TerminoIogies in 0ebt harket - Peady Peference

Liquid Funds : Also known as Voney Varket Schemes, These funds provides easy liquidity and preservation of
capital. These schemes invest in shortterm instruments like Treasury 8ills, interbank call money market, CPs
Pepos and C0s. These funds are meant for shortterm cash management of corporate houses and are meant for
an investment horizon of 1day to J months. These schemes rank low on riskreturn matrix and are considered to
be the safest amongst all categories of mutual fund
Short Term PIans (STPs): Veant for investment horizon for three to six months. These funds primarily invest in
short term papers like Certificate of 0eposits (C0s) and Commercial Papers (CPs). Some portion of the corpus is
also invested in corporate debentures.
A Fixed haturity PIan (FhP) is a closeended scheme, and has an exit load, if redeemed, before the maturity
period. Such schemes can have a maturity period of three months to three years. t selects an instrument, which
corresponds with its maturity period. For instance, if the maturity of a scheme is one year, then the scheme will
invest in instruments having oneyear maturity. As the instrument will have a fixed interest rate payable on
quarterly/halfyearly basis, the NA7 will be on interest accrual basis.
0ebt Funds : 0ebt funds are funds that invest strictly in debt related securities. Unlike any other asset class like
equity, debt securities are characterized by the following factors Known maturity period, Known coupon rate (or
in common parlance known interest rate) E Known maturity value. 8y investing in debt instruments, these funds
ensure low risk and provide stable income to the investors. ncome/bond schemes invest in long and medium
term instruments like corporate bonds, debentures E fixed deposits. Covernment authorities, Pvt. Cos., 8anks
and Fs are some of the major issuers of debt papers. Examples of these instruments include 0ebentures issued
by Corporates, State Covt. E Central Covt., F0, CP, T 8ills E 0ebentures. 0ebt funds are further classified as :
ncome/bonds, liquid/money market and gilts schemes.

hIPs : nvests maximum of their total corpus in debt instruments while they take minimum exposure in equities.
t gets benefit of both equity and debt market. These scheme ranks slightly high on the riskreturn matrix when
compared with debt schemes.
CiIt Funds : nvest their corpus in securities issued by Covernment, popularly known as Covt. of ndia debt
papers. These Funds carry zero 0efault risk but have nterest Pate risk. These schemes are safer as they invest
in papers backed by Covernment.
C Secs l CiIt edged Securities : Securities / Sovereign papers issued by the Central / State E Quasi
Covernments. t is a promissory note, issued by the original holder, which contains a promise by the President of
ndia / State Covt. to pay as per given schedule. The maturity period is medium and longterm depending upon
an investor's goals. There are other plans, too, like monthly income plans (VPs) wherein every month a fixed
amount is invested of which approximately 20 is allocated to equity and the remaining to debt.
SCL : Subsidiary Ceneral Ledger Account is the demat facility for C Sec offered by the P8. n the case of SCL
facility the securities remain in the computers of P8 by credit to the SCL account of the owner.

Treasury iIIs : Shortterm instruments issued by the Treasury or P8 to mobilize short term funds for the Covt.
They have a tenor like 14 to J64 days E sold at a discount E redeemed at par on auction basis by C0. They have
nil credit risk E negligible price risk.
honey harket Instruments : 0ebt instruments having maturity less than 1 year at the time of issue. These are
highly liquids and have negligible risk. The VVT are treasury bills, C0, CP E Pepos.

C0 : These are transferable short term deposits issued by 8anks E Fs. t has a maturity of 91 - J65 days E are
issued at a discount E redeemed at par. They offer higher rate if interest than T 8ills E Term deposits.
CP : They are shortterm unsecured promissory note issued by financially strong forms. t has a maturity of 90 -
180 days E are issued at a discount E redeemed at par.

Pepos : t is used as an abbreviation for repurchase agreement or ready forward E involves a simultaneous 'sale
E repurchase' agreement. They are very convenient, safe E earn a predetermined return. Pepos are very short
term market instruments. t is nothing but a collateralized borrowing and lending. n reverse Pepos securities
are purchased in a temporary purchase with a promise to sell it back after a specified period at a prespecified
price. Pepo for one party is Peverse Pepo for the other party. The rate of interest paid by the P8 to borrow
funds from commercial banks is call Pepo Pate

CaII honey : 8orrowing or lending for one day in the interbank market is known as call money. Entry into this
segment of the market is restricted to notified participants which include scheduled commercial banks, primary
dealers and satellite dealers, development financial institutions and mutual funds.

