Indian Debt Markets - A Primer

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PRIMER ON
INDIAN DEBT
MARKETS
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Glossary of Important Terms and Commonly Used Market Terminology.....................6

Some Useful Information.......................................................................................... 12
What are Fixed Income Securities?........................................................................12
What is Money Market?......................................................................................... 12
What is a Certificate of Deposit (CD)?...................................................................13
What is a Commercial Paper (CPs)?.......................................................................13
What is a Fixed Deposit?....................................................................................... 14
What is Over the Counter (OTC)?..........................................................................14
What is a Credit Default Swap?............................................................................. 14
What is an Interest Rate Swap?............................................................................. 15
What is a Call money market?...............................................................................15
What are a Repo and a Reverse Repo Rate?..........................................................15
What is a Repo market?......................................................................................... 16
What is a Cash Reserve Ratio (CRR)?....................................................................17
What is a Statutory Liquid Ratio (SLR)?.................................................................17
What are Open Market Operations (OMOs)?..........................................................18
What is meant by buyback of Government securities?.........................................18
What is Liquidity Adjustment Facility (LAF)?..........................................................19
What is the role of the Clearing Corporation of India Limited (CCIL)?....................19
What is Collateralized Borrowing and Lending Obligation (CBLO).........................20
What are the role and functions of FIMMDA?.........................................................21
What is the role of National Securities Clearing Corporation Ltd. (NSCCL)?..........23
What is a debenture?............................................................................................ 23
What is Convexity?................................................................................................ 24
Analytics................................................................................................................... 25
What is time value of money?...............................................................................25
What is present value?.......................................................................................... 25
What is Yield?........................................................................................................ 26
How is Yield to Maturity computed?......................................................................26
How is the Price of a bond calculated? What is the total consideration amount of a
trade and what is accrued interest?......................................................................27
What is the relationship between yield and price of a bond?................................27
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How is the yield of a bond calculated?..................................................................28

What is the day count conventions used in calculating bond yields?....................29
How is the yield of a Treasury bill calculated?.......................................................30
What is Duration?.................................................................................................. 30
What are Clean Price and the Dirty Price in reference to trading in G-Secs?.........30
How are the Face Value, Trade Value and the settlement value different from each
other?.................................................................................................................... 31
What are credit spreads?....................................................................................... 32
What is a Debt Market?............................................................................................ 33

Who are the market participants in the Government Securities (G-Secs) Market?...34
Participants and products in the Indian G-Secs markets...........................................37
What are the advantages for investing in Fixed Income securities?.........................38
What are the risks associated with Indian Debt Markets?........................................38
What factors determine the interest rate in the Debt market?.................................40
What is a Government Security (G-Secs)?................................................................41
What are Treasury Bills?........................................................................................... 41
What are Cash Management Bills (CMBs)?...............................................................41
What are Dated Government Securities?.................................................................42
What are Fixed Rate Bonds?..................................................................................... 42
What are Floating Rate Bonds?.................................................................................43
What are Zero Coupon Bonds?................................................................................. 43
What are Capital Indexed bonds?............................................................................. 43
What are Bonds with Call / Put options?...................................................................44
What are special securities?..................................................................................... 44
Who regulates Indian G-Secs market?......................................................................45
Why should one invest in G-Secs?............................................................................45
What are the Dos and Donts prescribed by the RBI for dealing in government
securities?................................................................................................................ 46
What are auctions and how are the G-Secs issued through these auctions?............46
What are the different types of auctions used for issue of G-Secs?..........................48
What is competitive and non competitive bidding?...............................................49
How and in what form can G-Secs be held?.............................................................50
How does the trading in Government securities take place?....................................51
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How are the dealing transactions recorded by the dealing desk?............................53

How do the Government securities transactions settle in the primary market?.......54
How do the Government securities transactions settle in the secondary market?...54
What are the important considerations while undertaking security transactions?. . .55
What are the important guidelines for valuation of G-Secs?....................................57
Example showing valuation of G-Secs......................................................................58
What affects the price of G-Sec?.............................................................................. 60
How are the G-secs transactions reported?..............................................................60
What are the various websites that give information on Government securities?....62
What is shut period?................................................................................................. 66
What is Delivery versus Payment (DvP) settlement?................................................66
Bond credit ratings................................................................................................... 67
What are corporate bonds?...................................................................................... 68
Why should one invest in corporate bonds?.............................................................68
Who regulates the Corporate Bond Markets?...........................................................68
What are the different types of corporate bonds?....................................................69
What are the key components of the corporate bonds?...........................................70
What are the factors and risks investors should keep in mind while trading /
investing in the Corporate Bonds?............................................................................72
How are corporate bonds issued in India?................................................................73
Where are the corporate bonds listed?.....................................................................73
How trading takes place in the Capital market segment for the corporate bonds?. .74
What are the important guidelines for valuation of Corporate Bonds?.....................74
What are the corporate bonds available for trading in the capital market segment?
................................................................................................................................. 75
Where will one get details of todays corporate bond trade data in the capital
market segment?..................................................................................................... 76
Important Excel functions for bond related functions...............................................77
Present Value......................................................................................................... 77
Future Value.......................................................................................................... 78
Coupon days......................................................................................................... 79
Yearfrac................................................................................................................. 80
PRICE..................................................................................................................... 81
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YIELD..................................................................................................................... 82
DURATION.............................................................................................................. 83
Modified Duration.................................................................................................. 84
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Glossary of Important Terms and Commonly Used Market
Terminology
SOURCE: RBI
Accrued Interest
The accrued interest on a bond is the amount of interest accumulated on a bond
since the last coupon payment. The interest has been earned, but because coupons
are paid only on coupon dates, the investor has not gained the money yet. In India
day count convention for Government Securities (G-Secs) is 30/360.
Bid Price/ Yield
The price/yield being offered by a potential buyer for a security
Big Figure
When the price is quoted as Rs.102.35, the portion other than decimals (102) is
called the big figure.
Competitive Bid
Competitive bid refers to the bid for the stock at the price stated by a bidder in an
auction.
Coupon
The rate of interest paid on a debt security as calculated on the basis of the
securitys face value.
Coupon Frequency
Coupon payments are made at regular intervals throughout the life of a debt
security and may be quarterly (4 times during a year), semi-annual (twice a year) or
annual payments.
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Discount
When the price of a security is trading below the par value or the face value (FV), it
is said to be trading at discount. The value of the discount is the difference between
the FV and the Price. For example, if a security with a FV of 100 is trading at Rs.99,
the discount is Rs.1.
Duration (Macaulay Duration)

Duration of a bond is the number of years taken to recover the initial investment of
a bond.
Related Reference:
What is Duration?
Face Value
Face value is the amount that is to be paid to an investor at the maturity date of the
security. Debt securities can be issued at varying face values; however in India they
typically have a face value of Rs.100. The face value is also known as the
repayment amount. This amount is also referred as redemption value, principal
value (or simply principal), maturity value or par value.
Floating-Rate Bond
Bonds whose coupon rate is re-set at predefined intervals and is based on a prespecified market based interest rate.
Gilt/ Government Securities (G-Secs)

Government securities are also known as gilts or gilt edged securities. Government
security means a security created and issued by the Government for the purpose
of raising a public loan or for any other purpose as may be notified by the
Government in the Official Gazette and having one of the forms mentioned in The
Government Securities Act, 2006.
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Market Lot
Market lot refers to the standard value of the trades that happen in the market. The
standard market lot size in the Government securities market is Rs. 5 crore in face
value terms.
Maturity Date
Maturity date is the date when the principal (face value) is paid back. The final
coupon and the face value of a debt security are repaid to the investor on the
maturity date. The time to maturity can vary from short term (1 year) to long term
(30 years).
Non-Competitive Bid
Non-competitive bidding means the bidder would be able to participate in the
auctions of dated government securities without having to quote the yield or price
in the bid. The allotment to the non-competitive segment will be at the weighted
average rate that will emerge in the auction on the basis of competitive bidding. It
is an allocating facility wherein a part of total securities are allocated to bidders at a
weighted average price of successful competitive bid.
Odd Lot
Transactions of any value other than the standard market lot size of Rs. 5 crore are
referred to as odd lot. Generally the value is less than the Rs. 5 crore with a
minimum of Rs.10, 000/-. Odd lot transactions are generally done by the retail and
small participants in the market.
Par
Par value is nothing but the face value of the security which is Rs. 100 for
Government securities in India. When the price of a security is equal to face value,
the security is said to be trading at par.
Premium
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When the price of a security is above the par value or the face value (FV), the
security is said to be trading at premium. The value of the premium is the difference
between the price and the face value. For example, if a security with a FV of Rs. 100
is trading at Rs.102, the premium is Rs.2.
Price
The price quoted is for per Rs. 100 of face value. Like any other financial
instrument, the price of the G-Sec is equal to the present value of all the future cash
flows. This price is based on a number of factors. In the secondary market, where
already-issued debt securities are bought and sold between investors, the price one
pays for a bond is based on a host of variables, including market interest rates,
accrued interest, supply and demand, credit quality, maturity date, and state of
issuance, market events and the size of the transaction.
Primary Dealers
Primary dealers are entities that are appointed to play role of intermediary between
the issuer of the G-Secs and the market. They are also known as market makers.
Their obligations include making continuous bids and offer price in the marketable
government securities or submitting reasonable bids in the auctions.
Real Time Gross Settlement (RTGS) system
RTGS system is a funds transfer mechanism for transfer of money from one bank to
another on a real time and on gross basis. This is the fastest possible money
transfer system through the banking channel. Settlement in real time means
payment transaction is not subjected to any waiting period. The transactions are
settled as soon as they are processed. Gross settlement means the transaction is
settled on one to one basis without bunching with any other transaction.
Considering that money transfer takes place in the books of the Reserve Bank of
India, this payment is taken as final and irrevocable.
Repo Rate
Repo rate is the return earned on a repo transaction expressed as an annual interest
rate.
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Residual Maturity
The remaining period until maturity date of a security is its residual maturity. For
example, a security issued for an original term to maturity of 10 years, after 2
years, will have a residual maturity of 8 years.
Secondary Market
Secondary market refers to the buying and selling that goes on after the initial
public sale of the security. This market is different from the primary or initial market
when securities are sold for the first time.
Tap Sale
Under Tap sale, a certain amount of securities is created and made available for
sale, generally with a minimum price, and is sold to the market as bids are made.
These securities may be sold over a period of day or even weeks; and authorities
may retain the flexibility to increase the (minimum) price if demand proves to be
strong or to cut it if demand weakens. Tap and continuous sale are very similar,
except that with Tap sale the debt manager tends to take a more pro-active role in
determining the availability and indicative price for tap sales. Continuous sale are
essentially at the initiative of the market.
Treasury Bills
Debt obligations of the government that have maturities of one year or less are
normally called Treasury Bills or T-Bills. They are instruments issued at a discount to
the face value and form an integral part of the money market.
Underwriting
The arrangement by which investment bankers undertake to acquire any
unsubscribed portion of a primary issuance of a security
Weighted Average Price/ Yield

