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BOND MARKETS

Presented By Group 2
Indian Debt Market - Pillars of the
Indian Economy
• The Debt Market plays a very critical role for
any growing economy which need to employ
a large amount of capital and resources for
achieving the desired industrial and financial
growth.
• The Indian debt market is today one of the
largest in Asia and includes securities issued
by the Government (Central & State
Governments), public sector undertakings,
other government bodies, financial
institutions, banks and corporates.
DEBT MARKET SIZE
• The Indian debt markets is the largest
segment of the Indian financial markets.
(Source RBI & CCIL)
• Outstanding issue size of Government
securities (Central and state) close to
Rs.13,474 billion (or Rs. 1,34,7435 crore)
• Secondary market turnover of around Rs
56,033 billion (in the previous year 2007)
DEBT MARKET SIZE
• INCREASED FROM $ 13 BILLION IN
2006 TO $ 20 BILLION IN 2007
• Non-government sector expected to grow
to $ 575 BILLION $ BY
2016,ACCORDING TO A GOLDMAN
SACHS REPORT
INTRODUCTION
• The Bond Market is the financial
market where debt securities or
bonds are traded.
• Those buying these bonds become
the creditors of the company.
• The most distinguishing feature of
these instruments is that the return
is fixed i.e. they are as close to being
risk free as possible, if not totally risk
free
Contd.

• The debt market in India can be divided


into two categories
2. The government securities market or the
G-Sec markets consisting of central
government and state government
securities (therefore loans being taken
by the central and state governments)
3. Bond market consisting of FI (financial
institutions) bonds, PSU (public sector
units) bonds and corporate
bonds/debentures.
Pros n cons
Pros Cons
 The returns are risk  The returns are not
free. as high as
 High liquidity. securities markets.
 Loans can be easily  The retail debt
procured from market is not very
banks against govt. well developed
securities
Types of bonds
• Dated Securities
• Zero Coupon Bonds
• Capital Indexed Bonds
• Fixed Income Instruments issued by
corporates
• T-Bills
T-Bills
• Treasury bills (T-bills) offer short-term
investment opportunities, generally up to
one year.
• At present, the Government of India issues
three types of treasury bills through
auctions, namely, 91-day, 182-day and
364-day.
• Treasury bills are available for a minimum
amount of Rs.25,000 and in multiples of
Rs. 25,000. Treasury bills are issued at a
discount and are redeemed at par.
Treasury bills are also issued under the
Market Stabilization Scheme (MSS).
Dated Securities
• These instruments are of the face value of
Rs 100, which the buyer has to pay
upfront.
• The return is pre-decided. This is known as
the coupon rate or the interest rate. The
interest rate indicates the amount that will
be paid out by the government every year
till maturity. Time to maturity is fixed.
• When the security matures the face value
will be returned to the holder
Zero Coupon Bonds
• ZCBs are available at a discount to their
face value.
• There is no interest paid on these
instruments but on maturity the face value
is redeemed from the RBI
• The difference between the issue price
(discounted price) and face value is the
return on this security
Capital Indexed Bonds
• Capital indexed bonds have interest rates
as fixed percentage over the wholesale
price index
• The purpose is to provide investors with an
effective hedge against inflation
• They are issued at face value. The coupon
is fixed as a percentage over the WPI
Fixed Income instruments
issued by Corporates
• The companies issue debentures, which have a
face value and fixed coupon rate
• Debentures can be converted into shares
depending on the type of the instruments
• Those that cannot be converted are known as
NCD (non-convertible debentures).
• Some of the debentures can be partly converted
to stocks. These are known as PCDs (partly
convertible debentures).
• Those debentures that can be fully converted into
stocks are known as FCDs (fully convertible
debentures).
Calculation of Yields
Current Yield-The current yield calculates
the percentage return that the annual
coupon payment provides the investor. In
other words, this yield calculates what
percentage the actual coupon payment is
of the price the investor pays for the bond.

