21 ST MARCH,2012

THE FINANCIAL BULLETIN

ISSUE 1 , VOLUME 10

T H E F I N A N C I A L B U L L E T I N
FROM THE EDITORS DSK

A warm welcome to all our readers.. This Issue bring to you all the updates of Budget , the golden statue and News beyond the realms of finance.. Improve your knowledge with the current and happening news around the world Happy Reading... THIS ISSUE COVERS:

Understanding subprime mortgage credit derivatives 11 Financing the golden Synopsis of the budget 2012-13 Austerity deal of Greece Econometrics Will US be able to extract rare earth metals out of China Financial inclusion and its impact on India Retrospective amendments in taxation statue Debt securities and Indian debt market News

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ADVISORS:
PROF.HILDA AMALRAJ DR.V. NARENDRA

FACILITY CO-ORDINATOR

DR.S VIJAYALAKSHMI

STUDENT CO-ORDINATOR:
ROSHNI NAIR

EDITORIAL TEAM :
TANUJ KOHLI SAMARTH SRIVASTAVA JASLEEN LAMBA RAUNAK TEKRIWAL DEEP DUTTA MENKA BAAJAJ MANALI DEBROY CHAITALEE KUMARI DIVYA BONAGIRI

COMPILED BY:
ROSHNI NAIR

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UNDERSTANDING SUBPRIME MORTGAGE CREDIT DERIVATIVES PART II

In the previous issue, I discussed about Mortgage Credit, Types and features of Non-Agency Mortgages, First and Second Lien Mortgages. In this issue I will continue my discussion on Second Liens. In the early days of the home-equity market i.e. from period 1991 to 1993, a substantial percentage of loans were seconds. However, in the modern subprime world post 1995, seconds have played a minor role. Table 1 shows Number of Second Lien Standalone deals. It shows the growth in the number and volume of Second Lien deals since 1995. Table 1 : NUMBER OF SECOND LIEN STANDALONE DEALS In Millions $ www.intex.com Issue Year 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 Deal Count 1 4 4 4 8 2 9 11 29 34 55 74 Original Issuance 84 770 916 1279 2605 272 2740 3791 7993 11220 24319 38336

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RISKS ASSOCIATED WITH SECOND LIEN By their very nature, seconds carry more risk than first lien mortgages. In an exceptionally strong housing market it is possible that a default on a well seasoned second may not result in a complete loss if the Combined Loan to Value Ratio has been pushed well below 100. In contrast, in some recent subprime deals, loss severities on seconds have been greater than 100%. A 100% severity is a standard assumption and is what rating agencies use in standard credit enhancement levels. Second lien originating in year 2005 and 2006 are said to have higher risks associated with them in comparison to other liens.

Credit and Prepayments are the two principal risks inherent in agency and non agency mortgage-backed securities. In Non-Agency Market apart from credit risk, prepayment risk is also present. In order to maximize the value of a securitized pool of non agency loans, issuers need to address those credit concerns. This is done by separating the cash flow from a pool of loans into individual tranches with credit ratings that start at AAA and go down to B or unrated.

In a Non-Agency market two principal structures have evolved that create a series of bonds with a range of credit ratings. Most Low weighted average coupon, low risk prime deals have a Six-Pack structure . The Six-Pack structure consists of 3 Mezzanine and 3 Subordinate bonds serving as a support. In contrast to Low weighted average coupon, most high weighted average coupon, high risk subprime deals utilize an excess spread/ overcollateralization structure.

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MORTGAGE SECURITIZATIONS One fundamental of all mortgage products is that loans with higher default risk carry higher interest rates. Prime and Alt-A loans carry higher loan rates than agency collateral, while subprime loans have higher rates than prime and Alt-A loans.

As discussed in my previous article, the rate on a mortgage is very strongly determined by that particular loans Characteristics. We know that credit grade, loan-to-value (LTV) and loan size were among the most important parameters across the entire credit spectrum of mortgages.