It is the weighted average mean of the price/ yield where weight being the amount
used at that price/ yield. The allotment to the non-competitive segment will be at
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the weighted average price/yield that will emerge in the auction on the basis of
competitive bidding.
Yield or Current Yield

Yield is the annual percentage rate of return earned on a security. Yield is a function
of a securitys purchase price and coupon interest rate. Yield fluctuates according to
numerous factors including global markets and the economy.
Please note that, the current yield does not include any of the capital gains or the
losses that an investor would make if the bond were bought at a discount or a
premium. Due to this we can also use the Adjusted Current Yield
Yield to Maturity (YTM)

Yield to maturity is the total return one would except to receive if the security is
being held until maturity. Yield to maturity is essentially the discount rate at which
the present value of future payments (investment income and return of principal)
equals the price of the security.
Yield Curve
The graphical relationship between yield and maturity among bonds of different
maturities and the same credit quality. This line shows the term structure of interest
rates. It also enables investors to compare debt securities with different maturities
and coupons.
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Some Useful Information

What are Fixed Income Securities?
A fixed-income security is a debt instrument issued by a government or any other
entity to finance and expand their operations.
Fixed-income securities provide investors a return in the form of fixed periodic
payments and eventual return of principal at maturity.
What is Money Market?
While the Government Securities (G-Secs) market generally caters to the

investors with a long term investment horizon, the money market provides
investment avenues of short term tenor.
Money market transactions are generally used for meeting short term
liquidity mismatches.
By definition, money market is for a maximum tenor of up to one year. Within

the one year, depending upon the tenors, money market is classified into:
o
o
o
Overnight market - The tenor of transactions is one working day.

Notice money market The tenor of the transactions is from 2 days to
14 days.
Term money market The tenor of the transactions is from 15 days to
one year.
The money market is regulated by the RBI. All the above mentioned money
market transactions should be reported on the Negotiated Dealing System
(NDS)
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What is a Certificate of Deposit (CD)?
CDs are short-term borrowings in the form of Usance Promissory Notes having
a maturity of not less than 15 days up to a maximum of one year.
CDs are subject to payment of Stamp Duty under Indian Stamp Act, 1899
(Central Act)
They are like bank term deposits accounts. Unlike traditional time deposits
these are freely negotiable instruments and are often referred to as
Negotiable Certificate of Deposits
Features of CD
o
o
o
o
All scheduled banks (except regional rural banks (RRBs) and Cooperative banks) are eligible to issue CDs
Issued to individuals, corporations, trusts, funds and associations
They are issued at a discount rate freely determined by the issuer and
the market/investors
Freely transferable by endorsement and delivery. At present CDs are
issued in physical form
These are issued in denominations of Rs.5 Lakh initially and Rs. 1 Lakh thereafter.
Bank CDs have maturity up to one year. Minimum period for a bank CD is fifteen
days. Financial Institutions are allowed to issue CDs for a period between 1 year and
up to 3 years. CDs issued by All India Financial Institutions (AIFI) are issued in
physical form and at a discount to the face value.
SOURCE: FIMMDA
What is a Commercial Paper (CPs)?
CPs are short term borrowings by Corporates, Financial Institutions, Money

Market.
CPs when issued in Physical Form are negotiable by endorsement and
delivery and hence highly flexible instruments
Issued subject to minimum of Rs 5 lakh and in the multiples of Rs. 5 lakh
thereafter
Maturity is 15 days to 1 year
Unsecured and backed by credit of the issuing company
Can be issued with or without Backstop facility (facility to advance funds only
when a borrower cannot obtain funds under short term instruments like CPs
etc) of Bank or a financial institution
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What is a Fixed Deposit?
A fixed deposit account allows an investor to deposit his money for a set period of
time in the bank, thereby earning a higher rate of interest in return.
What is Over the Counter (OTC)?

Over-the-counter (OTC) or off-exchange trading is to trade financial instruments
such as stocks, bonds, commodities or derivatives directly between two parties. It is
contrasted with exchange trading, which occurs via facilities constructed for the
purpose of trading (i.e. exchanges), such as futures exchanges or stock exchanges.
What is a Credit Default Swap?

A credit default swap (CDS) is an agreement that the seller of the CDS will
compensate the buyer in the event of a loan default. The buyer of the CDS makes a
series of payments (the CDS "fee" or "spread") to the seller and, in exchange,
receives a payoff if the loan defaults.
In the event of default the buyer of the CDS receives compensation (usually the
face value of the loan), and the seller of the CDS takes possession of the defaulted
loan.
However, anyone can purchase a CDS, even buyers who do not hold the loan
instrument and who have no direct insurable interest in the loan (these are called
"naked" CDSs). If there are more CDSs contracts outstanding than bonds in
existence, a protocol exists to hold a credit event auction; the payment received is
usually substantially less than the face value of the loan
SOURCE: Wikipedia
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What is an Interest Rate Swap?

Interest rate swaps are simply the exchange of one set of cash flows (based on
interest rate specifications) for another. Because they trade OTC, they are really just
contracts set up between two or more parties, and thus can be customized in any
number of ways.
Generally speaking, swaps are sought by firms that desire a type of interest rate
structure that another firm can provide less expensively.
SOURCE: Investopedia
What is a Call money market?

Call money market is a market for uncollateralized lending and borrowing of funds.
This market is predominantly overnight and is open for participation only to
scheduled commercial banks and the primary dealers.
What are a Repo and a Reverse Repo Rate?
Repo (Repurchase) rate is the rate at which the RBI lends shot-term money to
the banks against securities. When the repo rate increases borrowing from
RBI becomes more expensive. Therefore, we can say that in case, RBI wants
to make it more expensive for the banks to borrow money, it increases the
repo rate; similarly, if it wants to make it cheaper for banks to borrow money,
it reduces the repo rate
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Reverse Repo rate is the rate at which banks park their short-term excess
liquidity with the RBI. The banks use this tool when they feel that they are
stuck with excess funds and are not able to invest anywhere for reasonable
returns. An increase in the reverse repo rate means that the RBI is ready to
borrow money from the banks at a higher rate of interest. As a result, banks
would prefer to keep more and more surplus funds with RBI.
Thus, we can conclude that Repo Rate signifies the rate at which liquidity is injected
in the banking system by RBI, whereas Reverse repo rate signifies the rate at which
the central bank absorbs liquidity from the banks
What is a Repo market?
Repo or ready forward contract is an instrument for borrowing funds by

selling securities with an agreement to repurchase the said securities on a
mutually agreed future date at an agreed price which includes interest for the
funds borrowed.
The reverse of the repo transaction is called reverse repo which is lending of
funds against buying of securities with an agreement to resell the said
securities on a mutually agreed future date at an agreed price which includes
interest for the funds lent.
It can be seen from the definition above that there are two legs to the same
transaction in a repo/ reverse repo. The duration between the two legs is
called the repo period.
Predominantly, repos are undertaken on overnight basis, i.e., for one day
period. Settlement of repo transactions happens along with the outright
trades in government securities.
The consideration amount in the first leg of the repo transactions is the
amount borrowed by the seller of the security. On this, interest at the agreed
repo rate is calculated and paid along with the consideration amount of the
second leg of the transaction when the borrower buys back the security.
The overall effect of the repo transaction would be borrowing of funds backed
by the collateral of Government securities.
As part of the measures to develop the corporate debt market, RBI has
permitted select entities (scheduled commercial banks, all-India Financial
Institutions, Non Banking Financial Companies, mutual funds, housing finance
companies, insurance companies) to undertake repo in corporate debt
securities
This is similar to repo in G-Secs except that corporate debt securities are
used as collateral for borrowing funds
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Only listed corporate debt securities that are rated AA or above by the
rating agencies are eligible to be used for repo
Commercial paper, certificate of deposit, non-convertible debentures of
original maturity less than one year are not eligible for the purpose
These transactions take place in the OTC market and are required to be
reported on FIMMDA platform within 15 minutes of the trade for
dissemination of information
They are also to be reported on the clearing house of any of the exchanges
for the purpose of clearing and settlement
What is a Cash Reserve Ratio (CRR)?
Banks in India are required to hold a certain proportion of their deposits in the
form of cash. However please note that, Banks dont hold these as cash with
themselves, but deposit such cash with RBI / currency chests, which is
considered as equivalent to holding cash with RBI.
This minimum ratio (that is the part of the total deposits to be held as cash) is
stipulated by the RBI and is known as the CRR.
Thus, when a banks deposits increase by Rs100, and if the cash reserve ratio
is 5.50%, the banks will have to hold additional Rs 5.50 with RBI and Bank will
be able to use only Rs 95.5 for investments and lending / credit purpose.
Therefore, higher the ratio (i.e. CRR), the lower is the amount that banks will
be able to use for lending and investment.
This power of RBI to reduce the lendable amount by increasing the CRR
makes it an instrument in the hands of a central bank through which it can
control the amount that banks lend. Thus, it is a tool used by RBI to control
liquidity in the banking system.
What is a Statutory Liquid Ratio (SLR)?
This term is used by bankers and indicates the minimum percentage of

deposits that the bank has to maintain in form of gold, cash or other
approved securities.
Thus, we can say that it is ratio of cash and some other approved securities
to liabilities (deposits)
It regulates the credit growth in India.
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What are Open Market Operations (OMOs)?
OMOs are the market operations conducted by the RBI by way of sale/ purchase of
G-Secs to/ from the market with an objective to adjust the rupee liquidity conditions
in the market on a durable basis.
When the RBI feels there is excess liquidity in the market, it resorts to sale of G-Secs
thereby sucking out the rupee liquidity. Similarly, when the liquidity conditions are
tight, the RBI will buy securities from the market, thereby releasing liquidity into the
market.
What is meant by buyback of Government securities?

