Government Securities

submitted by: Chanchal goyal roll no: 17, M.B.A.(2.3)

A Government security is a tradable instrument issued by the Central Government or the State Governments. 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). In India, the Central Government issues both, treasury bills and bonds or dated securities while the State Governments issue only bonds or dated securities, which are called the State Development Loans (SDLs). Government securities carry practically no risk of default and, hence, are called risk-free gilt-edged instruments. Government of India also issues savings instruments (Savings Bonds, National Saving Certificates (NSCs), etc.) or special securities (oil bonds, Food Corporation of India bonds, fertiliser bonds, power bonds, etc.). They are, usually not fully tradable and are, therefore, not eligible to be SLR securities.

1) Issued at face value 2) No default risk as the securities carry sovereign guarantee. 3) Ample liquidity as the investor can sell the security in the secondary market 4) Interest payment on a half yearly basis on face value 5) No tax deducted at source 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).

Primary Market Secondary Market 1) Primary Market: The Primary Market consists of the issuers of the securities, viz., Central and Sate Government and buyers include Commercial Banks, Primary Dealers, Financial Institutions, Insurance Companies & Co-operative Banks. RBI also has a scheme of non-competitive bidding for small investors

2) Secondary Market: The Secondary Market includes Commercial banks, Financial Institutions, Insurance Companies, Provident Funds, Trusts, Mutual Funds, Primary Dealers and Reserve Bank of India. Even Corporates and Individuals can invest in Government Securities. The eligibility criteria is specified in the relative Government notification

1) Dated Government securities. 2) Zero Coupon bonds. 3) Partly Paid Stock. 4) Floating Rate Bonds. 5) Bonds with Call/Put Option. 6) Capital indexed Bonds.

Dated Government securities are long term securities and carry a fixed or floating coupon (interest rate) which is paid on the face value, payable at fixed time periods (usually half-yearly). 1) They are issued at face value. 2) Coupon or interest rate is fixed at the time of issuance, and remains constant till redemption of the security. 3)The tenor of the security is also fixed. 4)Interest /Coupon payment is made on a half yearly basis on its face value. 5)The security is redeemed at par (face value) on its maturity date.

Zero Coupon bonds are bonds issued at discount to face value and redeemed at par. These were issued first on January 19, 1994 and were followed by two subsequent issues in 1994-95 and 1995-96 respectively. 1)They are issued at a discount to the face value. 2) The tenor of the security is fixed. 3) The securities do not carry any coupon or interest rate. The difference between the issue price (discounted price) and face value is the return on this security. 4) The security is redeemed at par (face value) on its maturity date

Partly Paid Stock is stock where payment of principal amount is made in installments over a given time frame. It meets the needs of investors with regular flow of funds and the need of Government when it does not need funds immediately. The first issue of such stock of eight year maturity was made on November 15, 1994 for Rs. 2000 crore. Such stocks have been issued a few more times thereafter. 1)They are issued at face value, but this amount is paid in installments over a specified period. 2) Coupon or interest rate is fixed at the time of issuance, and remains constant till redemption of the security. 3)The tenor of the security is also fixed. 4) Interest /Coupon payment is made on a half yearly basis on its face value. 5)The security is redeemed at par (face value) on its maturity date.

Floating Rate Bonds are securities which do not have a fixed coupon rate. The coupon is re-set at pre-announced intervals (say, every six months or one year) by adding a spread over a base rate. In the case of most floating rate bonds issued by the Government of India so far,the base rate is the weighted average cut-off yield of the last three 364- day Treasury Bill auctions preceding the coupon re-set date and the spread is decided through the auction. Floating Rate Bonds were first issued in September 1995 in India.

Bonds can also be issued with features of optionality wherein the issuer can have the option to buy-back (call option) or the investor can have the option to sell the bond (put option) to the issuer during the currency of the bond. 6.72%GS2012 was issued on July 18, 2002 for a maturity of 10 years maturing on July 18, 2012. The optionality on the bond could be exercised after completion of five years tenure from the date of issuance on any coupon date falling thereafter. The Government has the right to buyback the bond (call option) at par value (equal to the face value) while the investor has the right to sell the bond (put option) to the Government at par value at the time of any of the half-yearly coupon dates starting from July 18, 2007.

Capital indexed Bonds are bonds where interest rate is a fixed percentage over the wholesale price index. These provide investors with an effective hedge against inflation. These bonds were floated on December 29, 1997 on tap basis. They were of five year maturity with a coupon rate of 6 per cent over the wholesale price index. The principal redemption is linked to the Wholesale Price Index.

Qus : From where can g-secs be procured? Ans : G-secs can be procured either directly from the primary market or from the secondary market. This market pertains to the participation in fresh Government of India issues by players like Reserve Bank of India, Primary & Satellite Dealers, Commercial Banks, Financial Institutions, Mutual Funds and others including individuals. And secondary market refers to the regular trading activity that characterises any stock market.

Ques: What are the types of risks involved in gsecs? Ans:These securities are usually referred to as risk free securities. But these securities are subject to interest-rate risks. Subject to changes in the over all interest rate scenario, the price of these securities may appreciate or depreciate.

This risk is again akin to all those securities, which generate intermittent cash flows in the form of periodic coupons. The most prevalent tool deployed to measure returns over a period of time is the yield-to-maturity (YTM) method. The YTM calculation assumes that the cash flows generated during the life of a security is re-invested at the rate of the coupon. The risk here is that the rate at which the interim cash flows are re-invested may fall thereby affecting the returns.

The minimum amount of investment in G-Sec is Rs. 10,000.00 and that incase of T-Bills is Rs. 25,000.00. However, there is no maximum amount / limit set for investments

Thank you