Turning a Higher than average coupon on subprime mortgages into a credit enhancement. For this excess interest needs to be identified. The excess interest is the difference between the coupon payments due on the bonds issued and the coupon paid by collateral less fees and expenses.

In typical jumbo or Alt-A deals, using a six-pack structure available excess interest is typically monetized through an interest-only bond class. Another concept is that of excess spread, which is equal to excess interest minus current losses.

In a deal structure i.e. the coupon payments, the difficult task of balancing cash flows between reserving too much or not having enough available excess spread is generally allocated to triggers. Triggers are thresholds for losses or delinquencies, and affect target reserve levels once they are hit. Triggers either increase the target reserve (step-ups), or

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prevent it from decreasing (step-downs). Triggers sometimes depend on the current credit support available in a deal, rather than on predetermined levels.

In the Jumbo and Alt-A worlds, deals have traditionally been structured without excess spread because the strip of excess spread was generally too small to provide significant enhancement. With the broadening of the scope of the Alt-A market and the more frequent inclusion of loans with a relatively high off-market spread in Alt-A collateral, using excess spread for credit enhancement has started to make sense.

The complexity of an Excess Spread and Overcollateralization was exposed by the meltdown of the subprime industry. These structures accomplish the objective of shifting cash flow to more senior tranches if a deal is not performing well, but these features and their impacts on bond values are not intuitive and often confusing. This has made it difficult for institutions holding these securities to value them properly and this has contributed to the freezing up of the credit markets.

In the next article, I will discus about the features of Excess Spread and Overcollateralization i.e. subprime triggers and step downs. Till then enjoy your Summer Internship and holidays

By SAMARTH SRIVASTAVA

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FINANCING THE GOLDEN STATUE

The golden statue mentioned is the Oscar statue also named the Academy award of merit and is one type of academy awards. An Academy Award is an award bestowed by the American Academy of Motion Pictures Arts and Sciences to recognize excellence of professionals in the film industry. This award is given to actors, directors and writers for the work done by them.

The first awards were presented on May 16, 1929, at a private brunch at the Hollywood Roosevelt Hotel with an audience of about 270 people. The root of the name Oscar is contested. One biography of Bette Davis claims that she named the Oscar after her first husband, band leader Harmon Oscar Nelson. Many other famous people like Walt Disney , Columnist Sidney Skolsky, Norwegian-American Eleanor Lille berg have claimed that they have played a major role in naming the Golden Statue. The Oscar statue is made of gold-plated britannium on a black metal base, it is 13.5 in (34 cm) tall, weighs 8.5 lb

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(3.85

kg)

and

depicts

knight

rendered

in

Art

Deco

style

holding

a crusader's sword standing on a reel of film with five spokes. The five spokes each represent the original branches of the Academy: Actors, Writers, Directors, Producers, and Technicians. Over 2700 gold plated statuettes have been handed out since MGM art director Cedric Gibbons designed what is now arguably the most recognized trophy in the World.

But producing Hollywoods biggest night of the year hardly comes cheap. From the lavish food and drink to the gold-plated statuettes themselves, little expense is spared to make this night an entertainment extravaganza. The total amount spent on this night is somewhere close to 135 Million dollars. The economic addition made to city of Los Angeles has been a talk of the town lately.

Here are some surprising things on which a large amount of money is spent on the Oscars

Red carpet - The Oscars red carpet is an impressive 500 feet long and 33 feet wideor 16,500 square feet. Most L.A.-area companies that provide the service charge an average of $1 and $1.50 per square foot of carpet. At that rate, the Academys walkway could cost as much as $24,750.

Hairs, make-up - On Oscar day, the makeup specialists are high in demand. They are at the disposal of all the A list stars for a period of one day. This cost can somewhere come around $ 10K - $ 11K.