Buyback of Government securities is a process whereby the Government of India and
State Governments buy back their existing securities from the holders.
The objectives of buyback are as follows:
Reduction of cost (by buying back high coupon securities)

Reduction in the number of outstanding securities and improving liquidity in the
Government securities market (by buying back illiquid securities)
Infusion of liquidity in the system
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Government makes provisions in their budget for buying back of existing securities.
Buyback can be done through an auction process or through the secondary market
route, i.e., NDS/NDS-OM.
What is Liquidity Adjustment Facility (LAF)?
LAF is a facility extended by the RBI to the scheduled commercial banks and
primary dealers to avail of liquidity in case of requirement or park excess funds
with the RBI in case of excess liquidity on an overnight basis against the
collateral of Government securities including State Government securities.
Basically LAF enables liquidity management on a day to day basis.
LAF is an important tool of monetary policy and enables RBI to transmit interest
rate signals to the market.
The operations of LAF are conducted by way of repurchase agreements with RBI
being the counter-party to all the transactions. The interest rate in LAF is fixed
by the RBI from time to time. Currently the rate of interest on repo under LAF
(borrowing by the participants) is 6.25% and that of reverse repo (placing funds
with RBI) is 5.25%.
What is the role of the Clearing Corporation of India Limited

(CCIL)?
The CCIL is the clearing agency for Government securities.
It acts as a Central Counter Party (CCP) for all transactions in Government

securities itself between two counterparties thus neutralizing the
counterparty risk
On this platform, anonymous trading takes place
In effect, during settlement, the CCP becomes the seller to the buyer and
buyer to the seller of the actual transaction.
All outright trades undertaken in the OTC market and on the Negotiated
Dealing System Open Market (NDS-OM) platform are cleared through the
CCIL.
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Once CCIL receives the trade information, it works out participant-wise net
obligations on both the securities and the funds leg.
The payable / receivable position of the constituents is reflected against their

respective custodians.
CCIL forwards the settlement file containing net position of participants to the
RBI where settlement takes place by simultaneous transfer of funds and
securities under the Delivery versus Payment system.
CCIL also guarantees settlement of all trades in Government securities. That

means, during the settlement process, if any participant fails to provide
funds/ securities, CCIL will make the same available from its own means. For
this purpose, CCIL collects margins from all participants and maintains
Settlement Guarantee Fund.
Related Reference:
Delivery vs. Payment system
What is Collateralized Borrowing and Lending Obligation

(CBLO)
CBLO is a money market instrument operated by the Clearing Corporation of India
Ltd. (CCIL), for the benefit of the entities who have either no access to the interbank
call money market or have restricted access in terms of ceiling on call borrowing
and lending transactions. CBLO is a discounted instrument available in electronic
book entry form for the maturity period ranging from one day to ninety days (up to
one year as per RBI guidelines). In order to enable the market participants to borrow
and lend funds, CCIL provides the Dealing System through Indian Financial Network
(INFINET), a closed user group to the Members of the Negotiated Dealing System
(NDS) who maintain Current account with RBI and through Internet for other entities
who do not maintain Current account with RBI.
By participating in the CBLO market, CCIL members can borrow or lend funds
against the collateral of eligible securities. Eligible securities are Central
Government securities including Treasury Bills, and such other securities as
specified by CCIL from time to time. Borrowers in CBLO have to deposit the required
amount of eligible securities with the CCIL based on which CCIL fixes the borrowing
limits. CCIL matches the borrowing and lending orders submitted by the members
and notifies them. While the securities held as collateral are in custody of the CCIL,
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the beneficial interest of the lender on the securities is recognized through proper
documentation.
What are the role and functions of FIMMDA?
The Fixed Income Money Market and Derivatives Association of India

(FIMMDA), is an association of Scheduled Commercial Banks, Public Financial
Institutions, Primary Dealers and Insurance Companies
FIMMDA is a voluntary market body for the bond, money and derivatives
markets.
FIMMDA has members representing all major institutional segments of the

market.
The membership includes

o Nationalized Banks such as
State Bank of India, its associate banks and other nationalized
banks;
o
Private sector banks such as

ICICI Bank
HDFC Bank
IDBI Bank
Foreign Banks such as

Bank of America
ABN Amro
Citibank,
Financial institutions such as

IDFC
EXIM Bank
NABARD
Insurance Companies like

Life Insurance Corporation of India (LIC)
ICICI Prudential Life Insurance Company
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Birla Sun Life Insurance Company and all Primary Dealers
FIMMDA represents market participants and aids the development of the

bond, money and derivatives markets.
It acts as an interface with the regulators on various issues that impact the
functioning of these markets.
It also undertakes developmental activities, such as, introduction of

benchmark rates and new derivatives instruments, etc.
It releases rates of various Government securities that are used by market

participants for valuation purposes.
It also plays a constructive role in the evolution of best market practices by

its members so that the market as a whole operates transparently as well as
efficiently.
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What is the role of National Securities Clearing Corporation
Ltd. (NSCCL)?
The National Securities Clearing Corporation Ltd. (NSCCL) is a wholly owned
subsidiary of NSE.
NSCCL carries out the clearing and settlement of the trades executed in the
Equities and Derivatives segments and operates Subsidiary General Ledger
(SGL) for settlement of trades in government securities.
It assumes the counter-party risk of each member and guarantees financial

settlement.
It also undertakes settlement of transactions on other stock exchanges like,

the Over the Counter Exchange of India.
NSCCL has successfully brought about an up-gradation of the clearing and

settlement procedures and has brought Indian financial markets in line with
international markets.
What is a debenture?
A Debenture is a debt security issued by a company (called the Issuer), which

offers to pay interest in lieu of the money borrowed for a certain period.
In essence it represents a loan taken by the issuer who pays an agreed rate
of interest during the lifetime of the instrument and repays the principal
normally, unless otherwise agreed, on maturity.
These are long-term debt instruments issued by private sector companies.
These are issued in denominations as low as Rs 1000 and have maturities
ranging between one and ten years.
Long maturity debentures are rarely issued, as investors are not comfortable
with such maturities
Debentures enable investors to reap the dual benefits of adequate security
and good returns.
Unlike other fixed income instruments such as Fixed Deposits, Bank Deposits
they can be transferred from one party to another by using transfer from.
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Debentures are normally issued in physical form. However, Corporates/PSUs

have started issuing debentures in Demat form. Generally, debentures are
less liquid as compared to Public Sector Unit bonds and their liquidity is
inversely proportional to the residual maturity. Debentures can be secured or
unsecured.
What is Convexity?
Calculation of change in price due to change in yields based on duration works only
for small changes in prices. This is because the relationship between bond price and
yield is not strictly linear i.e., the unit change in price of the bond is not
proportionate to unit change in yield.
However, over large variations in prices, the relationship is curvilinear i.e., the
change in bond price is either less than or more than proportionate to the change in
yields. This is measured by a concept called convexity, which is the change in
duration of a bond per unit change in the yield of the bond.
NOTE: The information provided in the above section has been sourced from various
websites like RBI, NSE, and FIMMDA
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Analytics
What is time value of money?
The concept of time value of money is based on the premise that an investor
prefers to receive a payment of a fixed amount of money today, rather than
an equal amount in the future, all else being equal.
In particular, if one receives the payment today, one can then earn interest
on the money until that specified future date, hence increasing the
purchasing power of the investor.
What is present value?
Present value is the current worth of a future sum of money or stream of cash
flows given a specified rate of return.
Future cash flows are discounted at the discount rate, and the higher the
discount rate, the lower the present value of the future cash flows.
Determining the appropriate discount rate is the key to properly valuing
future cash flows, whether they are earnings or obligations. This is also
referred to as "discounted value".
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What is Yield?
Yield refers to the percentage rate of return paid on a stock in the form of
dividends, or the effective rate of interest paid on a bond or note.
There are many different kinds of yields depending on the investment
scenario and the characteristics of the investment.
Yield to Maturity (YTM) is the most popular measure of yield in the Debt
Markets and is the percentage rate of return paid on a bond, note or other
fixed income security if you buy and hold the security till its maturity date.
Current Yield is the coupon divided by the Market Price and gives a fair
approximation of the present yield.
Current Yield = Coupon of the Security (in %) x Face Value of the Security /Market
Price of the Security
Market Price = 120, Coupon = 10.18% then Current Yield = (0.1018 x 100)/120 =
8.48%
How is Yield to Maturity computed?
The calculation for YTM is based on the coupon rate, length of time to
maturity and market price.
It is the Internal Rate of Return on the bond and can be determined by
equating the sum of the cash-flows throughout the life of the bond to zero.
A critical assumption underlying the YTM is that the coupon interest paid over
the life of the bond is assumed to be reinvested at the same rate.
The YTM is basically obtained through a trial and error method by
determining the value of the entire range of cash-flows for the possible range
of YTMs so as to find the one rate at which the cash-flows sum up to zero.
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How is the Price of a bond calculated? What is the total
consideration amount of a trade and what is accrued interest?
The price of a bond is nothing but the sum of present values all future cash
flows of the bond.
The interest rate used for discounting the cash flows is the Yield to Maturity
(YTM) of the bond.
Accrued interest is the interest calculated for the broken period from the last
coupon day till a day prior to the settlement date of the trade.
Since the seller of the security is holding the security for the period up to the
day prior to the settlement date of the trade, he is entitled to receive the
coupon for the period held.
During settlement of the trade, the buyer of security will pay the accrued
interest in addition to the agreed price and pays the consideration amount
The price of the bond is usually in 2 decimal places
What is the relationship between yield and price of a bond?
When the market price of the bond is less than the face value, i.e., the bond
sells at a discount, Yield To Maturity (YTM) > current yield > coupon yield.
When the market price of the bond is more than its face value, i.e., the bond
sells at a premium, coupon yield > current yield > YTM.
When the market price of the bond is equal to its face value, i.e., the bond
sells at par, YTM = current yield = coupon yield.
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How is the yield of a bond calculated?
An investor who purchases a bond can expect to receive a return from one or more
of the following sources:
The coupon interest payments made by the issuer;

Any capital gain (or capital loss) when the bond is sold; and
Income from reinvestment of the interest payments that is interest-oninterest.
The most commonly used yield measures by investors to measure the potential
return from investing in a bond are briefly described below:
Coupon Yield
The coupon yield is simply the coupon payment as a percentage of the face
value.
It refers to nominal interest payable on a fixed income security like G-Secs.
This is the fixed return the Government (i.e., the issuer) commits to pay to
the investor.
Coupon yield thus does not reflect the impact of interest rate movement and
inflation on the nominal interest that the Government pays.
Coupon yield = Coupon Payment / Face Value
Coupon: 8.24, Face Value: Rs.100, Market Value: Rs.103.00, Coupon yield =
8.24/100 = 8.24%
Current Yield
The current yield is simply the coupon payment as a percentage of the bonds
purchase price.
It does not take into account the reinvestment of the interest income
received periodically. It only considers the coupon interest and ignores other
sources of return that will affect an investors return.
Current yield = (Annual coupon rate / Purchase price) X100
The current yield for a 10 year 8.24% coupon bond selling for Rs.103.00 per Rs.100
par value is calculated below:
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Annual coupon interest = 8.24% x Rs.100 = Rs.8.24

