MARKET

Debt Market
 INTRODUCTION

The debt market is any market situation where trading debt

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.
 Story time
ABC Ltd. Become a renowned organization and now expanded its business throughout the
world. Now, it require further fund for expansion. But, this time Mr. A planned to not issue
further shares and dilute his ownership but to launch an investment option called Bonds, in
which it has planned to take investors money for tenure of 5 years and after that ABC ltd will
return back the invested money of investor. And, during this 5 years, company will pay 10%
interest/coupon to each of its investor who has invested in this bond.

If you have invested Rs. 50,000 at Rs. 1000 of each bonds in this bond. (Face value will be Rs.
1000) on 1st March 2013. You will get 50 bonds, Yearly interest of Rs. 5000 (1,000X10%=Rs.
100 per bond & 100X50 no. of bonds = Rs. 5,000 as interest amount)

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 WHAT IS DEBT?
In English the meaning of debt is loan, the same is the meaning of Debt in investment.

It is a contract between issuer and investor on pre-determined rate of interest, maturity and the
repayment of the principal amount.

The investor in Debt market is a lender for the issuer.

The major investor in this are institutional investor (corporate, Banks, Insurance etc.)

Instrument Features:

Maturity: The period of bonds, it is life spam of bond, after this bond doesnt exist in the
market.

Interest/Coupon: This is a amount that issuer pays to investor to on

daily/weekly/monthly/quarterly/annually. This measures in percentage and it is paid on
face value.

Principal Amount: This is a money that an investor invest. 5

 Debt Market

Organized Unorganized
Debt Market Debt Market

Bonds & Fixed Money

NCDs Deposits lenders

Primary Secondary Primary Non-traded

Market Market Market on exchange

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 WHAT IS DEBT?
In English the meaning of debt is loan, the same is the meaning of Debt in investment.

It is a contract between issuer and investor on pre-determined rate of interest, maturity and the
repayment of the principal amount.

The investor in Debt market is a lender for the issuer.

The major investor in this are institutional investor (corporate, Banks, Insurance etc.)

Instrument Features:

Maturity: The period of bonds, it is life spam of bond, after this bond doesnt exist in the
market.

Interest/Coupon: This is a amount that issuer pays to investor to on

daily/weekly/monthly/quarterly/annually. This measures in percentage and it is paid on
face value.

Principal Amount: This is a money that an investor invest. 7

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.
CLASSIFIACTION OF INDIAN DEBT MARKET

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.
 DEBT INSTRUMENTS

Government Securities

Corporate Bonds

Certificate of Deposit

Commercial Papers
Government Securities

It is the Reserve Bank of India that issues Government Securities or

G-Secs on behalf of the Government of India.

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
Corporate Bonds

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
Certificate of Deposit

Certificate of Deposits (CDs), which usually offer higher returns

than Bank term deposits, are issued in demat form
Banks can offer CDs which have maturity between 7 days and
1 year.

CDs from financial institutions have maturity between 1 and 3

years

Commercial Papers
There are short term securities with maturity of 7 to 365 days.
 Risk Associated:
One of a major risk in Debt market is a default risk; it means a company unable to pay back

capital or/and interest amount.

To reduce that risk, there are few agencies who tracks the fundamental situation of the company

and give rating the particular company. (One of the famous credit rating agencies is CRISIL).

These agencies are known as Credit Rating Agency.

The ratings describes like;

AAA- Most fundamental company safest company8 to invest, and it gradually reduces its quality

with AA, A, BBB, BB, B CCC, CC, C, and is default company.

Lower the credit rating, higher the interest rate that a company offers to its client.
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 Interest Rate Risk
Something which we can earn but not able to earn, because we have blocked
our funds somewhere else. This is known as interest rate risk.

Means, the interest rate is keep on changing, so if an investor invested at 10%

interest rate FD/Bond, and there is a new bond launched with 12% interest rate,
so this investor is loosing this 2% extra benefit, this is known as interest rate risk.

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 How secondary markets function in Debt
Market
The function of secondary market is as same as equity market. However,
Debt market is not that volatile then equity market.

The prices fluctuates in Debt market due to interest rate fluctuations.

If interest rate comes down, the price of bonds goes up and vice a versa.

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