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Clothes Most celebs dont pay for their clothes. They take it on rent from the known fashion houses, designers and jewelers. These stars take the services of a wardrobe stylist who commands close to $4K - $6K. Transportation The cost of a chauffeured car on Oscar night can go past an EMI payment for a Limo. The stars pay up to $3750K for availing the services of a well dressed chauffer with a classy car. The Award Eight and a half pound Oscar is cast in Brittanie metal and plated in copper and nickel silver before the finishing touch, a layer of 24 carat gold, is applied. Each statuette costs $500 to make. While its difficult to know the number of awards that are given on that particular day but as per the estimates, around 25 awards are distributed to the artists. Some other expenses incurred during the event include the Best picture campaigns, tickets, gifts, champagne, security, etc which sum up to the amount remaining after the above expenses are done.

There are also some other opportunities that the event throws to the outside World. The advertisers play an important role in making the event happen. And, it also gives them a huge market to promote their products as such campaigns are often targeted at certain sections of the society. The glitz-packed ceremony rolls out a red carpet for women, who pay close attention when the cameras cut to commercials, branding experts say. As much as 70 percent of the audience is female, according to a famous American ad magazine Ad week, and for advertisers, this takes some of the guesswork out of devising product messaging. Despite a 10 percent drop in Oscar viewership to 37.6 million last year, the star-studded night remains a powerful product pusher.

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It is because of the above reasons that Oscars occupy an important place in the economy of Los Angeles since it generates staggering revenue of $500 Million. Therefore, it has become mandatory for the American Government to promote this event before and after it has taken place so that they can reap the maximum benefits out of one the biggest financial happenings in the World of cinema. As rightly described by a film critic , Oscar is the most valuable and the least expensive item of Worldwide public relations ever invented by any industry.

Source: www.oscars.org Bloomberg.com By TANUJ KOHLI

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SYNOPSIS OF THE BUDGET 2012-13

The Union Budget of 2012 is an average budget in the sense that it failed to address some macroeconomic issues like fiscal deficit and economic growth. The fiscal deficit in the current year is expected to remain at 5.1 percent of GDP and the economy is expected to grow by 7.6 percent in the current year. Although the increase in tax rates as well as the base will raise Government revenue it is at the expense of making some products dearer to the consumers. For example increase in import tariff on Gold will raise the price of Gold and

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very low oil subsidies is likely to raise the price of oil .The Budget aims to reduce subsidies from 1.9% of GDP to 1.75% of GDP spread over the next three years. It will further raise the price of the subsidized items. However a good news is that some of the provisions of Direct Tax Code and Goods and Service tax are going to be implemented from the current financial year. The Budget gave an incentive for the development of Infrastructure companies in the form of more tax holidays. It will boost infrastructure in the economy in the form of Public as well as Private Infrastructure which means stimulus for more production and an increase in real GDP. Indian companies can now get access to cheap foreign debt through External Commercial Borrowing. It will lead to increase in FDI flows in the economy and the rupee is expected to strengthen against US dollar. However exports will be discouraged in such a scenario. IMPACT ON COMMON MAN For a common man the Income tax exemption limit has been raised from Rs 180000 to Rs 200000.The upper limit of tax slab for the rate of 20 percent has been raised from 8 lakh to Rs 10 lakh. This measure has certainly reduced the burden of taxes for a common man which means more disposable income. Interest from Savings bank account has been provided deduction up to Rs 10000 and a provision has been made for a deduction of Rs 5000 on preventive health check up. It will encourage private savings and gives boost to the health sector. Senior citizens without business incomes are exempt from the payment of advance tax. The securities transaction tax on cash delivery has been reduced to 0.1percent from earlier .125 percent. It will encourage investment in stock market. The interest subvention rate of 1 percent on housing loan up to 15 lakh has been extended for one more year. It will reduce the burden of interest on housing loan to the common man. First time investors in the stock market will get a deduction of Rs 50000 for three years. It means the Indian stock market will get more money .However the common man will have to

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pay more service tax to the service provider as the base rate has been enhanced from 10 percent to 12 percent.