Current yield = (8.24/Rs.103)X100 = 8.00%
What is the day count conventions used in calculating bond

yields?
The conventions followed in Indian market are given below.
Bond market:
o The day count convention followed is 30/360, which means that
irrespective of the actual number of days in a month, the number of
days in a month is taken as 30 and the number of days in a year is
taken as 360.
Money market:
o The day count convention followed is Actual/365, which means that the
actual number of days in a month is taken for number of days
(numerator) whereas the number of days in a year is taken as 365
days.
Please note that: In case of Treasury bills, which are essentially money market
instruments, money market convention is followed.
SOURCE: BSE
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How is the yield of a Treasury bill calculated?
The yield on the Treasury bill is calculated in the following manner
Wherein;
P Purchase price
D Days to maturity
Day Count: For Treasury Bills, D = [actual number of days to maturity/365]
What is Duration?
Duration refers to the payback period of a bond to break even, i.e., the time taken
for a bond to repay its own purchase price. In other words, it is a measurement of
how long, in years, it takes for the price of a bond to be repaid by its internal cash
flows. It is an important measure for investors to consider, as bonds with higher
durations carry more risk and have higher price volatility than bonds with lower
durations.
Calculation for Duration
First, each of the future cash flows is discounted to its respective present
value for each period. Since the coupons are paid out every six months, a
single period is equal to six months and a bond with two years maturity will
have four time periods.
Second, the present values of future cash flows are multiplied with their
respective time periods (these are the weights). That is the Present Value
(PV) of the first coupon is multiplied by 1, PV of second coupon by 2 and so
on.
Third, the above weighted PVs of all cash flows are added and the sum is
divided by the current price (total of the PVs in step 1) of the bond. The
resultant value is the duration in no. of periods. Since one period equals to six
months, to get the duration in no. of year, divide it by two. This is the time
period within which the bond is expected to pay back its own value if held till
maturity.
The rate at which the above cash flows are discounted is the yield on the
bond.
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What are Clean Price and the Dirty Price in reference to
trading in G-Secs?
G-Secs are traded on a clean price (Trade price) but settled on the dirty price (Trade
price + Accrued Interest). This happens, as the coupon payments are not
discounted in the price, as is the case in the other non-govt. debt instruments.
How are the Face Value, Trade Value and the settlement value
different from each other?
The Cumulative face Value of the securities in a transaction is the face Value
of the Transaction and is normally the identifiable feature of each transaction.
The Trade value is the cumulative price of the traded G-Secs (i.e. no. of
securities multiplied by the price)
The Settlement value will be the trade value plus the Accrued Interest. The
Accrued Interest per unit of the Bond is calculated as = Coupon of Bond x
Face Value of the G-Sec. (100) x (No. of Days from Interest Payment Date to
Settlement Date)/360. In computing the no. of days between the Interest
Payment Date and the Settlement Date of the trade, only one of the two days
is to be included.
SOURCE: BSE
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What are credit spreads?
The difference between the yield on a corporate bond and a government bond is
called the credit spread (sometimes just called the yield spread).
As the illustrated yield curves demonstrate, the credit spread is the difference in
yield between a corporate bond and a government bond at each point of maturity.
As such, the credit spread reflects the extra compensation investors receive for
bearing credit risk. So, the total yield on a corporate bond is a function of both the
Treasury yield and the credit spread, which is greater for lower-rated bonds. If the
bond is callable by the issuing corporation, the credit spread increases more,
reflecting the added risk that the bond may be called.
NOTE: The information provided in the above section has been sourced from various
websites like RBI, NSE, and FIMMDA
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Government Securities Market
What is a Debt Market?
Debt market is a platform for trading (buying and selling) of the fixed income
securities.
These fixed income securities are issued by:
Central and State Governments
Municipal Corporations
Govt. bodies
Commercial entities
o Financial Institutions
o Banks
o Public Sector Units
o Public Ltd. Companies
A debt market is also known as a fixed income market as debt instruments mostly
pay fixed returns or coupons.
SOURCE: RBI
Please find below a table showing growth in the Indian Wholesale Debt Market
Business.
**NSE
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Related Reference:
Fixed Income Securities
Who are the market participants in the Government

Securities (G-Secs) Market?
Demand Side Participants
Supply Side Participants
Reserve Bank of India

RBI acts as an investment banker to the
government, raises funds for the
government through bond and t-bill
issues, and also participates in the
market through open- market
operations, in the course of conduct of
monetary policy.
Central Government
They raise money through bond
issuances, to fund budgetary deficits and
other short and long term funding
requirements
Banks
These are the largest investors in the
debt markets; particularly the Treasury
bond and bill markets on statutory basis
Reserve Bank of India

The RBI regulates the bank rates and
repo rates and uses these rates as tools
of its monetary policy. Changes in these
benchmark rates directly impact debt
markets and all participants in the
market.
They are also very large participants in

the call money and overnight markets.
They are arrangers of commercial paper
issues of Corporates.
They are also active in the inter-bank
term markets and repo markets for their
short term funding requirements.
Mutual funds
They have emerged as another
important player in the debt markets,
owing primarily to the growing number
Through open- market operations, in the

course of conduct of monetary policy, it
creates supply of Government Bonds and
Bills.
Primary dealers
These are market intermediaries
appointed by the RBI, who underwrite
and make market (i.e. buy& sell) in
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of bond funds that have mobilised
significant amounts from the investors.
government securities and bills.
Most mutual funds also have specialised

bond funds such as gilt funds and liquid
funds.
Mutual funds are not permitted to borrow
funds, except for very short-term
liquidity requirements. Therefore, they
participate in the debt markets predominantly as investors, and trade on
their portfolios quite regularly.
Foreign Institutional Investors (FIIs)

FIIs are permitted to invest in Dated
Government Securities and Treasury Bills
within certain specified limits.
State Governments, municipalities

and local bodies
These participants issue securities in the
debt markets to fund their
developmental / infrastructure projects,
as well as to finance their budgetary
deficits. Please note that there has not
been enough participation from the
municipal and local bodies
Provident funds
PFs are large investors in the bond
markets as their prudential regulations
governing the deployment of the funds
they mobilise, mandate investments predominantly in treasury and Public Sector
Units bonds. They are, however, not very
active traders in their portfolio, as they
are not permitted to sell their holdings,
unless they have a funding requirement
that cannot be met through regular
accruals and contributions.
Public sector units (PSUs)

These entities are large issuers of debt
securities. They use the funds for raising
funds to meet their short term and long
term requirements.
Charitable Institutions, Trusts and
Corporate treasuries
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Societies. These are also large
investors in the debt markets. They are,
however, governed by their rules and
byelaws with respect to the kind of
bonds they can buy and the manner in
which they can trade on their debt
portfolios.
These entities issue short and long term

paper to meet their financial
requirements.
Retail Investors / High Net Worth

Individuals (HNWI)
These investors have also started taking
keen interest in this market due to the
stability and risk free returns it offers
Public sector financial institutions

These entities regularly access debt
markets with bonds for funding their
long term financing requirements and
working capital needs.
Corporates
These investors also buy the
government securities to manage their
overall portfolio risk.
SOURCE: FIMMDA
Please note that there is very less direct participation from the retail, HNWI and
corporate investors in the Government Securities market as compared to the other
participants. The markets are mostly dominated by wholesale players. Retail and
smaller investors mostly participate though debt mutual funds or listed debentures
and bonds in NSE and BSE. Most of the demand side players in due course become
supply side players too.
Related references:
Government Securities
Open market operations
Statutory Liquid Ratio
Dated Government Securities
Treasury Bills
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Did you know?
Traditionally, the Banks have been the largest investors in G-Secs accounting for
more than 60% of the transactions in the Wholesale Debt Market.
The Banks are a prime and captive investor base for G-secs as they are normally
required to maintain an SLR of 24% but it has been observed that the banks
normally invest 5% to 10% more than the normal requirement in G-Secs because of
the risk free nature of the G-Secs and also the greater returns in G-Secs as
compared to other investments of comparable nature
SOURCE: RBI
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Participants and products in the Indian G-Secs markets
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SOURCE: FIMMDA and NSE
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What are the advantages for investing in Fixed Income

securities?
The investors can achieve diversification from uncertainties in other risk

asset classes like equities, real estate etc
There are no credit risks especially in Government securities
If timed properly then there is an advantage of capital gains
These instruments offer a predictable stream of payments by way of interest
and repayment of principal at the maturity of the instrument.
These are issued by the eligible entities against the moneys borrowed by
them from the investors in these instruments
The investors can preserve and increase their invested capital and also
ensure the receipt of dependable interest income.
The investors can even neutralize the default risk on their investments by
investing in Govt. securities, which are normally referred to as risk-free
investments due to the sovereign guarantee on these instruments.
SOURCE: RBI
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What are the risks associated with Indian Debt Markets?

Risks associated with the Indian Debt markets
If Investments are held till maturity
If Investments are not held till

maturity
If an investment is held till maturity then

there will be no default risk ( for G-Secs)
and the interest risk, however there will
be a re-investment risk from the coupons
received
If an investment is not held till maturity

then an investor will face a
interest rate risk (also known as

market risk)
re-investment risk
For non government debt investments,

apart from above there will also be a
counter party risk where the central
clearing mechanism is not at work;
however they will not face any return
volatility
However there will be volatility in the

returns achieved
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Default Risk
This risk can be defined as the risk that an issuer of a bond may be unable to
make timely payment of interest or principal on a debt security or to
otherwise comply with the provisions of a bond indenture and is also referred
to as credit risk.
Default risk can be mitigated by Credit Default Swaps, subject to RBI
regulations.
Interest Rate Risk

This risk can be defined as the risk emerging from an adverse change in the
interest rate prevalent in the market so as to affect the yield on the existing
instruments.
Interest rate risk can be mitigated by holding securities till maturity.
Reinvestment Rate Risk

This risk can be defined as the probability of a fall in the interest rate
resulting in a lack of options to invest the interest received at regular
intervals at higher rates at comparable rates in the market.
Reinvestment Rate risk can also be mitigated by Credit Default Swaps,
subject to RBI regulations.
Counter Party Risk

This risk is the normal risk associated with any transaction and refers to the
failure or inability of the opposite party to the contract to deliver either the
promised security or the sale-value at the time of settlement. This risk occurs
when the transactions are not settled by the Clearing Corporation of India Ltd
(CCIL).
Please note that
Some of the above tools are not available to the retail investors due to high
market lots.
Advanced market risk management techniques involve use of derivatives like
Interest Rate Swaps (IRS) through which the nature of cash flows could be
altered. However, these are complex instruments requiring advanced level of
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expertise for proper understanding. Adequate caution, therefore, need to be

observed for undertaking the derivatives transactions and such transactions
should be undertaken only after having complete understanding of the
associated risks and complexities.
Related References:
Role of CCIL
Settlement Procedure by CCIL
Credit Default Swaps
Interest rate Swaps
SOURCE: RBI
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What factors determine the interest rate in the Debt

market?
Some of the factors which determine the interest rate in the debt market are:
Monetary policy driven by the RBI

Liquidity available within the banks
GDP growth rates
Global economic scenarios
Demand for money
Supply of money
Government borrowings
Inflation rate
SOURCE: FIMMDA
Related Reference:
What factors affect the price of a G Sec?
Top
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What is a Government Security (G-Secs)?
A Government security is a tradable instrument issued by the Central or the

State Governments.
It acknowledges the Indian Governments debt obligation.
Such securities are short term (usually called treasury bills, with original
maturities of less than one year) or long term (usually called Government
bonds or dated securities with original maturity of one year or more).
In India, the Central Government issues both, treasury bills and bonds or
dated securities while the State Governments issue only bonds or dated
securities, which are called the State Development Loans (SDLs).
Government securities carry practically no risk of default and, hence, are
called risk-free instruments.
SOURCE: RBI
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What are Treasury Bills?

