Dissemination of information related to the debt market, namely
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Dissemination of information related to the debt market – a one stop shop for debt market information. Fixed Income Bond valuation covering Government dated securities with NSE VaR, State Development Loan, Other SLR Bonds, Corporate Bands valuation, Mutual Fund valuation – daily NAV base and Equity valuation – daily closing price based on daily VaR and Corporate Bond rating information.
Fixed-income securities are investments where the cash flows are according to a predetermined amount of interest, paid on a fixed schedule in general.
The different types of fixed income securities include government securities, corporate bonds, commercial paper, treasury bills, strips etc. Of these, corporate bond has many inbuilt features and comes with Bond Covenant - Bond covenants are designed to protect the interests of both parties (Bond Issuer and Bond Holder)
Holders of fixed-income securities are creditors of the issuer, not owners and receive interest periodically as a reward for lending. Equity represents a share in the ownership of the issuer and receives dividend as a reward as and when the issuer make the net profit.
Fixed interest rate securities are those in which the interest payable is fixed at the time of the issue and predetermined, so it is called Fixed Interest as no change in interest income during the life of the bond. Floating interest rate securities are those in which the interest payable is reset from at pre-determined intervals according to a pre-determined benchmark, say TBills, INBMK, MIFOR rates as a benchmark, so-called floating interest as the interest income may fluctuate during the life of the bond.
Credit quality (otherwise called Rating), coupon, maturity are key components of fixed-income securities.
Credit quality is an indicator of the ability of the issuer of the fixed income security to pay back his obligation. The credit quality of fixed-income securities is usually assessed by independent rating agencies such CRISIL, ICRA, CARE and FITCH in India. The rating scales start from AAA (called triple AAA), the highest rating, less risky, to D, the lowest rating, high risk.
The yield on a security is the implied interest offered by a security over its life, given its current market price. The market price, in turn, depends on various factor, namely, liquidity in the system, credit growth, GDP growth, fund inflow into the country, currency movement, demand/supply for the issue and investor preference.
Maturity indicates the life of the security, that is, the time over which interest flows will occur. All security ceased to exist on maturity date in general. Some securities are may mature on its Call, Put date if respective party exercises their right before bond maturity in particular.
Coupon payments are the cash flows that are offered by a particular security issue at fixed intervals (monthly, quarterly, semiannually or annually). The coupon expressed as a percentage, and paid on the face value of the security, called a coupon rate.
A bond's coupon rate is the actual amount of interest income earned on the bond each year based on its face value. A bond's yield to maturity (YTM - Yield to maturity is an approximates average return of the bond over its remaining term) is the estimated rate of return based on the assumption it is held until the maturity date.
To calculate the bond's coupon rate, divide the total annual interest payments, Rs 9, by the Rs 100 face value. Your bond has a 9% coupon rate.
If the bond sells at its face value, the coupon rate and yield are equal each other. If bond you sell above its face value, say our Rs. 100 bond at a Rs 10 premium, the bond's yield is now equal to Rs 9 / Rs 110, or 8.18%. Thus, yield and price are inversely related.
Long-term securities typically offer more return than short-term securities because uncertainty prevails more in longer-term bonds than the short term, thus investors usually prefer to lend money for shorter terms. Hence the long-term issues get investor only if offer higher rate of interest, so money lent out for longer terms will have a higher yield.
Callable securities are those which can be called by the issuer at predetermined time/times, by repaying the holder of the security a Face Value or certain amount which is fixed under the terms of the security. A reverse of a callable bond is puttable. Puttable securities are those which can be put/surrender to issue by the investor at predetermined time/times at Face Value or certain amount which is fixed under the terms of the security.
Prices and interest rates are inversely related.
A security whose price is dependent upon or derived from one or more underlying assets. Its value is determined by fluctuations in the underlying asset. The most common underlying assets include stocks, bonds, commodities, currencies, interest rates and market indexes.
The different types of derivatives include forwards, futures, options, swaps etc.
A forward contract is a contract to trade in a particular asset (which may be another security) at a particular price on a pre-specified date – a future date.
A forward rate agreement is an agreement to lend money on a particular date in the future at a rate that is determined today. It is like a forward contract where the underlying asset is a bond.
Futures are standardized forward contract that is traded on an exchange and where the counter-party (the party with which the contract has been signed) is the exchange itself.
Options are one category of derivatives. Other types of derivatives include futures contracts, swaps, and forward contracts. A derivative is a financial contract that gets its value from an underlying asset. An equity option is a derivative based on the value of a stock.
Interest rate swaps are agreements where one side pays/receive the other a particular interest rate (fixed or floating) and the other sides receive/pays the other a different interest rate (fixed or floating).
Accordingly, swaps are:
Fixed vs Floating swaps: Where one side pays the other a fixed interest rate and the other pays a floating rate determined by some benchmark and reset at fixed time intervals.