The UID adhaar project gets a fund for the enrollment of 40 crore more people. It means that around 60 crore people will be covered under this project by the end of this year. The budget proposes to start a national mission on food processing by the Central Government in collaboration with the State Government. It will make the supply chain of food distribution system efficient and will contain food Inflation.

The budget aims to develop agricultural sector by allocating 200 crores to agricultural research. Target on agricultural credit has been raised to Rs 575000 crores. Interest rate on agricultural loans has been reduced .It will lead to better provision of food grains to the common man and led to reduction in food inflation. By RAUNAK TEKRIWAL

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AUSTERITY DEAL OF GREECE

As we all know that Greece is embroiled in one of the worst ever economic crisis. A combination of complex factors is responsible for this which is as follows:

High defense spending due to historic enmity with Turkey. Government fiscal policy. Inflexible monetary policy. Poor regulatory control and mechanism. Excessive government spending during late 2000s to provide bailout packages to financial sectors so as to overcome the financial crisis.

Slow economic growth. Imbalance in international trade. Easy availability of credit which leads to high risk of lending and borrowing. Globalization of Finance

The result of Greece crisis resulted in the decline in GDP with 6.9%, the unemployment rate has gone up by 19.9% in November 2011 from 7.5% in 2008, 1,1100 Greek companies have gone bankrupt. In order to provide relief to Greece from this crisis, the Troika (EU, IMF and ECB) have agreed in February 2012 to provide a bailout package the second time to Greece worth 130 billion ($ 173 billion). The Europeans have reached out to help it, but with certain conditions which has triggered unrest in the country. The condition being that the Greece Government has to reduce its spending with 3.3bn in 2012 and another 10bn in 2013 and 2014. The bailout deal also involved a debt restructure of Greek government bonds with the private holders. This being a tentative agreement on austerity cuts has increased the chances of bankruptcy. As a result there has been a lot of anti-austerity protest and political unrest in Greece.

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Whether this bailout package will help Greece to overcome the adverse affect of crisis or not can only be determined in times to come as the Greece crisis has resulted in the financial contagion. ByCHAITALEE KUMARI

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ECONOMETRICS

ECONOMETRICS is one of the new courses which our college is going to offer as an elective in finance for second year. ECONOMETRICS is a study which was evolved to explain the advancement of economic theory in its relation to mathematics and statistics. This study aims at unification of the theoretical quantitative and the empirical qualitative approach to economics problems. It is by no means same as statistics econometrics nor application of mathematics to econometrics, it is unified study of economic models, mathematical statistics and economic data. Purpose: The main purpose of econometrics is, to give empirical content to economic theory by formulating economic models in testable form, to estimate those models and to test them as to acceptance or rejection.

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For example: let us consider the basic economic relationship between price of a good and quantity of the good that people wish to purchase at each price (demand relationship). According to economics as price increases quantity decreases keeping other things constant so as to isolate the relationship of interest. A mathematical equation can be developed to understand the relationship between these variables. Q = X0 + X1 PRICE + X2 INCOME + E Where Q is quantity X0 is intercept, E is error term, X1 and X2 are parameters of price and income respectively whose values can be estimated by using regression analysis. And later this model will be tested for significance. Methodology of econometrics: Different approaches are used in econometric, some of them are the followingCowls Commission approach: It is a specific, probabilistic framework in estimating simultaneous equations to model an economy. Its main contribution was exposing the bias of ordinary least squares regression identifying coefficient estimates. As deterministic models are inconsistent with observed economic quantities and so it is incoherent to apply this deterministic models to non-deterministic data. According to this model econometric models should be explicitly designed to incorporate randomness, stochastic errors should not be simply added to deterministic models to models to male them random. This approach is given by Trygve Haavelmo. Structural approach: This approach is very close to haavelmos approach. Here a probabilistic economic model is specified and the quantitative analysis is performed. This approach typically leads to likelihood-based analysis, including maximum likelihood and Bayesian estimation.