Treasury bills or T-bills, are money market instruments, which
Are short term debt instruments issued by the Government of India

Are presently issued in three tenors, namely, 91 day, 182 day and 364 day
Are zero coupon securities and pay no interest
Please note that the RBI releases an annual calendar of T-bill issuances for a
financial year in the last week of March of the previous financial year. They
announce the issue details of T-bills through a press release every week.
SOURCE: RBI
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What are Cash Management Bills (CMBs)?
These are issued by Government of India to meet the temporary mismatches

in their cash flow
They have the generic character of T-bills but are issued for maturities less
than 91 days
Like T-bills, they are also issued at a discount and redeemed at face value at
maturity.
The tenure, notified amount and date of issue of the CMBs depend upon the
temporary cash requirement of the Government.
The announcement of their auction is made by RBI through a Press Release
which is issued one day prior to the date of auction.
The settlement of the auction is on T+1 basis.
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Investment in CMBs is also reckoned as an eligible investment in Government

securities by banks for Statutory Liquid Rate (SLR) purpose under Section 24
of the Banking Regulation Act, 1949.
SOURCE: RBI
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What are Dated Government Securities?
Dated Government securities are long term securities and carry a fixed or
floating coupon (interest rate) which is paid on the face value, payable at
fixed time periods (usually half-yearly).
The tenor of dated securities can be up to 30 years
The Public Debt Office (PDO) of the RBI acts as the registry / depository of
Government securities and deals with the issue, interest payment and
repayment of principal at maturity.
Most of the dated securities are fixed coupon securities.
SOURCE: RBI
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What are Fixed Rate Bonds?
These are bonds on which the coupon rate is fixed for the entire life of the
bond. Most Government bonds are issued as fixed rate bonds.
SOURCE: RBI
Top
Did you know?

Majority of the government and corporate bonds issued are fixed rate bonds.
Indian markets have less of floating rate bonds, zero coupon bonds and capital
indexed bonds due to its liquidity, demand and pricing issue
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What are Floating Rate Bonds?
These are securities which do not have a fixed coupon rate. The coupon is reset at pre-announced intervals (say, every six months or one year) by adding
a spread over a base rate.
SOURCE: RBI
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What are Zero Coupon Bonds?
These are bonds with no coupon payments. Like Treasury Bills, they are
issued at a discount to the face value. The Government of India issued such
securities in the nineties; it has not issued zero coupon bonds after that.
SOURCE: RBI
Top
What are Capital Indexed bonds?
These are bonds in which the principal is linked to an accepted index of

inflation with a view to protecting the holder from inflation.
SOURCE: RBI
Top
Did you know?
The government is currently working on a fresh issuance of Inflation Indexed

Bonds wherein payment of both, the coupon and the principal on the bonds,
will be linked to an Inflation Index (Wholesale Price Index).
In the proposed structure, the principal will be indexed and the coupon will be
calculated on the indexed principal.
In order to provide the holders protection against actual inflation, the final
WPI will be used for indexation.
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What are Bonds with Call / Put options?
These are bonds with features of optionality wherein the issuer can have the
option to buy-back (call option) or the investor can have the option to sell the
bond (put option) to the issuer during the currency of the bond.
SOURCE: RBI
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What are special securities?
Government issues special securities to entities like Oil Marketing Companies,

Fertilizer Companies, the Food Corporation of India, etc. as compensation to
these companies in lieu of cash subsidies.
These securities are usually long dated securities carrying coupon with a
spread of about 20-25 basis points over the yield of the dated securities of
comparable maturity.
These securities are, however, not eligible SLR securities but are eligible as
collateral for market repo transactions.
The beneficiary oil marketing companies may divest these securities in the
secondary market to banks, insurance companies / Primary Dealers, etc., for
raising cash.
SOURCE: RBI
Top
Did you know?

Steps are being taken to introduce new types of instruments like STRIPS (Separate
Trading of Registered Interest and Principal of Securities).
STRIPS are instruments wherein each cash flow of the fixed coupon security is
converted into a separate tradable Zero Coupon Bond and traded. For example,
when Rs.100 of the 8.24%GS2018 is stripped, each cash flow of coupon (Rs.4.12
each half year) will become coupon STRIP and the principal payment (Rs.100 at
maturity) will become a principal STRIP.
STRIPS will also provide institutional investors with an additional instrument for their
asset- liability management. Further, as STRIPS have zero reinvestment risk, being
zero coupon bonds, they can be attractive to retail/non-institutional investors.
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Who regulates Indian G-Secs market?

The Reserve Bank of India controls and regulates the G-Secs Market.
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Why should one invest in G-Secs?

Investing in G-Secs has the following advantages:
Besides providing a return in the form of coupons (interest), they offer the
maximum safety as they carry the Sovereigns commitment for payment of
interest and repayment of principal.
They can be held in book entry, i.e., dematerialized/ scrip less form, thus,
obviating the need for safekeeping.
They are available in a wide range of maturities from 91 days to as long as 30
years to suit the duration of a bank's liabilities.
They can be sold in market lots in the secondary market to meet cash
requirements.
For retail investors, retail lots can be sold on NSE or the BSE
They can also be used as collateral to borrow funds in the repo market.
The settlement system for trading in G-Secs, which is based on Delivery
versus Payment (DvP), is a very simple, safe and efficient system of
settlement. The details about this system have been explained later below.
Their prices are readily available due to a liquid and active secondary market
and a transparent price dissemination mechanism.
SOURCE: RBI
Related References:
Delivery vs. Payment
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What are the Dos and Donts prescribed by the RBI for
dealing in government securities?
Do's and Don'ts for

investing in government securities_RBI.docx
SOURCE: RBI
Top
What are auctions and how are the G-Secs issued through
these auctions?
An auction is a price building process driven by a competitive bidding

process, wherein the seller receives a collective assessment of prospective
value of the asset to be sold.
G-Secs are issued through auctions conducted by the RBI. (detailed
information about type of auctions is given below)
These auctions are conducted on the electronic platform called the NDS
(negotiated dealing system) which is also called an Auction platform.
Commercial banks, scheduled urban co-operative banks, Primary Dealers,
insurance companies and provident funds, who maintain funds account
(current account) and securities accounts (SGL Subsidiary General Ledger
account) with RBI, are members of this electronic platform.
All members of PDO-NDS (public debt office negotiated dealing system) can
place their bids in the auction through this electronic platform.
All non-NDS members including non-scheduled urban co-operative banks can
participate in the primary auction through scheduled commercial banks or
Primary Dealers.
For this purpose, the urban co-operative banks need to open a securities
account with a bank / Primary Dealer such an account is called a Gilt
Account. (A Gilt Account is a dematerialized account maintained by a
scheduled commercial bank or Primary Dealer for its constituent (e.g., a nonscheduled urban co-operative bank)).
The RBI, in consultation with the Government of India, issues an indicative
half-yearly auction calendar which contains information about the amount of
borrowing, the tenor of security and the likely period during which auctions
will be held.
A Notification and a Press Communication giving exact particulars of the
securities, viz., name, amount, and type of issue and procedure of auction are
issued by the Government of India about a week prior to the actual date of
auction.
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RBI places the notification and a Press Release on its website (www.rbi.org.in)
and also issues an advertisement in leading English and Hindi newspapers.
SOURCE: RBI
Related References:
How securities are settled in the primary market?
How securities are settled in the secondary market?
Please refer the following document for an example of RBIs press release
for auction
RBI_Press
Release.pdf
Please refer the following document for an example of RBIs declaration of

the auction result
RBI_Auction
result.pdf
Please refer the following document for an example of RBIs issuance

calendar
RBI_Issuance
Calender for first half FY2012.pdf
Top
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What are the different types of auctions used for issue of
G-Secs?
Before the introduction of auctions, the interest rates (coupon rates) on G-Secs were
administratively fixed by the Government of India. With the introduction of auctions,
these get fixed through a market based price discovery process.
Yield Based Auction

A yield based auction is generally conducted when a new G-Sec is issued.
Investors bid in yield terms up to two decimal places (for example, 8.19%)
Bids are then arranged in ascending order and the cut-off yield is arrived at the
yield corresponding to the notified amount of the auction.
The cut-off yield is taken as the coupon rate for the security.
Successful bidders are those who have bid at or below the cut-off yield. Bids which
are higher than the cut-off yield are rejected.
Price Based Auction

A price based auction is conducted when Government of India re-issues G-Secs
issued earlier.
Bidders quote in terms of price per Rs.100 of face value of the security (e.g.,
Rs.102.00)
Bids are arranged in descending order and the successful bidders are those who
have bid at or above the cut-off price.
Bids which are below the cut-off price are rejected.
Uniform price auction

In a Uniform Price auction, all the successful bidders are required to pay for the
allotted quantity of G-secs at the same rate, i.e., at the auction cut-off rate,
irrespective of the rate quoted by them.
Multiple price auctions
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In a Multiple Price auction, the successful bidders are required to pay for the allotted
quantity of G-secs at the respective price / yield at which they have bid.
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What is competitive and non competitive bidding?

Competitive Bidding
Non Competitive Bidding
In a competitive bidding, an investor

bids at a specific price / yield and is
allotted securities if the price / yield
quoted is within the cut-off price / yield
Under the scheme, eligible investors

apply for a certain amount of securities
in an auction without mentioning a
specific price / yield.
Competitive bids are made by well

informed investors such as banks,
financial institutions, primary dealers,
mutual funds, and insurance companies.
Non-competitive bidding is open to

individuals, Hindu Undivided Families,
Regional Rural Banks (RRBs), cooperative banks, firms, companies,
corporate bodies, institutions, provident
funds, and trusts.
This kind of bidding is useful for retail /
small investors who can participate in
the primary auction by opening a
Constituents' Subsidiary General Ledger
Account (CSGL) with any bank or a
primary dealer
Multiple bidding is also allowed, i.e., an

investor may put in several bids at
various price/ yield levels.
The participants in non-competitive

bidding are, however, required to hold a
gilt account with a bank. RRBs and cooperative banks which hold SGL and
Current Account with the RBI can also
participate under the scheme of noncompetitive bidding without holding a
gilt account
SOURCE: RBI
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How and in what form can G-Secs be held?
The Public Debt Office (PDO) of the RBI, Mumbai acts as the registry and central
depository for the G-Secs. These may be held by investors either as physical stock
or in dematerialized form. However, please note that from May 20, 2002, it is
mandatory for all the RBI regulated entities to hold and transact in G-Secs only in
dematerialized (SGL) form.
Physical Form
o These are held as stock certificates which cannot be transferred by
way of endorsement and delivery.
o These are transferred by executing a transfer form as the ownership
and transfer details are recorded in the books of PDO.
o The transfer of a stock certificate is final and valid only when the same
is registered in the books of PDO.
Please refer below for a copy of a government security stock certificate
Specimen of
Government Security_Stock Certificate.docx
Demat Form
The holders can maintain their securities in dematerialsed form in either of the two
ways:
o
SGL Account: Reserve Bank of India offers Subsidiary General Ledger

