Bond Market

Bond Terminology

Germany
France

UK
Italy

USA
India

Bunds
Obligations
Assimilable de Tresor
(OATS)
Gilt Edged Securities
Buoni del Tesoro
Poliennali
Treasury Notes
Bonds

Bonds?
Yankee Bonds
Bulldog Bonds
Euro Bonds
Straight Bonds / Plain Vanilla Bonds /

Bullet Bonds
Zero Coupon Bonds
Deep Discount Bonds

Players in the Debt Market

Government
Private enterprises

Wholesale Debt Segment

Year
2011-2012
2010-2011
2009-2010
2008-2009
2007-2008
2006-2007
2005-2006
2004-2005
2003-2004
2002-2003
2001-2002
2000-2001
1999-2000
1998-1999
1997-1998
1996-1997
1995-1996
1994-1995

WDM Business Growth (www.nseindia.com, 02.08.2011)

Market
Net Traded
Average Daily
Number of
Capitalisation Trading Days
Value
Value
Trades
(crores)
(crores)
(crores)
3658038
16
1194
39751.8
2484.49
3594877
264
21577
599198.57
2269.69
3165929
258
25980
625640.07
2424.96
2848315
238
16129
335951.52
1411.56
2123346
248
16179
282317.02
1138.38
1784801
244
19575
219106.47
897.98
1567574
271
61891
475523.48
1754.70
1461734
293
124308
887293.66
3028.31
1215864
294
189518
1316096.24 4476.52
864481
297
167778
1068701.54 3598.32
756794
289
144851
947191.22
3277.48
580835
289
64470
428581.51
1482.98
494033
294
46987
304216.24
1034.75
411470
289
16092
105469.13
364.95
343191
289
16821
111263.28
384.99
292772
291
7804
42277.59
145.28
207783
291
2991
11867.68
40.78
158181
223
1021
6781.15
30.41

Average
Trade Size
(crores)
33.29
27.77
24.08
20.83
17.45
11.19
7.68
7.14
6.94
6.37
6.54
6.65
6.47
6.55
6.61
5.42
3.97
6.64

Retail Debt Segment

RDM Business Growth (www.nseindia.com, 02.08.2011)
Traded
Value
( lakhs)

Month/Year

No of trades

Traded
quantity

2011-2012

0.00

2010-2011

20

0.02

2009-2010

50

0.06

2008-2009

0.00

2007-2008

0.00

2006-2007

12,120

13.69

2005-2006

0.00

2004-2005

31

122,390

149.27

2003-2004

912

372,820

464.41

Retail Debt Segment

Sr. No.

Sec Type Security

Issue
Name

High Price Low Price High Yield Low Yield

GS

CG2004

11.24%

105.0000 104.6500 4.8379

4.7845

GS

CG2004

11.50%

103.2600 102.0650 4.7123

4.4431

GS

CG2004

11.75%

104.1000 103.5000 4.7203

4.5004

GS

CG2004

11.95%

104.9200 103.0900 4.7137

4.3949

GS

CG2004

11.98%

106.8800 104.1700 4.7729

4.4180

GS

CG2004

12.50%

104.7500 100.6100 4.7932

3.7692

GS

CG2004

12.59%

105.3700 102.5900 4.6475

4.4522

GS

CG2005

6.50%

102.9800 101.5000 5.5965

4.5810

GS

CG2005

9.90%

107.9900 106.2300 4.8042

4.4498

10

GS

CG2005

10.20%

108.5800 107.9900 4.6068

4.4734

Source: www.nseindia.com, 02.08.2011

Corporate Debt Segment (02.09.2011) NSE

No. of securities traded

No. of Trades
Traded Value (Rs crores)

15
25
460.5

Issuer
Central
Government

Description

LOT

Compensation Bond

GD

Converted Stock

GC

Floating Rate Bond

GF

Govt. Loan

GS

Partly Paid up Loan

GP

Treasury Bill

TB

Zero Coupon Bond

GZ

Index Bond

GI

Development Loan

SG

Municipal Taxable Bonds

MT

Statutory Corpn. Taxable Bonds

TS

Institutions

Banks

Floating Rate Bond

FB

Non-SLR Bond

ID

SLR Bond

IB

Zero Coupon Bond

IZ

Deep Discount Bond

DI

Tax-Free Bond

IF

Bonds

BB

Certificate of Deposit

CD

Floating Rate Bond

BF

Zero Coupon Bonds

BZ

Commercial Paper

CP

Debentures

DB

Promissory Note

CN

Deep discount Debentures

DC

Securitized Debt

SD

Floating Rate Debenture

CF

Infrastructure Bond

CI

Unit 64

US

Mutual Funds units

MF

Mutual fund cumulative

MC

State Government
Local Bodies

Statutory Corpn. Taxfree Bonds

SF
Corporate

Public Sector Unit

Promissory Note

PD

Taxable Bond

PT

Tax-Free Bond

Zero Coupon Bond

Cumulative Bond

Infrastructure Bond

PF

PZ

PE

Mutual Funds

PI

WDM Trade Parameters

Market Lot

Rs. 5 Crore

Settlement for value at

t +0

Deals entered up to 13.00 hours

Settlement for value at

t + 1*

Deals entered after 13.00 hours

*t+1 will be the default for contracts done in securities, other than
Government of India securities.