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Quasi structural approach: it is a model more useful for abstraction or approximation. So in this model gives a inference views of structural model as an approximation rather than the truth. This theory has led to concepts of the pseudo-true value, the

quasi-likelihood function, quasi-MLE and quasi-likelihood inference. Semi parametric approach: As probabilistic model is specified partially, some features are left unspecified. This approach typically leads to estimation methods such as least-square and generalized methods of moments. Vector auto regression (VAR) approach: It is used to capture the linear interdependencies among multiple time series, also generalizes univariate auto regression models. All variables in this model are treated symmetrically, each variable has an equation explaining its evolution based on its own lags and the lags of all other variables in the model. Calibration approach: similar to quasi-structural approach, this approach interprets structural models as approximations and hence inherently false. The difference is that this literature rejects the mathematical statistics as inappropriate for approximate models, and instead selects parameters by matching model and data moments using non-statistical ad hoc methods.

Reference http://www.ssc.wisc.edu/~bhansen/econometrics By DIVYA BONAGIRI

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WILL US BE ABLE TO EXTRACT RARE EARTH METALS OUT OF CHINNA???

China has further restricted the exports of rare earth metals to the West. The Chinese decision has not gone down well with the western countries. The U.S, European Union and Japan requested consultations with China, a step that will lead the governments to ask WTO judges to rule should negotiations fail to resolve the issue. China produces at least 90 percent of the worlds rare earths, 17 chemically similar metallic elements used in Boeing Co. (BA) helicopter blades, Nokia Oyj (NOKIA) cell phones, Toyota Motor Corp. hybrid cars and wind turbines. China says it curbed output and exports to conserve resources and protect the environment. In a similar case, the WTO found in July that Chinese limits on raw-materials exports broke global rules and gave domestic companies an unfair advantage. WTO appellate judges in January upheld the ruling, which supported a complaint by the U.S., the EU and Mexico. U.S. Trade Representative Ron Kirk called that report a tremendous victory. Facing pressure to lower the nations 8.3 percent unemployment rate heading into Novembers election, Obama is leaning harder on China. He signed an executive order creating a panel to probe unfair trade practices by nations including China, and the U.S. has urged the Asian nation to allow its undervalued currency to appreciate. The U.S.-China trade deficit widened to $295 billion last year and the imbalance is a main source of friction between the two countries. Chinas policy goal is to protect resources and the environment, not to distort markets, the Ministry of Commerce said in statement on website. Under WTO rules, the four governments must hold talks for at least two months in a bid to resolve the dispute. If the talks fail, the complaining governments can ask a WTO panel to intervene. Rare earths became a political and legislative issue in July 2010 when China moved to limit domestic output and slash export quotas by 40 percent, souring ties with major users including the U.S. and Japan, where buyers cut usage after prices soared in the first half of 2011. China said on

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December 28 that it was leaving the 2012 overseas sales caps virtually unchanged. Prior to this, the U.S. has filed 12 WTO complaints against China while the EU has lodged five. China has complained twice against the 27-nation bloc and five times against the U.S. Demand for rare earths may rebound following a 25 percent slump in prices this year. That would benefit producers of the metals such as Molycorp Inc. (MCP), which owns the largest rare-earth deposit outside of China, located near Mountain Pass, California. Chinas policies on rare earths result in massive distortions and harmful disruptions in supply chains for these materials throughout the global marketplace. This complaint also involves export restraints on tungsten and molybdenum. Chinas limit on the supplies of five rare-earth minerals -dysprosium, terbium, europium, neodymium and yttrium -- pose a threat to increasing use of clean-energy technologies such as wind turbines and solar panels. While prices of rare earths fell in the second half of 2011, they remain volatile, leading some companies to search for ways to consider reducing reliance on the minerals. By DEEP DUTTA

