Debt Market

By

Prof.Palak Rajani

SECURITIES MARKET

EQUITY MARKET

DEBT MARKET

DERIVATIVES MARKET

FUTURES OPTIONS

GOVERNMENT SECURITIES

CORPORATE DEBT MARKET

MONEY MARKET

Debt Market situation where trading of debt The debt market is any market

instruments take place. Examples of debt instruments include mortgages, promissory notes, bonds, and Certificates of Deposit A debt market establishes a structured environment where these types of debt can be traded with ease between interested parties.

The debt market often goes by other names, based on the types of debt

instruments that are traded In the event that the market deals mainly with the trading of corporate bond issues, the debt market may be known as a bond market. If mortgages and notes are the main focus of the trading, the debt market may be known as a credit market When fixed rates are connected with the debt instruments, the market may be known as a fixed income market.

Debt instruments: fundamental features

Debt instruments are contracts in which one party lends money to another on predetermined terms with regard to rate of interest to be paid by the borrower to the lender, the periodicity of such interest payments &

repayment of principal amount borrowed.

In Indian securities markets, we generally use the term

bond for debt instruments issued by Central govt, state govt & PSU. & the term debentures for instruments issued by private corporate sector

 A bond is a contract that requires the borrower to pay

specified payments (interest income & principal) to lender/bondholder. Thus, a bond is like a loan, the issuer is the borrower (debtor) & the holder is the lender (creditor) & coupon is the interest
Features of Bond

Maturity date.
Coupon Principal

 Maturity refers to the date on which the bond matures

& term to maturity refers to number of years remaining for the bond to mature. Coupon rate refers to periodic interest payments that are made by the borrower . It is the product of the principal & coupon rate. It is stated directly- Ex: 8% or indirectly tying with the benchmark rate: (Mibor+ 0.5%) Principal is the amount that has been borrowed is also called Par Value or Face value. Typical FV are Rs 100, Rs1000 & Rs 10000 & above. Generally Govt bonds have face value of Rs 100/-

Example

GS CG2012 7.40% stands for Govt. dated security, issued by the Central Govt. and maturing in 2012 carrying a coupon of 7.40%. TB 364D 160503 stands for Treasury Bill issued for 364 days and maturing on 16/05/03.

Features of Bond
Straight Bonds
Zero Coupon bonds Floating Rate Bonds Bonds with embedded options

Straight bonds : In a plain vanilla bond, coupon is pre-determined rate, as a percentage value of the bond. For Ex: GOI 10.79% 2015

Zero Coupon bonds

In such a bond, no coupons are paid. The bond is

instead issued at a discount to its face value, at which it will be redeemed. Its also called as deep discount bond. Ex NABARD BONDS, kisan vikas patra Floating rate bonds
Bonds whose coupon rate is not fixed, but reset with

reference to a benchmark rate, are called floating rate bonds. Example: Idbi issued a 5 year floating rate bond, in July 1997, with the rates being re-set semi-annually with reference to the 10 year yield on Cg + 50 basis point mark up

Callable bonds
Bonds that allow the issuer to alter the tenor of a bond,

by redeeming it prior to the original maturity date are called callable bonds.
Puttable Bonds Bonds that provide the investor with the right to seek redemption from the issuer, prior to the maturity date , are called puttable bonds

Convertible Bonds
A convertible bond provides the investor the option to

convert the value of the outstanding bond into equity of the borrowing firm, on pre-speicfied terms.
Amortizing Bonds

The structure of some bonds may be such that the principal is not repaid at the end/maturity but over the life of the bond, includes both interest & principal is called an amortising bond. Auto loans , consumer loans & home loans are examples of amortising bond

Asset Backed Securities

Asset backed securities represent a class of fixed

income securities, created out of pooling toghter assets, & creating securities that represent participation in cash flows from the asset pool. For Ex: select housing loans of housing finance company can be pooled & securities can be created , which represent a claim on repayments made by home loan borrowers such securities are called mortgagebacked securities. In Indian context these are known as structured obligations (SO). The process is also called as securitization .

Why you should invest It will not attract any tax deducted at source (TDS). Interest rate is better than bank FD. It offers liquidity as the bonds will be listed on NSE. The bonds may quote at premium on listing. The credit rating of the bond indicates highest degree of safety with regard to timely payment of interest and principal on the instrument. AAA by CARE and AAA/Stable by CRISIL If the call option is not exercised by the bank, the coupon rate will be enhanced by 50 bps.

Classification of Indian Debt Market

Indian debt market can be classified into two categories:

Government Securities Market (G-Sec Market): It consists of central and state government securities. It means that, loans are being taken by the central and state government.It is also the most dominant category in the India debt market. Bond Market: It consists of Financial Institutions bonds, Corporate bonds and debentures and Public Sector Units bonds. These bonds are issued to meet financial requirements at a fixed cost and hence remove uncertainty in financial costs.