Basis swaps: Where the two sides pay each other rates determined by different benchmarks.
Overnight interest rate swaps are currently prevalent to the largest extent. They are swaps where the floating rate is an overnight rate (such as NSE MIBOR) and the fixed rate is paid in exchange for the compounded floating rate over a certain period.
The call money market is an integral part of the Indian Money Market, where the day-to-day surplus funds (mostly of banks) are traded. The loans are of short-term duration varying from 1 to 14 days. The money that is lent for one day in this market is known as "Call Money", and if it exceeds one day (but less than 15 days) it is referred to as "Notice Money". Term Money refers to Money lent for 15 days or more in the InterBank Market.
Banks borrow in this money market for the following purpose:
Thus call money usually serves the role of equilibrating the short-term liquidity position of banks
Call Money Market Participants:
1.Those who can both borrow as well as lend in the market - RBI (through LAF) Banks, PDs
2.Those who can only lend Financial institutions-LIC, UTI, GIC, IDBI, NABARD, ICICI and mutual funds etc.
By convention, the term "Money Market" refers to the market for short-term requirement and deployment of funds. Money market instruments are those instruments, which have a maturity period of less than one year. The most active part of the money market is the market for the overnight call and term money between banks and institutions and repo transactions. Call Money / Repo are very short-term Money Market products. The below-mentioned instruments are normally termed as money market instruments:
Commercial Papers are short-term borrowings by Corporates, FIs, PDs, from Money Market.
Features:
Eligibility Criteria
Any private/public sector co. wishing to raise money through the CP market has to meet the following requirements:
Commercial Papers can be issued in both physical and Demat form. When issued in the physical form Commercial Papers are issued in the form of Usance Promissory Note. Commercial Papers are issued in the form of discount to the face value.
Commercial Papers are short-term unsecured borrowings by reputed companies that are financially strong and carry a high credit rating. These are sold directly by the issues to the investors or else placed by borrowers through agents/brokers etc.
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.
CD is 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:
These are issued in denominations of Rs.5 Lacs and Rs. 1 Lac thereafter. Bank CDs have maturity up to one year. The 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 AIFI are also issued in physical form (in the form of Usance promissory note) and is issued at a discount to the face value.
A tradable form of loan is normally termed as a Debt Instrument. They are usually obligations of the issue of such instrument as regards certain future cash flow representing Interest & Principal, which the issuer would pay to the legal owner of the Instrument. Debt Instruments are of various types. The distinguishing factors of the Debt Instruments are as follows: -
Institutional investors operating in the Indian Debt Market are:
RBI: The Reserve Bank of India is the main regulator for the Money Market. Reserve Bank of India also controls and regulates the G-Secs Market. Apart from its role as a regulator, it has to simultaneously fulfill several other important objectives viz. managing the borrowing program of the Government of India, controlling inflation, ensuring adequate credit at reasonable costs to various sectors of the economy, managing the foreign exchange reserves of the country and ensuring a stable currency environment.
RBI controls the issuance of new banking licenses to banks. It controls the manner in which various scheduled banks raise money from depositors. Further, it controls the deployment of money through its policies on CRR, SLR, priority sector lending, export refinancing, guidelines on investment assets etc.
Another major area under the control of the RBI is the interest rate policy. Earlier, it used to strictly control interest rates through a directed system of interest rates. Each type of lending activity was supposed to be carried out at a pre-specified interest rate. Over the years RBI has moved slowly towards a regime of market determined controls.
SEBI
Regulator for the Indian Corporate Debt Market is the Securities and Exchange Board of India (SEBI). SEBI controls the bond market and corporate debt market in cases where entities raise money from public through public issues.
It regulates the manner in which such money are raised and tries to ensure a fair play for the retail investor. It forces the issue to make the retail investor aware, of the risks inherent in the investment, by way and its disclosure norms. SEBI is also a regulator for the Mutual Funds, SEBI regulates the entry of new mutual funds in the industry. It also regulates the instruments in which these mutual funds can invest. SEBI also regulates the investments of debt FIIs.
Apart from the two main regulators, the RBI and SEBI, there are several other regulators specific for different classes of investors, eg the Central Provision Fund Commissioner and the Ministry of Labour regulate the Provident Funds.
Religious and Charitable trusts are regulated by some of the State governments of the states, in which these trusts are located.
When we talk about interest rates, there are different types of interest rates - rates that banks offer to their depositors, rates that they lend to their borrowers, the rate at which the Government borrows in the bond/G-Sec, market, rates offered to small investors in small savings schemes like NSC rates at which companies issue fixed deposits etc.