CPP : A portion, decided by the P8, of the depositors' money that banks must keep in the form of cash. The
purpose of CPP is to ensure that the banks are liquid at all times and is changed from time to time to regulate
the availability of credit and the money supply in the economy.

asis Point : 0ne hundredth of a percentage (i.e..01). As interest rates are generally sensitive in the second
place after the decimal point, the measure has large importance for the debt market.

TerminoIogies in 0ebt harket - Page 3

Coupon : The rate of interest paid on a security, generally a fixed percentage of the face value, is called the
coupon. The origin of the term dates back to the time when bonds had coupons attached to them, which the
investor had to detach and present to the issuer to receive the money.

Asset backed security : Any security that offers to the investor as asset as collateral. The rate of return
required for such types of bonds is less compared to bonds that offer no collateral.

Auction : The process of issuing a security through a pricediscovery mechanism through asking for bids. This is
the process followed by the P8 for all type of issues of debt market paper by it.

Currency YieId : The coupon rate divided by the price of the bond. This is a very inadequate measure of yield,
as it does not take into the account the effect of the future cash flows and the application of discounting factors
on them.

0iscount : The quantum by which a security is issued or traded below its par value is called 0iscount.

0uration : 0uration is a measure of 8ond's price risk. t is a weighted average of all the cashflows associated
with a bond, weighed by the proportion of value due to the jth payment in the cashflow stream, with sum of all
j's equalling one. Thus a bond with duration of 1.50 years means that a rise in its yield by one percent would
result in a decline of its value by 1.50.

FIoating Pate Note : t is an instrument that does not pay a fixed rate of interest on its face value. The interest
paid on such instruments is dependent upon the value of a benchmark rate. The benchmark rate is mutually
agreed upon by the issuer and the investor and has to specify some criteria. The interest paid is typically a
markup on the benchmark so agreed.

Interest Pate Swap : t is transaction in which a flow of coupon of one variety is exchanged for another of a
different variety, but in the same currency.

LIDP : Stands for London nter8ank 0ffered Pate. This is very popular bench mark and is issued for US0, C8P,
Euro, Swiss Franc, Canadian 0ollar E Yen.

hIDP : Stands for Vumbai nter8ank 0ffered Pate, it is closely modeled on the L80P. Currently there are two
calculating agents for the benchmark - Peuters E the NSE. The NSE V80P benchmark is more popular of the
two.

hark to harket : VTV is a very popular reporting and performance measurement tools for any investment n this
technique the price at which the investment was made is compared with the price which the asset can realize if
liquidated in the current market at that moment. The difference is either VTV gain or VTV loss depending upon
the current worth visvis the original price. Liabilities can also be made subject to the same analysis as assets.
Periodicity of the VTV depends upon the liquidity of the market in which the asset is a class.

Pisk Free Pate : An interest rate is given out by an investment that has a zero probability of default.
Theoretically this rate can never exist in practice but sovereign debt is used as the nearest proxy.

PLP : This is the acronym for Prime Lending Pate. This is the rate at which a bank in ndia lends to its prime
customer. The bank usually follows as internal credit rating system and charges a spread over the PLP for non
prime customers.

SLP : Statutory Liquidity Patio is that part of their Net 0emand and Time Liabilities that a bank is required by
Law to be kept invested in approved securities, like sovereign issues, is known as SLP. The maintenance of SLP
ensures a minimum liquidity in the bank's assets.

YieId to haturity (YTh) : t is the rate of discount that equates the discounted value of all the future cash flows
of a security with its current price. n a way, it is another way of stating the price of a security as other things
remaining constant, the price is a direct function of the YTV. t is used primarily for its simplicity of nature and
ease of calculation.

Zero Coupon ond : ZC8 is one that pays no periodic interest are typically issued at a discount and redeemed at
face value. The discount rate, apportioned over the life of the bond is the effective interest paid by the issuer
to the investor. n ndia, the ZC8 are virtually nonexistent over one year E up to one year, the T8ills issued are
proxies for ZC8.