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FINANCIAL INCLUSION AND ITS IMPACT ON INDIA

RBI has come up with a scheme of Financial inclusion which is basically the process of ensuring access to appropriate financial products and services needed by all sections of the society in general and vulnerable groups such as weaker sections and low income group in particular, at an affordable cost in a fair and transparent manner by regulated mainstream institutional players. The main objective of RBI is to take banking to all excluded sections of the society, rural and urban. Though, the main focus initially was to cover villages with population above 2000 by March 2012, but RBI has extended this over a period of next 3 to 5 years. Lets have a look at what the Banks have contributed to achieve Financial Inclusion objectives: Coverage of villages: Banks have, up to June 2011, opened banking outlets in 1.07 lakh villages up from just 54,258 as on March 2010. Out of these, 22,870 villages have been covered through brick and mortar branches and 460 through other modes like mobile vans, etc.

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Opening of No-frills account: Basic banking no-frills account, with nil or very low minimum balance requirement as well as no charges for maintaining such minimum balance, were introduced as per RBI directive in 2005. As on June 2011, 7.91 crore No-frills accounts have been opened by banks. Small overdrafts in No-frill accounts: Banks have been advised to provide small ODs in such accounts. Up to June 2011, banks had provided 9.34 lakh ODs amounting to Rs. 37.42 crore. General Credit Cards: Banks have been asked to consider introduction of a General Purpose Credit Card (GCC) facility up to Rs. 25,000/- at their rural and semi-urban branches. The credit facility is in nature of revolving credit entitling the holder to withdraw up to the limit sanctioned As on June 2011, banks had provided credit aggregating Rs.2, 356.25 crore in 10.70 lakh GCC accounts. Kisan Credit Cards: Kisan Credit Cards to small time farmers have been issued by banks. As on June 30, 2011 the total number of KCCs issued has been reported as 202.89 lakh. Contribution of RBI in Achieving Financial Inclusion Objectives: RBI has adopted bank-led model as its main plank for achieving the goals under financial inclusion. RBI has adopted ICT based agent bank model through Business Correspondents (Panchayats, individuals selected by banks, etc.) for ensuring door step delivery of financial products and services. The approach adopted has been technology and delivery model neutral, whether through handheld devices, mobiles, mini ATMs, etc. Impact of Financial Inclusion: Economic growth: Through financial inclusion there will be inclusive growth and an increase in credit creation by the banks. People will avail the loan facility easily and the rural people will have easy access to credit which will result in the overall economic growth of

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the country. Financial Development: Economic growth of a country has direct influence on the financial development of the country. As credit will be easily available to the people this automatically creates more demand and supply of financial products in India. Way Forward: One of the major challenges under Financial Inclusion has been the technological problem.. Appropriate and effective technology is need for financial inclusion to take place on an accelerated scale. The Banks need to have smooth delivery and business model. It is important that adequate infrastructure such as digital and physical connectivity, uninterrupted power supply, etc are available. Conclusion: After going through the impact of Financial Inclusion on Indian People, I conclude that Financial Inclusion is the road which India needs to travel towards becoming a global player. An inclusive growth will act as a source of empowerment and allow people to participate more effectively in the economic and social process. Banks that have global ambitions should meet local aspirations. Financial access will also attract global market players to our country that will result in increasing employment opportunities. In order to serve millions of our poor villagers, what we need is Technology with a human touch. It can be summarized that the The future lies with those who see the poor as their customers as commerce for the poor is more viable than the rich.