Advantages
The biggest advantage of investing in Indian debt market is its assured returns. The returns that the market offer is almost riskfree (though there is always certain amount of risks, however the trend says that return is almost assured). Safer are the government securities.
On the other hand, there are certain amounts of risks in the

corporate, FI and PSU debt instruments. However, investors can take help from the credit rating agencies which rate those debt instruments. The interest in the instruments may vary depending upon the ratings. Another advantage of investing in India debt market is its high liquidity. Banks offer easy loans to the investors against government securities.

Disadvantages

As there are several advantages of investing in India debt market, there are certain disadvantages as well. As the returns here are risk free, those are not as high as the equities market at the same time. So, at one hand you are getting assured returns, but on the other hand, you are getting less return at the same time.
Retail participation is also very less here, though increased recently.

There are also some issues of liquidity and price discovery as the retail debt market is not yet quite well developed

 Information on the size of the various segments of the

debt market in India is not readily available. This is due to the fact that many debt instruments are privately placed & therefore not listed on markets. Rbi regulates the issuance of g-secs, coporate securities come under the purview of SEBI. The periodic reports of issuers & investors are therefore sent to two different regulators. Therefore aggregated data for the market as a whole is difficult to obtain. For Short term lending players are able to lend among themselves such as inter-bank money, inter corporate loans

DEBT INSTRUMENTS
Government Securities
Corporate Bonds Certificate of Deposit Commercial Papers

 Government Securities

Government Bonds-Government bonds also called government securities

(g-secs) or gilt-edged securities. These are generally medium to longterm bonds issued by RBI on behalf of the government of India and state governments
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.
RBI also issues tax-free bonds, called the 6.5% RBI relief bonds, which is a

popular category of tax-free bonds

 Corporate Bonds These comprise generally of Commercial papers & bonds / debentures.

These bonds come from PSUs and private corporations and are offered for an extensive range of tenures up to 15 years. 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.

Commercial Papers There are short term securities with maturity of 7 to 365 days. CPs are issued by corporate entities at a discount to face value.

 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 ` 1 Lac and in multiple of that. In India this market is the least dominant

Participants in the Debt Market

Debt Market is pre-dominantly wholesale markets,

with dominant institutional investor participation. Central Government RBI as investment banker to the government Primary dealers State Government, municipalities Public sector units Corporate Banks Mutual Funds FIIs Provident funds

Changes In Debt Market

THEN
PLAIN VANILLA BONDS STABLE & ADMINISTERED INTEREST RATES SIMPLISTIC MEASURES OF RETURN & LIFE RULES OF THUMB FEW PLAYERS PASSIVE APPROACH ILLIQUID MARKET

NOW
BONDS WITH COMPLEX FEATURES VOLATILE & MARKETDETERMINED INTEREST RATES PRECISE MEASURES OF RETURN & LIFE ANALYTICAL METHODS MORE PLAYERS RELATIVELY MORE ACTIVE APPROACH LIQUID MARKET ?

 Case study SBI bonds

SBI Bonds
State Bank of India (SBI) has come out with a Series 1 and Series 2 Bonds of Face Value of Rs. 10,000 aggregating to Rs. 500 crore with an option to retain oversubscription up to Rs. 500 crore, thus, aggregating to a total of up to Rs. 1,000 crore. The bank intends to deploy the Issue proceeds to augment its capital base in line with its growth strategy. SBI Bond Options Series 1 : It has a maturity of 10 years with a coupon of 9.25% paid annually. It will have a call option after five years and one day with 0.5% additional step-up after five years, in case the call option is not exercised by SBI. Series 2 : It has a maturity of 10 years with a coupon of 9.50% paid annually. It will have a call option after ten years and one day with 0.5% additional step-up after five years, in case the call option is not exercised by SBI.

IES SAPM5 BondValuation 2010

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SBI Bonds
Product Details

The issue opens on Oct 18, 2010 and closes on Oct 25, 2010. The minimum application amount is Rs. 10,000 with multiples of Rs. 10,000. The issuance and trading has to be compulsorily in dematerialized form. The bonds will be listed on NSE. These are Series I & II bonds of Face Value of Rs. 10,000 aggregating to Rs. 500 crore with an option to retain oversubscription up to Rs. 500 crore. Resident Indian individuals, HUF, partnership firms, corporate, banks, financial institutions, insurance companies, mutual funds,, private/public religious / charitable trust, co-operative society can invest in these bonds. Allotment in each of the categories is on a First Come First Serve Basis. Investment upto 5 lacs comes under retail category. Investment above 5 lacs comes under HNI category.

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