Current Yield= Coupon Rate ×


100
Purchase Price
Contd.

• Yield to Maturity-YTM is discount rate that


equates present value of the all the cash
inflows to the cost price of the government
security (market price), which is actually
the Internal Rate of Return of the
government security. The concept of Yield
to Maturity assumes that the future cash
flows are reinvested at the same rate at
which the original investment was made.
Contd.

YTM = I+(F-M)/N
(F+M)/2

where
I = Annual interest Rate
F = Face value of bond
M = Market price of the bond
N = Number of years to maturity
.
• .
Types of Risk Bondholders
Face
• Interest Rate Risk
The risk of a bond changing in value when interest rates
change. This affects all bonds regardless of credit
quality, but is more severe for longer maturity bonds.
• Reinvestment Risk
The risk that investors will be unable to reinvest the
coupon payments at the coupon rate. This is more
important for high coupon bonds.
• Default (Credit) Risk
The risk that the firm will go bankrupt and not make all
payments to
bondholders.
• Other Risks: Inflation, Liquidity
Factors that affect valuations of debt
instruments
• Monetary policy
• Economic growth
• Fiscal policy
• Inflation
• Attractiveness of debt market
Wholesale Debt Market
• The Wholesale Debt Market (WDM)
segment of the Exchange commenced
operations on June 30, 1994. This provided
the first formal screen-based trading
facility for the debt market in the country.
• Provides trading facility G-secs, T-Bills,
Bonds issued by PSUs, commercial papers,
corporate debentures etc
WHOLESALE DEBT MARKET-
MAJOR PLAYERS
• BANKS
• FI’s
• RBI
• Primary Dealers
• Insurance Companies
• Provident Funds
• MF’s
• Corporates
• FII’s
TYPES OF TRADE IN THE WDM
1. OUTRIGHT SALE OR PURCHASE
2. REPO TRADE-Also known as Ready Forward Trade,
trade which is intended to be reversed at a later point
in time at a rate which will include interest component
for the remaining period, one participant sells the
securities to the other with an agreement to purchase
them back at a later date
• Advantages:-
Facilitates creation of liquidity by permitting the seller
to avail a specific sum of money in lieu of interest
payment

Broken Period Concept


G-SEC
• The Government Securities market is the
oldest and the largest component of the
Indian debt market in terms of market
capitalization, outstanding securities and
trading volumes.
• The G-Secs market plays a vital role in the
Indian economy as it provides the benchmark
for determining the level of interest rates in
the country through the yields on the
government securities which are referred to
as the risk-free rate of return in any economy
Growth in WDM
• The Debt Segment has shown a gradual but
consistent growth in turnover in the past few
years with increased participation from the
mainstream banking and institutional players.
This Segment expects a sustained rise in
turnover and participation in the coming years
with the initiation of activity by new Members
and the continued support and participation
of major banks, Primary Dealers and
institutions.
Transformations in the Market
Structure
• The first half of the twentieth century had witnessed a significant amount of
retail interest and participation in the G-Sec market with more than half the
holdings of G-Secs issued being held by retail investors, a trend which
continued until the early sixties.

• The Indian Debt Market structure was hitherto that of a wholesale market
with participation largely restricted to the Banks, Institutions and the Primary
Dealers.

• The volumes in the Wholesale Debt Market over the past few years are
rapidly expanding showing attractive financial market with a strong potential
for retail participation.

• The Retail Debt Market in India is being created, thanks to the pioneering
efforts of the Exchanges and the market participants and the strong
leadership and guidance by SEBI, RBI and the Govt. of India.
Govt. Initiative
• The Hon'ble Union Finance Minister, while presenting the
Union Budget for 2006-2007, accepted the recommendations
of the High Level Committee on Corporate Bonds and
Securitization and made a significant policy announcement
about creation of a single, unified exchange-traded market for
corporate bonds in India.