By CHAITALEE KUMARI

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RETROSPECTIVE AMENDMENTS IN TAXATION STATUTE

Parliament The Supreme Legislative Body of India is having the final authority over all the other political bodies and hence, it is bestowed with powers of legislation. It is competent to legislate with prospective or retrospective amendments but the power to legislate retrospectively is upheld by court with a warning that it should not be unreasonable. The most important thing to be kept in mind is retrospective amendments should be constitutional. The power of retrospective amendments lies in the fact that they can render an earlier courts decision ineffective by amending the infirmities/defects in the law on the base of which the decision was awarded. In the budget for FY 2012-13, our Finance Minister Mr. Pranab Mukherjee made a killer retrospective amendment to income tax which will make foreign players like Vodafone to not enjoy their returns that easily as before. The amendment will give the IT department all the emergency rights and powers to override all court orders and to the matter of fact Supreme Courts order as well can be overridden. This is specially done for companies like Vodafone who does cross border transactions, where the underlying assets lie in our country. Putting it safe, FM injected clause 113 in the finance bill i.e. the validation clause which says it will operate notwithstanding anything contained in any judgement , decree or order

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of any court or tribunal or any authority. The clause basically says that for companies like Vodafone, SAB Miller where there is always a change in ownership of capital asset in India because of the sales of shares abroad, the tax department will have overriding powers to decide what to tax and henceforth courts cannot intervene in that decision.

Finance Minister, Pranab Mukherjee admits that retrospective amendments is not good and should not be done, but the amendment would prevent outflow of revenue from the country that has already been collected and appropriated. To some extent this amendment will do good to our country as in , it will ensure that cross border deals like Vodafone Essar are made liable to pay capital gain tax in the country which will add to our revenue. But then this amendment has already started creating negative sentiment among the foreign investors. Retrospective amendments in tax laws will make foreign investors question our legislature and governance and hence, we would start losing the investors confidence. This will make India an investor unfriendly country especially at times when we will need it the most.

Putting an end to all these post budget talks and opinions, FM said that India is not a no tax country and tax would have to be paid in the country on any asset that is created by business based in India. The Finance Ministry Officials backed the clause by saying that it wont hamper the FDIs, and cited the example of China where indirect transfers are taxed but it has not impacted FDIs. Also, it would work on the structure of law, as cases can be reopened if felt necessary.

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So, in all the retrospective amendments brought by our FM makes India portray a much stronger country than being feeble to attract foreign investors and lure them. India has set out a message to the world that its not a country where you can make your own benefit and enjoy the returns. When the country people are taxed so are you....!!!

Source: Financial Express, taxindiaonline.com

By-MANALI DEBROY

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DEBT SECURITIES AND INDIAN DEBT MARKET

Any debt instrument that can be bought or sold between two parties and has basic terms defined, such as notional amount (amount borrowed), date. Debt interest rate and maturity/renewal

securities include government bonds, corporate bonds, CDs, municipal bonds,

preferred stock, collateralized securities (such as CDOs, CMOs, GNMAs) and zero-coupon securities The interest rate on a debt security is largely determined by the perceived repayment ability of the borrower; higher risks of payment default almost always lead to higher i n t e r e s t r a t e s t o b o r r o w c a p i t a l .

Also known as "fixed-income securities." Government Bonds: A government bond is a bond issued by a national government, generally promising to pay a certain amount (the face value) on a certain date, as well as periodic interest payments. Government bonds are usually denominated in the country's own currency. Bonds issued by national governments in foreign currencies are normally referred to as sovereign bonds

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Corporate Bonds: A corporate bond is a bond issued by a corporation. It is a bond that a corporation issues to raise money in order to expand its business.[1] The term is usually applied to longer-term debt instruments, generally with a maturity date falling at least a year after their issue date. Corporate bonds are often listed on major exchanges (bonds there are called "listed" bonds) and ECNs, and the coupon (i.e. interest payment) is usually taxable. Sometimes this coupon can be zero with a high redemption value. However, despite being listed on exchanges, the vast majority of trading volume in corporate bonds in most developed markets takes place in decentralized, dealer-based, over-the-counter markets. Some corporate bonds have an embedded call option that allows the issuer to redeem the debt before its maturity date. Other bonds, known as convertible bonds, allow investors to convert the bond into equity. Municipal Bonds: A debt security issued by a state, municipality or county to finance its capital expenditures. 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 issue. Also known as a "muni." Preferred Stocks: A class of ownership in a corporation that has a higher claim on the assets and earnings than common stock. Preferred stock generally has a dividend that must be paid out before dividends to common stockholders and the shares usually do not have voting rights. Collaterized Debt Obligation: CDO is a promise to pay cash flows to investors in a prescribed sequence, based on how much cash flow the CDO collects from the pool of bonds or other assets it owns. If cash collected by the CDO is insufficient to pay all of its investors, those in the lower layers

