DEBT MARKET

Debt market refers to the financial market where investors buy and sell debt securities, mostly in the form of bonds. These markets are important source of funds, especially in a developing economy like India. India debt market is one of the largest in Asia. Like all other countries.

Debt Instruments
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. GSecs 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. There are also some perpetual bonds. 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. However, these bonds also give higher returns than the G-Secs.

Certificate of Deposit These are negotiable money market instruments. Certificate of Deposits (CDs), which usually offer higher returns than Bank term deposits, are issued in demat form and also as a Usance Promissory Notes. There are several institutions that can issue CDs. Banks can offer CDs which have maturity between 7 days and 1 year. There are some agencies like ICRA, FITCH, CARE, CRISIL etc. that offer ratings of CDs.

Market Segment Issuer

1.Government Securities

Instrument

Central Zero Coupon Bonds, Government Coupon Bearing Bonds, Treasury Bills, STRIPS State Governments Coupon Bearing Bonds.

An acronym for 'separate trading of registered interest and principal securities'. Treasury STRIPS are fixed-income securities sold at a significant discount to face value and offer no interest payments because they mature at par.

2.Public Sector Bonds

Government Agencies/ Govt. Statutory Bodies Guaranteed Bonds, Debentures Public Sector Units PSU Bonds, Debentures, Commercial Paper Corporates Bonds,Debentures, Commercial Paper, Floating Rate Bonds, Zero Coupon Bonds, Inter-Corporate Deposits

3. Private Sector Bonds,

Banks

Certificates of Deposits, Debentures, Bonds

Financial Institutions Certificates of Deposits, Bonds

Floating Rate Notes Floating Rate Notes are different than fixed rate notes because they pay out variable coupon interest payments at each period (monthly, quarterly, semi-annually or annually). The amount of these variable payments are determined by the current market interest rates such as the LIBOR (London Interbank Offered Rate) or Federal Funds Rate (FFR) + a "spread." A spread is a percentage point example 0.2 that remains constant.

Types of risk
Default Risk The risk that the bond's issuer will be unable to pay the contractual interest or principal on the bond in a timely manner, or at all. Call Risk The risk that a bond will be called by its issuer. Callable bonds have call provisions, which allow the bond issuer to purchase the bond back from the bondholders and retire the issue. This is usually done when interest rates have fallen substantially since the issue date. Call provisions allow the issuer to retire the old, high-rate bonds and sell low-rate bonds in a bid to lower debt costs.

 interest rate risk - the risk that bond prices will fall as interest rates rise. By buying a bond, the bondholder has committed to receiving a fixed rate of return for a fixed period. Should the market interest rate rise from the date of the bond's purchase, the bond's price will fall accordingly.

 Reinvestment Risk The risk that the proceeds from a bond will be reinvested at a lower rate than the bond originally provided. For example, imagine that an investor bought a $1,000 bond that had an annual coupon of 12%. Each year the investor receives $120 (12%*$1,000), which can be reinvested back into another bond. But imagine that over time the market rate falls to 1%. Suddenly, that $120 received from the bond can only be reinvested at 1%, instead of the 12% rate of the original bond.

The key role of the debt markets in the Indian Economy stems from the following reasons: Efficient mobilization and allocation of resources in the economy Financing the development activities of the Government Transmitting signals for implementation of the monetary policy Facilitating liquidity management in tune with overall short term and long term objectives.

Current yield

So, if you purchased a bond with a par value of $100 for $95.92 and it paid a coupon rate of 5%, this is how you'd calculate its current yield:

Yield to maturity

c = annual coupon payment (in dollars, not a percent) Y = number of years to maturity B = par value P = purchase price

 Suppose your bond is selling for $950, and has a coupon rate of 7%; it matures in 4 years, and the par value is $1000. What is the YTM? The coupon payment is $70 (that's 7% of $1000), so the equation to satisfy is 70(1 + r)-1 + 70(1 + r)-2 + 70(1 + r)-3 + 70(1 + r)-4 + 1000(1 + r)-4 = 950 r is 8.53%

Bond Selling At . . .Satisfies This Condition Discount Coupon Rate < Current Yield < YTM Premium Coupon Rate > Current Yield > YTM Par Value Coupon Rate = Current Yield = YTM

Segments in the secondary debt market

Wholesale Debt Market - where the investors are mostly Banks, Financial Institutions, the RBI, Primary Dealers, Insurance companies, MFs, Corporates and FIIs. Retail Debt Market- involving participation by individual investors, provident funds, pension funds, private trusts, NBFCs and other legal entities in addition to the wholesale investor classes.

There are normally two types of transactions, which are executed in the Wholesale Debt Market :

An outright sale or purchase and A Repo trade

 An outright Buy or sell transaction is a one where there is no intended reversal of the trade at the point of execution of the trade. The Buy or sell transaction is an independent trade and is in no way connected with any other trade at the same or a later point of time.

 A Ready Forward Trade (which is normally referred to as a Repo trade or a Repurchase Agreement ) is a transaction where the said trade is intended to be reversed at a later point of time at a rate which will include the interest component for the period between the two opposite legs of the transactions. So in such a transaction, one participant sells securities to other with an agreement to purchase them back at a later date. The trade is called a Repo transaction from the point of view of the seller and it is called a Reverse Repo transaction from point of view of the buyer.

How is the settlement carried out in the Wholesale Debt Market?

The settlement for the various trades is finally carried out through the SGL of the RBI except for transfers between the holders of Constituent SGL A/cs in a particular Bank or Institution like intra-a/c transfers of securities held at the Banks and CCIL. As far as the Broker Intermediated transactions are concerned, the settlement responsibility for the trades in the Wholesale market is primarily on the clients i.e. the market participants and the broker has no role to play in the same. The member only has to report the settlement details to the Exchange for monitoring purposes. The Exchange reports the trades to RBI regularly and monitors the settlement of these trades

What are the three trading modules in the GILT system? GILT permits trading in the Wholesale Debt Market through the three following avenues: Order Grabbing System - which provides for active interaction between the market participants in keeping with the negotiated deal structure of the market. Negotiated Deal Module - which permits the reporting of trades undertaken by the market participants through the members of the Exchange. Cross Deal Module - permitting reporting of trades undertaken by two different market participants through a single member of the Exchange.

Guidelines for Issue of Debt Instruments

Requirement of credit rating Requirement in respect of Debenture Trustee Creation of Debenture Redemption Reserves (DRR) Distribution of Dividends (any distribution of dividend shall require approval of the Debenture Trustees) Redemption The issuer company shall redeem the debentures as per the offer document. Disclosure and Creation of Charge