Account (SGL) facility to select restricted entities who can maintain
their securities in SGL accounts maintained with the Public Debt Offices
of the Reserve Bank of India.
Gilt Account: As the eligibility to open and maintain an SGL account
with the RBI is restricted, an investor including a retail investor has the
option of opening a Gilt Account with a bank or a Primary Dealer which
is eligible to open a Constituents' Subsidiary General Ledger Account
(CSGL) with the RBI.
Under this arrangement, the bank or the Primary Dealer, as a custodian of the Gilt
Account holders, would maintain the holdings of its constituents in a CSGL account
(which is also known as SGL II account) with the RBI.
The servicing of securities held in the Gilt Accounts is done electronically,
facilitating hassle free trading and maintenance of the securities.
hiswloatbecngdfrukImpvRBPyGS,Txq/-'AD.E
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Please note that the investors also have the option of holding G-Secs in a
dematerialized account with a depository (NSDL / CDSL, etc.). This
facilitates their trading on the stock exchanges.
SOURCE: RBI
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How does the trading in Government securities take

place?
The trading for government securities can be done in the following ways:
Over the counter (OTC) / Telephone
Please click on the below attachment for an example of a Deal Slip
Confidential
Specimen of Deal
Slip.docx
Confidential
Negotiated Dealing Systems (NDS)

o NDS facilitates the members to submit electronically, bids or
applications for primary issuance of G-Secs when auctions are
conducted.
o NDS also provides an interface to the Securities Settlement System
(SSS) of the PDO, RBI, Mumbai thereby facilitating settlement of
transactions in G-Secs (both outright and repos) conducted in the
secondary market.
o Membership to the NDS is restricted to members holding SGL and/or
Current Account with the RBI, Mumbai.
Negotiated Dealing Systems Order matching (NDS OM)

o NDS-OM is operated by the Clearing Corporation of India Ltd. (CCIL) on
behalf of the RBI
o This is an order driven electronic system, where the participants can
trade anonymously by placing their orders on the system or accepting
the orders already placed by other participants.
o Direct access to the NDS-OM system is currently available only to
select financial institutions like Commercial Banks, Primary Dealers,
Insurance Companies, Mutual Funds, etc.
o Other participants can access this system through their custodians,
i.e., with whom they maintain Gilt Accounts.
o The main advantages of this system are price transparency and better
price discovery
Stock Exchanges
o Retail investors can trade in the debt market securities on stock
exchanges like BSE and NSE.
SOURCE: RBI
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How are the dealing transactions recorded by the dealing
desk?
For every transaction entered into by the trading desk, a deal slip should be
generated which should contain data relating to the following:
o nature of the deal
o name of the counter-party
o whether it is a direct deal or through a broker (if it is through a broker,
name of the broker)
o details of security
o amount
o Price
o contract date
o time and settlement date
These deal slips should be serially numbered and verified separately to
ensure that each deal slip has been properly accounted for.
Once the deal is concluded, the deal slip should be immediately passed on to
the back office (it should be separate and distinct from the front office) for
recording and processing.
For each deal, there must be a system of issue of confirmation to the counterparty.
The timely receipt of requisite written confirmation from the counter-party,
which must include all essential details of the contract, should be monitored
by the back office.
With the need for counterparty confirmation of deals matched on NDS-OM will
not arise, as NDS-OM is an anonymous automated order matching system.
However, in case of trades finalized in the OTC market and reported on NDS,
confirmations have to be submitted by the counterparties in the system i.e.,
NDS.
Once a deal has been concluded through a broker, there should not be any
substitution of the counter-party by the broker.
Similarly, the security sold / purchased in a deal should not be substituted by
another security under any circumstances.
A maker-checker framework should be implemented to prevent any individual
misdemeanor. It should be ensured that the same person is not carrying out
the functions of maker (one who inputs the data) and checker (one who
verifies and authorizes the data) on the system.
On the basis of vouchers passed by the back office (which should be done
after verification of actual contract notes received from the broker / counter
party and confirmation of the deal by the counter party), the books of
account should be independently prepared.
Confidential
SOURCE: RBI
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How do the Government securities transactions settle in

the primary market?
Once the allotment process in the primary auction is finalized (as explained
earlier), the successful participants are advised of the consideration amounts
that they need to pay to the Government on settlement day.
The settlement cycle for dated security auction is T+1, whereas for that of
Treasury bill auction is T+2.
On the settlement date, the fund accounts of the participants are debited by
their respective consideration amounts and their securities accounts (SGL
accounts) are credited with the amount of securities that they were allotted.
SOURCE: RBI
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How do the Government securities transactions settle in

the secondary market?
The transactions relating to G-Secs are settled through the members

securities / current accounts maintained with the RBI, with delivery of
securities and payment of funds being done on a net basis.
CCIL guarantees settlement of trades on the settlement date by becoming a
central counter-party to every trade through the process of novation, i.e., it
becomes seller to the buyer and buyer to the seller.
Please note that, all outright secondary market transactions in G-Secs are
settled on T+1 basis. However, in case of repo transactions, the market
participants will have the choice of settling the first leg on eitherT+0 basis or
T+1 basis as per their requirement.
SOURCE: RBI
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What are the important considerations while undertaking
security transactions?
Which security to invest in

o
o
o
o
Typically this involves deciding on the maturity and coupon.

Maturity is important because this determines the extent of risk an
investor is exposed to higher the maturity, higher the interest rate
risk or market risk.
If the investment is largely to meet statutory requirements, it may be
advisable to avoid taking undue market risk and buy securities with
shorter maturity.
Within the shorter maturity range (say 5-10 years) it would be safer to
buy securities which are liquid, that is, securities which trade in
relatively larger volumes in the market.
The information about such securities can be obtained from the
website of the CCIL (http://www.ccilindia.com/OMMWCG.aspx), which
gives real-time secondary market trade data on NDS-OM.
Since pricing is more transparent in liquid securities, prices are easily
obtainable thereby reducing the chances of being misinformed on the
price in these cases.
The coupon rate of the security is equally important for the investor as
it affects the total return from the security.
In order to determine which security to buy, the investor must look at
the Yield to Maturity (YTM) of a security. Thus, once the maturity and
yield (YTM) is decided, the investor may select a security by looking at
the price/yield information of securities traded on NDS-OM or by
negotiating with bank or PD or broker.
Related Reference:
Yield to maturity
Where and whom to buy from

o
This structure is for the wholesale debt markets which is dominated by

large players having market lots of over 5 crore. Retail investors, who
find this process difficult, can participate in this through the non
competitive bidding (this has been explained above).
Retail investors can participate in this market through retail lots in
stock exchanges like BSE and the NSE and also through the debt
mutual funds.
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o
o
o
o
The wholesale markets are used as benchmark for the retail lots.
However, these retail lots come at a premium as compared to the
market lots.
In terms of transparent pricing, the NDS-OM is the safest because it is
a live and anonymous platform where the trades are disseminated as
they are struck and where counterparties to the trades are not
revealed.
In case the trades are conducted on the telephone market, it would be
safe to trade directly with a bank or a PD.
In case one uses a broker, care must be exercised to ensure that the
broker is registered on NSE or BSE or OTC Exchange of India.
So it is better to deal directly with bank / PD or on NDS-OM, which also
has a screen for odd-lots. Wherever a broker is used, the settlement
should not happen through the broker.
Trades should not be directly executed with any counterparties other
than a bank, PD or a financial institution, to minimize the risk of getting
adverse prices.
In the odd lot market which is very illiquid, prices can vary a lot and
liquidity can be low as a result.
How to ensure correct pricing

o
o
To be sure of prices, only liquid securities may be chosen for purchase.

A safer alternative for investors with small requirements is to buy
under the primary auctions conducted by RBI through the noncompetitive route.
To check the large traded prices of the whole sale lot for the correct
pricing
SOURCE: RBI and FIMMDA
Below is the NDS platform screen for market based pricing
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What are the important guidelines for valuation of G-Secs?
For the Cooperative banks, investments classified under 'Held to Maturity'

(HTM) category need not be marked to market and will be carried at
acquisition cost unless it is more than the face value.
If it is more than the face value, the premium should be amortized over the
period remaining to maturity. The individual scrip in the Available for Sale
(AFS) category in the books of the cooperative banks will be marked to
market at the year-end or at more frequent intervals.
The individual scrip in the Held for Trading (HFT) category will be marked to
market at monthly or at more frequent intervals. The book value of individual
securities in AFS and HFT categories would not undergo any change after
marking to market.
Central Government securities should be valued by taking the prices/ yields

put out by the Fixed Income Money Market and Derivatives Association of
India (FIMMDA) and the Primary Dealers Association of India (PDAI) jointly on
the website of the FIMMDA.
Prices of all Central Government securities are given out every day while
prices and yield curve for valuation are given at the end of every month. For
Confidential
example, the FIMMDA valuation of a Central Government security,

7.46%2017 as on March 31, 2009 was Rs.101.69. If a cooperative bank was
holding the same security in AFS or HFT categories at a book value of Rs.102,
the bank would be required to book a depreciation of Rs.0.31 per Rs.100 face
value of holding. If the total holding was Rs. 1 crore, the total depreciation to
be booked would be Rs.31,000/-.
State Government and other securities are to be valued by adding a spread

on the Central Government security yield of the corresponding residual
maturity. Currently, a spread of 25 basis points (0.25%) is added while
valuing State Government securities, special securities (oil bonds, fertilizer
bonds, SBI bonds, etc.) whereas for corporate bonds the spreads given by the
FIMMDA need to be added.
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Example showing valuation of G-Secs
Security 7.32% A.P.SDL 2014
Issue date December 10, 2004
Maturity date December 10, 2014
Coupon 7.32%
Date of valuation March 31, 2008
Procedure
Valuation of the above bond involves the following steps
Find the residual maturity of the bond to be valued.