• SEBI has subsequently taken several steps towards creation


of a vibrant Corporate Bond market. On July 2,2007 SEBI
permitted BSE to launch a trade matching platform with
essential features of an OTC Market. Several other initiatives
like simplification of the Debt listing agreement, rationalization
of stamp duty and introduction of Repos on Corporate Bonds
have been taken by SEBI.
Retail Debt Market Segment (RDM)

• The Retail Debt Market, in the new millennium,


presents a vast kaleidoscope of opportunities for
the Indian investor whose knowledge and
participation hitherto has been restricted to the
equity market.
The development of the Retail Debt Market has
engaged the attention of policy makers, regulators
and the Government in the past few years.
• The potential of the Retail Debt Market can be
gauged from the investor strength of more than 40
million in the Indian equity market
Emergence of the Retail Debt Market
• It would surprise many to know that a retail debt market was at one point of time very
much present in India.
The growing investments in the Bond Funds and the Money Market Mutual Funds are a
sign of the increasing recognition of this fact by the retail investors.
Retail investors would have a natural preference for fixed income returns and especially so
in the current situation of increasing volatility in the financial markets. The Central
Government Securities (G-Secs) are the one of the best investment options for an
individual investor today in the financial markets due to the following factors:
• Zero default risk - due to their sovereign guarantee, ensures the total safety of all
investments in G-Secs
• Lower average volatility in bond prices
• Greater returns as compared to the conventional safe investment avenues like Bank
Deposits and Fixed Deposits, which also contain credit risk
• Higher leverage -Greater borrowing capacity against G-Secs due to their zero risk status
• Wider range of innovations in the nature of securities like TBills, Index linked Bonds, Partly
Paid Bonds and others like STRIPS and securities with call and put options to follow soon
• Better and greater features to suit a large range of investment profiles and investor
requirements
• Growing liquidity and the increased turnover in recent times in the Indian Debt Markets
Retail Trading in G-Secs
• The Government of India and RBI, in early 2000 announced a
scheme for enabling retail participation through a non-
competitive bidding facility in the G-Sec auctions with a
reservation of 5% of the issue amount for non-competitive
bids by retail investors.
The Retail Trading in G-Secs. commenced on January 16,
2003 . The Indian Fixed Income Markets, which until some
time ago was the mainstay of the wholesale investors, were
made accessible to the retail investors to enable retail trading
in G-Secs through stock exchanges.
• The Indian Investor is today able to buy or sell G-Secs
through the nationwide BSE BOLT Network of more than
7,000 terminals spread across 410 cities around the country.
The Retail Debt Market Module of BSE
• The key features of the system are:

• Trading: by electronic order matching based on price-time priority


through the BOLT. Retail Trading in G-secs is on a Rolling
Settlements basis with a T+2 Delivery Cycle

• Clearing and Settlement: The Clearing and Settlement mechanism


for the Retail trading in G-Secs is based on the existing institutional
mechanism available at BSE. The trades executed throughout the
continuous trading sessions are netted out at the end of the trading
hours through a process of multilateral netting. The transactions are
netted out member-wise and then scrip-wise so as to determine the
net settlement and payment obligations of the Members.
…..cont
• The Delivery obligations and the payment orders in respect of these
Members are generated by the Clearing and Settlement system of
BSE. These statements indicate the pay-in and pay-out positions of
the Members for securities and funds who then give the necessary
instructions to their Clearing Banks and depositories.

• The entire risk management and the clearing and settlement


activities for the trades executed in the Retail Debt Market System is
undertaken by BSE Exchange Clearing House

• Holding and Transfer of G-Secs: The G-secs for retail trading


through BSE can be held by investors in the same Demat account
FUTURE
• The BSE Debt Market solution would soon provide
live Internet trading on its state-of-the-art
BSEWebx Trading System.
• The BSE Debt segment would seek to pave the
way for the development of a healthy, efficient and
active debt market mechanism and market
structure in line with world class standards and
greater integration with the global economy. This
will truly help the Indian capital markets to attain a
place of pride among the leading capital markets
of the world