rates fluctuate with market
conditions, but are typically lower than banks' ratesThere are short term securities with maturity
of 7 to 365 days. CPs are issued by corporate entities at a discount to face value.
Non-Convertible Debentures
Non-convertible debentures, which are simply regular debentures, cannot be converted into
equity shares of the liable company. They are debentures without the convertibility feature
attached to them. As a result, they usually carry higher interest rates than their convertible
Disadvantages of Non-Convertible Debentures:
On the other hand, the disadvantage of corporate bonds rests in the fact that investors
require a lot from credit issuer credibility, while returns and principal must be always paid
in time regardless the company profit.
A substantial disadvantage of bonds emissions lies in considerable emission costs
created by costs of issue (costs directly connected with issuing corporate bonds) and
costs of bonds life cycle (costs connected with the particular emission, arising in course
of the life cycle and in connection to paying back the emission).
On the top of it creditors may restrict the issuing company in various ways and have a
right to express their opinions on problem issues the solution of which may affect setting
up claims to the bonds themselves.
For a developing economy like India, debt instruments are crucial sources of capital funds. The
debt instrument in India is amongst the largest in Asia. It includes government securities, public
sector undertakings, other government bodies, financial institutions, banks, and companies.
An investor can invest in money market mutual funds for a period of as little as one day.
Avenues are also available for investing for longer horizons according to your risk
In conclusion, the ability of a continuously evolving and self-propelling enterprise is its ability to
not only learn and adapt to changes and opportunities, but also to make full use of them as and
when possible.
Financial Accounting By Marian Powers
Economic Times
Times Of India
Business Today