Find the Central Government security yield for the above residual maturity.
Add appropriate spread to the above yield to get the yield for the security
Calculate the price of the security using the derived yield above.
Step 1
Since valuation is being done on March 31, 2008, we need to find out the number of
years from this date to the maturity date of the security, December 10, 2014 to get
the residual maturity of the security. This could be done manually by counting the
number of years and months and days. However, an easier method is to use MS.
Excel function Yearfrac wherein we specify the two dates and basis This gives us
the residual maturity of 6.69 years for the security.
Step 2
To find the Central Government yield for 6.69 years, we derive it by interpolating the
yields between 6 years and 7 years, which are given out by FIMMDA. As on March
31, 2008, FIMMDA yields for 6 and 7 years are 7.73% and 7.77% respectively. The
yield for the 6.69 years is derived by using the following formula.
Confidential
Here we are finding the yield difference for 0.69 year and adding the same to the
yield for 6 years to get the yield for 6.69 years. Also notice that the yield has to be
used in decimal form (e.g., 7.73% is equal to 7.73/100 which is 0.0773)
Step 3
Having found the Central Government yield for the particular residual maturity, we
have to now load the appropriate spread to get the yield of the security to be
valued. Since the security is State Government security, the applicable spread is 25
basis points (0.25%). Hence the yield would be 7.76%+0.25% = 8.01%.
Step 4
The price of the security will be calculated using the MS Excel function Price Here,
we specify the valuation date as March 31, 2008, maturity date as December 10,
2014, rate as 7.32% which is the coupon, yield as 8.01%, redemption as 100 which
is the face value, frequency of coupon payment as 2 and basis as 4. The price we
get in the formula is Rs.96.47 which is the value of the security.
If the bank is holding Rs.10 crore of this security in its portfolio, the total value
would be 10*(96.47/100) = 9.647 crore.
Related Reference:
Excel function Yearfrac
Excel function - Price
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What affects the price of G-Sec?
Rupee fluctuations as against other foreign currencies

The level and changes in interest rates in the economy and other macroeconomic factors, such as, expected rate of inflation, liquidity in the market,
etc.
Developments in other markets like money, foreign exchange, credit and
capital markets
Further, developments in international bond markets, specifically the US
Treasuries affect prices of G-secs in India.
Policy actions by RBI (e.g., announcements regarding changes in policy
interest rates like Repo Rate, Cash Reserve Ratio, Open Market Operations,
etc.)
Related Reference:
What is the effect of Interest rates on the Indian Debt market?
Repo Rate
Cash Reserve Ratio
SOURCE: RBI
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How are the G-secs transactions reported?
Transactions undertaken between market participants in the OTC/telephone

market are expected to be reported on the NDS platform within 15 minutes
after the deal is put through over telephone.
Please note that all OTC trades are required to be mandatorily reported on
the secondary market module of the NDS for settlement.
Reporting on NDS is a four stage process as explained below:
o
o
The seller of the security has to initiate the reporting followed by

confirmation by the buyer.
This is further followed by issue of confirmation by the sellers back
office on the system and reporting is complete with the last stage
wherein the buyers back office confirms the deal. The system
architecture incorporates maker-checker model to preempt individual
mistakes as well as misdemeanor.
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o
Reporting on behalf of entities maintaining gilt accounts with the

custodians is done by the respective custodians in the same manner as
they do in case of their own trades i.e., proprietary trades.
The securities leg of these trades settle in the CSGL account of the
custodian. Once the reporting is complete, the NDS system accepts the
trade. Information on all such successfully reported trades flow to the
clearing house i.e., the CCIL.
.
In the case of NDS-OM,
o
o
o
Participants place orders (price and quantity) on the system which can
be modified/cancelled their orders. Order could be a bid for purchase
or offer for sale of securities.
The system, in turn will match the orders based on price and time
priority. That is, it matches bids and offers of the same prices with time
priority.
The NDS-OM system has separate screen for the Central Government,
State Government and Treasury bill trading. In addition, there is a
screen for odd lot trading for facilitating trading by small participants in
smaller lots of less than Rs. 5 crore (i.e., the standard market lot).
The NDS-OM platform is an anonymous platform wherein the
participants will not know the counterparty to the trade.
Once an order is matched, the deal ticket gets generated automatically
and the trade details flow to the CCIL. Due to anonymity offered by the
system, the pricing is not influenced by the participants size and
standing.
SOURCE: RBI
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What are the various websites that give information on
Government securities?
RBI financial market watch
http://www.rbi.org.in/Scripts/financialmarketswatch.aspx
This site provides links to information on prices of Government securities on NDS
(OTC market), NDS-OM, money market and other information on Government
securities like outstanding stock etc.
Confidential
NDS-OM market watch
http://www.ccilindia.com/OMHome.aspx
This site provides real-time information on traded as well as quoted prices of
Government securities. In addition prices of When Issued (WI) (whenever trading
takes place) segment are also provided.
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NDS market watch
http://www.rbi.org.in/Scripts/NdsUserXsl.aspx
This site provides information on prices of Government securities in OTC market.
Facility is provided for searching the prices of particular securities in a date range.
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FIMMDA
http://www.fimmda.org/
This site provides host of information on market practices for all the fixed income
securities including Government securities. Details of various pricing models
adopted by FIMMDA are provided in this site. In addition, the details of daily,
monthly and yearly closing prices of Government securities, corporate bond spreads
etc. are made available by FIMMDA through this site. Accessing information from
this site requires a valid login and password which are provided by FIMMDA to the
eligible entities.
Related Reference:
FIMMDA
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What is shut period?

Shut period means the period for which the securities cannot be delivered. During
the period under shut, no settlements/ delivery of the security which is under shut
will be allowed. The main purpose of having a shut period is to facilitate servicing of
the securities viz., finalizing the payment of coupon and redemption proceeds and
to avoid any change in ownership of securities during this process.
SOURCE: RBI
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What is Delivery versus Payment (DvP) settlement?

Delivery versus Payment (DvP) is the mode of settlement of securities wherein the
transfer of securities and funds happen simultaneously. This ensures that unless the
funds are paid, the securities are not delivered and vice versa. DvP settlement
eliminates the settlement risk in transactions. There are three types of DvP
settlements, viz., DvP I, II and III which are explained below;
DvP I The securities and funds legs of the transactions are settled on a
gross basis, that is, the settlements occur transaction by transaction without
netting the payables and receivables of the participant.
DvP II In this method, the securities are settled on gross basis whereas the
funds are settled on a net basis, that is, the funds payable and receivable of
all transactions of a party are netted to arrive at the final payable or
receivable position which is settled.
DvP III In this method, both the securities and the funds legs are settled on
a net basis and only the final net position of all transactions undertaken by a
participant is settled.
Liquidity requirement in a gross mode is higher than that of a net mode since the
payables and receivables are set off against each other in the net mode.
SOURCE: RBI
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Bond credit ratings

In investment, the bond credit rating assesses the credit worthiness of a
corporation's or government debt issues. It is analogous to credit ratings for
individuals.
Please refer to the below attached for the different credit rating tiers as per the
credit rating agencies, Moodys, Standard &Poors and Fitch
Credit Rating
Tiers.xlsx
SOURCE: Wikipedia
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Corporate Bonds Market
What are corporate bonds?
Corporate bonds are fixed income securities issued by Corporates i.e. entities
other than Government
The default risk in the corporate bonds is much higher than the G-Secs
For the above default risk, the investors are compensated by higher returns
as there is a high credit spread.
Related Reference:
What are credit spreads?
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Why should one invest in corporate bonds?
High return Compared to G-secs due to higher credit spreads

Low risk Compared to Equity
Fixed and Regular Income subject to default risks
Flexibility as various types of bonds available
Potential capital appreciation as there is a risk if interest rates fall or the
credit spreads over the G-Secs fall if the investment is not held till maturity.
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Who regulates the Corporate Bond Markets?
Securities and Exchange Board of India (SEBI) is the regulator for the Indian
Corporate Debt Market
It controls cases where entities raise money from public through public
issues.
It regulates the manner in which such moneys are raised and tries to ensure
a fair play for the retail investor.
It forces the issuer to make the retail investor aware, of the risks inherent in
the investment, by way and its disclosure norms.
It also regulates the instruments in which these mutual funds (which are
governed by SEBI) can invest.
It also regulates the investments of debt FIIs.
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What are the different types of corporate bonds?

Corporates bonds can broadly classify as follows:
Based on Issuer
Issuers of Corporate Bonds can be broadly classified in following classes:

o
o
o
o
o
Bonds
Bonds
Bonds
Bonds
Bonds
issued
issued
issued
issued
issued
by
by
by
by
by
Local Bodies
Public Sector Units
Financial Institutions
Banks
Corporates
Based on Maturity Period

o
o
o
o
Short Term Maturity: - Security with maturity period less than one year.
Medium Term: - Security with maturity period between 1year and 5
year.
Long Term Maturity: -Such securities have maturity period more than 5
years
Perpetual: - Security with no maturity. Currently, in India Banks issue
perpetual bond.
Based on Coupon
o Fixed Rate Bonds:-have a coupon that remains constant throughout the
life of the bond.
o Floating Rate Bonds: - Coupon rates are reset periodically based on
benchmark rate.
o Zero-coupon Bonds no coupons are paid. The bond is issued at a
discount to its face value, at which it will be redeemed. There are no
intermittent payments of interest
Based on option
o Bond with call option: - This feature gives a bond issuer the right, but
not the obligation, to redeem his issue of bonds before the bond's
maturity at predetermined price and date.
o Bond with put option: - This feature gives bondholders the right but not
the obligation to sell their bonds back to the issuer at a predetermined
price and date. These bonds generally protect investors from interest
rate risk.
Based on redemption
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o
o
Bonds with single redemption: - In this case principal amount of bond is

paid at the time of maturity only.
Amortising Bonds: - A bond, in which payment made by the borrower
over the life of the bond, includes both interest and principal is called
an amortizing bond.
Corporate Bonds can be issued either at par, Discount or Premium

Price of Bond
Discount
Sold for less than
face value
PAR
Sold for equal to
face value
Premium
Sold for more than
face value
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What are the key components of the corporate bonds?
Issue Price is the price at which the Corporate Bonds are issued to the
investors. It is mostly same as Face Value in case of coupon bearing bond. In
case of non-coupon bearing bond (zero coupon bond), security is generally
issued at discount or premium
Face Value (FV) is also known as the par value or principal value. Coupon
(interest) is calculated on the face value of bond. FV is the price of the bond,
which is agreed by the issuer to pay to the investor, excluding the interest
amount, on the maturity date. Sometime issuer can pay premium above the
face value at the time of maturity.
Coupon / Interest is the cash flow that is offered by a particular security at

fixed intervals / predefined dates. The coupon expressed as a percentage of
the face value of the security gives the coupon rate.
Coupon Frequency means how regularly an issuer pays the coupon to

holder. Bonds pay interest monthly, quarterly, semi-annually or annually.
Maturity date is a date in the future on which the investor's principal will be
repaid. From that date, the security ceases to exist.
Call / Put option date is the Date on which issuer or investor can exercise
their rights to redeem the security.
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Maturity / Redemption Value is the amount paid by issuer other than

coupon payments called redemption value. If the redemption proceeds are
more than the face value of the bond/debentures, the debentures are
redeemed at a premium. If one gets less than the face value, then they are
redeemed at a discount and if one gets the same as their face value, then
they are redeemed at par.
For Example, security with FV of Rs.1000/- issued on April 01, 2011, for a
period of 10 year at Rs. 1000/- , Coupon of 12% p.a. is paid every 6 month
on April & October 01, 2011.
Issue price = Rs.1000/Face value = Rs.1000/Coupon = 12%
Coupon Frequency = Half yearly
Maturity Date = April 01, 2021
Put Option =Not applicable
Call option =Not applicable
Redemption Value = Rs.1000/Top
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What are the factors and risks investors should keep in
mind while trading / investing in the Corporate Bonds?
Credit Spread: - The credit spread on the corporate bonds should be

adequate enough to compensate for the default.
Record date and Ex-date for interest payment: - Record date is the date
on which all the bond holders registered in the security till end of the date will
be eligible for the interest payment for that period. The issuer sets record
date for interest payment. Based on the record date, exchange sets Ex-date
for interest payment. The trade take place from ex-date is not eligible for
interest payment for that period. Trades take place after Ex-date till IP date, is
at Ex-interest price i.e. price excluding interest. In such case, accrued interest
will be zero.
Credit rating: - plays an important role in the trading of the bonds as the
highly rated bonds are more liquid in comparison to the bonds with the low
rating.
Interest rate condition: If interest rates rise the price of the bonds will
fall.
Reinvestment of coupon: - In case of corporate bond investor often

receives cash flow at a regular interval. To get the desired yield it is required
to get opportunity for investing such inflows.
Taxation: - Tax applicable on interest received. No Securities Transaction Tax