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(tranches) suffer losses first. Zero Coupon Securities: A debt security that doesn't pay interest (a coupon) but is traded at a deep discount, rendering profit at maturity when the bond is redeemed for its full face value. 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 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. There are various types of debt instruments available that one can find in Indian debt market. Government Securities Corporate Bonds Certificate of Deposit Commercial Papers

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Advantages:The biggest advantage of investing in Indian debt market is its assured returns. The returns that the market offer is almost risk-free (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.

Reference: Wikipedia Investopedia By JASLEEN LAMBA

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NEWS

Central bank keeps key rates unchanged :RBI Credit Policy The Reserve Bank of India (RBI) has left key policy rates untouched on Mar 15, 2012 citing high fiscal deficit and rising crude oil prices. The central bank has not cut rates for more than two years. In this period, the repo rate, which is the rate at which banks borrow money from RBI, has gone up by 3.5% to 8.5%. The government is poised to miss this fiscal year's deficit target of 4.6% of GDP by a wide margin.

Cash-strapped aviation sector expects changes in FDI policy & tax sops : Budget 2012 The cash-starved airline industry is looking forward to the ensuing budget with great expectations as it desperately wants changes in the FDI policy on aviation and more tax sops to help reduce the high debt and cost burden. The budget may, however, bring some good news for ailing Air India with the government likely to consider a support package of about Rs 10,000 crore, including additional equity infusion of Rs 6,600 crore.

GDP growth to improve from 6.9% in FY12 to 8.6% in FY14: Economic Survey According to the Economic Survey of India, FY12 growth is likely at 6.9% and growth is likely to improve ahead of Q2FY12. FY13 growth has been pegged at 7.6% and for FY14, growth will go back to 8.6%, the report says. The survey says that fiscal consolidation is on track, but a slippage is expected in fiscal deficit for FY12 on account of the spurt in oil prices and lower revenue growth.

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Launch of SME Exchanges: How is it different The National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE) on Tuesday launched their respective SME (small and medium enterprise) exchange platform. With this, SMEs--one of the key drivers of India's economic growth--will hopefully have better access to funds to support their long term growth plans.

Oil Price hold Budget to Baby Steps, Politics The ruling party, battered in recent state polls and hamstrung by slowing economic growth and high global oil prices, is in no position to advance bold economic reforms that could unclog flagging growth in Asia's third-largest economy.

Iran may export 5,000 MW power to India Iran is likely to supply 5,000 MW of electricity to India as power exports are more cost- efficient, says an Iranian media report. Quoting Irans energy minister Majid Namjou, the Press TV has said that India has indicated its willingness to import 5,000 MW of electricity from Iran. Transferring electricity is less costly compared to (exporting) natural gas, Namjou was quoted as saying to reporters on Sunday.

Squeezed Indian garment exporters cheer cotton export ban Indian garment exporters, hit by sluggish demand from the US and European markets, are applauding the Indian governments decision taken earlier this week to ban cotton exports. But an analyst warned that since the ban is under review, garment makers stand to benefit from focusing on cutting costs instead of banking on such one-off benefits.

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Credit card frauds down to 7,300 in 2011 The government today said the number of credit card frauds has come down to 7,305 in 2011, from 20,806 cases of fraud two years ago. "The Reserve Bank of India has reported that as per data submitted by scheduled commercial banks, incidents of credit card frauds have decreased during the calendar years 2009 to 2011," Minister of State for Finance Namo Narain Meena said in a written reply in the Rajya Sabha. By MENKA BAJAJ

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