WDM Transaction
Bank

Terminology used

Meaning

Bank A

11.40/08 for 25crore

Bank A is asking Bank B for a 2 way quote on

11.40% maturing 2008 for a total amount
of Rs. 25 crore (face value) for settling
today.

Bank B

12/18 for 15 crore

Bank B has given a price to buy at Rs. 117.12

and to sell at Rs.117.18 and the quote is
valid for Rs.15 crore only.

Bank A

Any

Bank B

17 for you

Bank B is willing to reduce the price for the

buyer to Rs.117.17.

Bank A

Done / Close

Bank A concludes the deal

Bank B

Confirmed (Bank B sells

11.40% 08 15 Crore
value today at 117.17 to
Bank A)

Bank B confirms the deal specifying security,

amount, price, settlement date and
counterparty

improvement,
buy

me

to

Bank A tells Bank B that he is looking to buy

but at a lower price.

RDS
The RETDEBT Market facility on the

NEAT (National Exchange for Automated

Trading) system of Capital Market
Segment is used for entering transactions
in RDM session.
Trading in Retail Debt Market is permitted

under Rolling Settlement (T + 2)

RDS Trading Parameters

Face Value
Permitted Lot Size
Tick Size
Operating Range
Mkt. Type Indicator
Book Type

Rs. 100/10
Rs. 0.01
+/- 5%
D (RETDEBT)
RD

Valuation of Debt Instruments

Bond Evaluation Measures

Running yield
Simple yield to maturity
Yield to maturity
Redemption yield
Holding period yield

Running Yield
Yield r = Coupon / Clean price

Simple Yield to Maturity

C P-CP
YTM s =
+
CP nCP
C is the coupon amount,
P is the face value of the bond,
CP is the clean price,
n is the number of years to maturity.

Redemption Yield
DP-CP
C+
n
Yr =
DP+CP
2
In the equation DP is the market exchange price of the debt instrument.
DP is Dirty Price
n is the number of years to maturity.
This equation gives an approximate redemption yield and this could work well
for long-term debt instruments having a maturity of more than 15 years.

or

Md =

1
1+
Yr

m

tj

Td

q-1

t=0

1+ 1

m
m

Yr

RP
1+ 1

Yr

q-1

Md is the market price (dirty price) of the debt instrument,

tj is the number of days between the current date and the next coupon payment.
Yr is the redemption yield,
q

is the total number of coupon payments before redemption (n X m),

m is the number of times coupon payments are made,

Td is the total number of days between two coupon payments,
RP is the redemption price.

Holding Period Yield

Yh is the holding period yield
i1 and i2 are the rates of interest at which the first coupon, second coupon etc. are
received
P1 is the price for which the debt instrument will be sold by the investor

The above Equation can be restated as:

Comparison of Yield Measures

Yields to Call / Put

Yc = yield to maturity expressed in %.

C = coupon amount.
Pc = Call price of the bond.
M = Market price (dirty price) of the bond.
n = the number of years to Call / Put date.

Yields on Index Linked Bonds

C is the coupon payment, 'm' is the times the coupon payment is made,
RPI (base) is the base of the index
RPI (C-d) is the index 'd' duration before the coupon payment time.
In case of half-yearly payments it will be 6 months plus the delay time in
publication of index and computation of coupon payment.

RPI (M-d) The index 'd' duration earlier to maturity time M

Two types of yield measures

Money / Nominal yield
Real yield

Money / Nominal yield

1 1m Y
C

Md

RPI1

m RPI
0

ri

RPI
2

q
RPI
C

m RPI
m
RPI

0 ....

0
2
q
1
1

1
Yri
1

Y
m

ri
m

M d = Market price of the bond

m = number of times coupon payments are made
Yri = Nominal yield
P = maturity payment
q = number of coupon payments till maturity.

Real yield

Yri is the nominal yield and 'i' is the forecasted inflation rate.
The real yield can be restated as:

C
C
P

RPI a
m
m
Md

...
1
RPI 0
1

Y
1

Yry

ry

RPIa = RPI1/(1+i) (1/m)
RPI1 = Index in the first year
'i' is the inflation rate
and 'm' is the number of times it is compounded.

Yield Curves
Ascending Yield Curve

Descending Yield Curve

Risk and Debt Instruments

Default Risk
Reinvestment Risk
Purchasing Power Risk
Price Risk
Liquidity risk

Risk Management in Bonds

Bond Duration
Modified Duration
Convexity

Bond Duration
Duration =
(Present value of cash flows * times to cash flows) / (Present value of
cash flows)

Modified Duration
Modified Duration = Macaulay Duration /( 1 + y / m)
y = yield to maturity and
m = number of discounting periods in year.

Convexity
Convexity = 1/(P x (1+y)^2) [CFt/(1+y)^t x (t^2 +t)]