(STT) is applicable on corporate bond trading. Capital gain tax, short term as
well as long term, is applicable.
Liquidity: - Currently corporate bond market is not very liquid.
Related references:
What factors affect the price of G-Sec?
What is the effect of interest rates in the Indian debt market?
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How are corporate bonds issued in India?
Corporate bonds can be issued in two ways:
Public issue
In public issue, corporations issue bonds to the market as a whole.
Institutions as well as retail investors can participate in this issue. The cost of
borrowing is little high in case of public issue.
Private placement
In private placement corporate, generally park the bond issuance with few
institutions. In India, more than 90% of the corporate bonds are issued
through private placement. It is an easiest and cheapest way of borrowing
corporate bonds.
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Where are the corporate bonds listed?

The corporate bonds are primarily listed in major stock exchanges like BSE and NSE.
In NSE, the private placement securities are listed and traded in whole sale debt
segment of the Exchange. Public issues are listed and traded in Capital market
segment of the Exchange
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How trading takes place in the Capital market segment for
the corporate bonds?
Currently, trading in corporate bonds in CM segment happens along with equity
shares.
There is no major difference.
Market: - Normal market

Tick Size: Rs0.01
Price Band: 20%
Trading price: - Trading in corporate bonds takes place at dirty price.
Settlement price: - Settlement in corporate bond takes place at dirty price.
Clearing and settlement: - Through National Securities Clearing
Corporation Ltd (NSCCL). In case of rolling settlement, netting will be done.
Related Reference:
NSSCL
Top
What are the important guidelines for valuation of

Corporate Bonds?
In the case of corporate bonds, the procedure of valuation is similar to the example
explained earlier above. The only difference is the spread that need to be added to
the corresponding yield on central government security will be higher (instead of
the fixed 25 bps for State Government securities), as published by the FIMMDA from
time to time.
FIMMDA gives out the information on corporate bonds spreads for various rated
bonds. While valuing a bond, the appropriate spread has to be added to the
corresponding CG yield and the bond has to be valued using the standard Price
formula.
For example, assuming that a AAA rated corporate bond is having same maturity
as that of the State Government bond in example, the applicable yield for valuation
will be 7.73%+ 2.09% (being the spread given by FIMMDA) which is 9.82%. With the
same parameters as in the Box V, the value of the bond works out to Rs.87.92.
Related Reference:
Confidential
Guidelines for valuation of G-Secs

Top
What are the corporate bonds available for trading in the

capital market segment?
http://www.nseindia.com/live_market/dynaContent/live_watch/equities_stock_watch.
htm?cat=SEC
Top
Confidential
Where will one get details of todays corporate bond trade

data in the capital market segment?
http://www.bseindia.com/bseplus/StockReach/AdvanceStockReach.aspx?
scripcode=934802
Top
Ratings / Rating Charts

Rating Definition
Highest Safety
High Safety
Adequate Safety
CARE
CARE AAA
CARE AA
CARE A
ICRA
[ICRA] AAA
[ICRA] AA
[ICRA] A
CRISIL
AAA
AA
A
Confidential
Moderate Safety
Moderate Risk
High Risk
Very High Risk
Default
CARE
CARE
CARE
CARE
CARE
BBB
BB
B
C
D
[ICRA] BBB
[ICRA]BBB
[ICRA] B
[ICRA] C
[ICRA] D
BBB
BB
B
C
D
*This section has been sourced from the NSE
Important Excel functions for bond related functions

Present Value
Excel Formula
PV (rate, nper, pmt, fv,
type)
Description
Explanation
This function is used to

find the present value of a
series of future payments
given the discount rate.
This forms the basis for
pricing a bond
Rate is the interest rate per

period.
Nper is the total number of
payment periods in an
annuity.
Pmt is the payment made
each period and cannot
change over the life of the
annuity.
Fv is the future value, or a
cash balance you want to
attain after the last payment
is made. If fv is omitted, it is
assumed to be 0 (the future
value of a loan, for example,
is 0).
Type is the number 0 or 1
and indicates when payments
are due.
Confidential
Future Value
Excel Formula
FV(rate, nper, pmt, PV,
type)
Description
calculate the future value
of a series of investments
made, given the interest
rate.
Explanation
Rate is the interest rate per
period.
Nper is the total number of
payment periods in an
annuity.
Pmt is the payment made
each period; it cannot change
over the life of the annuity.
Typically, pmt contains
principal and interest but no
other fees or taxes. If pmt is
omitted, you must include
the PV argument.
PV is the present value, or
the lump-sum amount that a
series of future payments is
worth right now. If PV is
omitted, it is assumed to be 0
(zero), and you must include
the pmt argument.
Confidential
Type is the number 0 or 1 and
indicates when payments are
due. If type is omitted, it is
assumed to be 0.
Coupon days
Excel Formula
COUPDAYS(settlement,
maturity, frequency,
basis)
Description
work out the number of
days from the beginning
to the end of the coupon
period that contains the
settlement date.
Explanation
Settlement is the security's
settlement date. The security
settlement date is the date
after the issue date when the
security is traded to the
buyer.
Maturity is the security's
maturity date. The maturity
date is the date when the
security expires.
Frequency is the number of
coupon payments per year.
For annual payments,
frequency = 1; for
semiannual, frequency = 2;
for quarterly, frequency = 4.
Confidential
Basis is the type of day
count basis to use.
Appropriate code for the day
count convention has to be
provided as shown below
Basis
Day Count Basis
0 or Omitted
1
2
3
4
US (NASD) 30/360
Actual / Actual
Actual / 360
Actual / 365
European 30 / 360
Yearfrac
Excel Formula
YEARFRAC(start_date,
end_date, basis)
Description
find the residual maturity
of a security in years.
Explanation
Start_date is a date that
represents the start date.
End_date is a date that
represents the end date.
count basis to use.
Confidential
PRICE
Excel Formula
PRICE(settlement,
maturity, rate, yld,
redemption, frequency,
basis)
Description
find the price of security
that pays periodic
interest.
Explanation
on which the security and
funds are exchanged.
security expires.
Rate is the security's
annual coupon rate.
Confidential
Yld is the security's annual
yield.
Redemption is the security's
redemption value per Rs.100
face value.
frequency = 1; for
count basis to use.
YIELD
Excel Formula
YIELD(settlement,
maturity, rate, pr,
redemption, frequency,
basis)
Description
find the Yield to Maturity
of a security given the
price of the security.
Explanation
security expires.
Confidential
Rate is the security's annual
coupon rate.
Pr is the security's price per
Rs.100 face value.
Redemption is the security's
redemption value per Rs.100
face value.
frequency = 1; for
count basis to use.
DURATION
Excel Formula
DURATION(settlement,
maturity, coupon, yld,
frequency, basis)
Description
find the Duration of a
security in number of
years.
Explanation
Confidential
security expires.
Coupon is the security's
annual coupon rate.
yield.
frequency = 1; for
count basis to use.
Modified Duration
Excel Formula
MDURATION(settlement,
Description
Explanation
Confidential
maturity, coupon, yld,
frequency, basis)
calculate the Modified

Duration of a security.

security expires.
Coupon is the security's
annual coupon rate.
yield.
frequency = 1; for
count basis to use.

Indian Debt Markets - A Primer

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Glossary of Important Terms and Commonly Used Market Terminology.....................6

How is the yield of a bond calculated?..................................................................28

What is a Debt Market?............................................................................................ 33

How are the dealing transactions recorded by the dealing desk?............................53

Duration (Macaulay Duration)

Gilt/ Government Securities (G-Secs)

Weighted Average Price/ Yield

Yield or Current Yield

Yield to Maturity (YTM)

Some Useful Information

What is Money Market?

While the Government Securities (G-Secs) market generally caters to the

By definition, money market is for a maximum tenor of up to one year. Within

Overnight market - The tenor of transactions is one working day.

What is a Commercial Paper (CPs)?

CPs are short term borrowings by Corporates, Financial Institutions, Money

What is Over the Counter (OTC)?

What is a Credit Default Swap?

What is an Interest Rate Swap?

What is a Call money market?

What are a Repo and a Reverse Repo Rate?

What is a Repo market?

Repo or ready forward contract is an instrument for borrowing funds by

What is a Cash Reserve Ratio (CRR)?

What is a Statutory Liquid Ratio (SLR)?

This term is used by bankers and indicates the minimum percentage of

What is meant by buyback of Government securities?

Reduction of cost (by buying back high coupon securities)

What is Liquidity Adjustment Facility (LAF)?

What is the role of the Clearing Corporation of India Limited

The CCIL is the clearing agency for Government securities.

It acts as a Central Counter Party (CCP) for all transactions in Government

On this platform, anonymous trading takes place

The payable / receivable position of the constituents is reflected against their

CCIL also guarantees settlement of all trades in Government securities. That

What is Collateralized Borrowing and Lending Obligation

What are the role and functions of FIMMDA?

The Fixed Income Money Market and Derivatives Association of India

FIMMDA has members representing all major institutional segments of the

The membership includes

Private sector banks such as

Foreign Banks such as

Financial institutions such as

Insurance Companies like

Birla Sun Life Insurance Company and all Primary Dealers

FIMMDA represents market participants and aids the development of the

It also undertakes developmental activities, such as, introduction of

It releases rates of various Government securities that are used by market

It also plays a constructive role in the evolution of best market practices by

It assumes the counter-party risk of each member and guarantees financial

It also undertakes settlement of transactions on other stock exchanges like,

NSCCL has successfully brought about an up-gradation of the clearing and

A Debenture is a debt security issued by a company (called the Issuer), which

Debentures are normally issued in physical form. However, Corporates/PSUs

What is present value?

How is Yield to Maturity computed?

What is the relationship between yield and price of a bond?

The coupon interest payments made by the issuer;

Annual coupon interest = 8.24% x Rs.100 = Rs.8.24

What is the day count conventions used in calculating bond

Who are the market participants in the Government

Demand Side Participants

Supply Side Participants