The factors which govern the interest rates are mostly economy related and are commonly referred to as macroeconomic. Some of these factors are:
G-Secs or Government of India dated Securities is Rupees One hundred face-value units/debt paper issued by Government of India in lieu of their borrowing from the market. These can be referred to as certificates issued by Government of India through the Reserve Bank acknowledging receipt of money in the form of debt, bearing a fixed interest rate (or otherwise) with interests payable semi-annually or otherwise and principal as per schedule, normally on due date on redemption
The term government securities encompass all Bonds & T-bills issued by the Central Government, state government. These securities are normally referred to, as "gilt-edged" as repayments of principal as well as interest are totally secured by a sovereign guarantee.
'Gilt Securities' are issued by the RBI, the central bank, on behalf of the Government of India. Being sovereign paper, gilt securities carry absolutely no risk of default.
Like Treasury Bills, G-Secs are issued by the Reserve Bank of India on behalf of the Government of India. These form a part of the borrowing program approved by the parliament in the ‘union budget’. G- Secs are normally issued in dematerialized form (SGL). When issued in the physical form they are issued in the multiples of Rs. 10,000/-. Normally the dated Government Securities, have a period of 1 year to 20 years. Government Securities, when issued in physical form, are normally issued in the form of Stock Certificates. Such Government Securities when are required to be traded in the physical form are delivered by the transferor to transferee along with a special transfer form designed under Public Debt Act 1944.
The transfer does not require stamp duty. The G-Secs cannot be subjected to the lien. Hence, is not an acceptable security for lending against it. Some Securities issued by Reserve Bank of India like 8.5% Relief Bonds are securities specially notified & can be accepted as Security for a loan.
Earlier, the RBI used to issue straight coupon bonds ie bonds with a stated coupon payable periodically. In the last few years, new types of instruments have been issued. These are:-
Inflation-linked bonds: These are bonds for which the coupon payment in a particular period is linked to the inflation rate at that time - the base coupon rate is fixed at the inflation rate (consumer price index-CPI) being added to it to arrive at the total coupon rate.
The idea behind these bonds is to make them attractive to investors by removing the uncertainty of future inflation rates, thereby maintaining the real value of their invested capital.
FRBs or Floating Rate Bonds comes with a coupon floater, which is usually a margin over and above a benchmark rate. E.g, the Floating Bond may be nomenclature/denominated as +1.25% FRB YYYY ( the maturity year ). +1.25% coupon will be over and above a benchmark rate, where the benchmark rate may be a six month average of the implicit cut-off yields of 364-day Treasury bill auctions. If this average works out 9.50% p.a then the coupon will be established at 9.50% + 1.25% i.e., 10.75%p.a. Normally FRBs (floaters) also bear a floor and cap on interest rates. Interest so determined is intimated in advance before such coupon payment which is normally, Semi-Annual.
Zero coupon bonds: These are bonds for which there is no coupon payment. They are issued at a discount to face value with the discount providing the implicit interest payment. In effect, zero coupon bonds are like long duration T - Bills.
State government securities (State Development Loans): SDLs, These are issued by the respective state governments but the RBI coordinates the actual process of selling these securities. Each state is allowed to issue securities up to a certain limit each year. The planning commission in consultation with the respective state governments determines this limit. Generally, the coupon rates on state loans are marginally higher than those of GOI-Secs issued at the same time. As issue Sates are not directly involved in issue process, say the timing of the issue, the coupon rate is not tuned so good as other bonds.
The procedure for selling off state loans, the auction process, and allotment procedure is similar to that for GOI-Sec. State Loans also qualify for SLR status Interest payment and other modalities are similar to
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.
Generally, debentures are better liquid than Company and Bank’s FD, but less liquid than as compared to PSU bonds.
Debentures are divided into different categories on the basis of (1) Debenture converted into Issuer’s company Equity (2) Debenture’s security nature.
Debentures can be classified on the basis of convertibility into:
On basis of Security, debentures are classified into:
Public Sector Undertaking Bonds (PSU Bonds): These are Medium or long term debt instruments issued by Public Sector Undertakings (PSUs). The term usually denotes bonds issued by the central PSUs (ie PSUs funded by and under the administrative control of the Government of India). Most of the PSU Bonds are sold on Private Placement Basis to the targeted investors at Market Determined Interest Rates. Most of the PSU Bonds are transferable and endorsement at delivery and are issued in the form of Promissory Note.
Like the rate of Interest on Bank’s Fixed Deposit, the Coupon rate is simply the interest rate that every debenture/Bond carries on its face value and is fixed at the time of issuance. For example, a 12% Per Annum – PA, coupon rate on a bond/debenture on the Face Value of Rs 100 implies that the investor will receive Rs 12 PA until its maturity. The coupon can be payable monthly, quarterly, half-yearly, or annually or as cumulative on redemption.
Securities are issued for a fixed period of time at the end of which the principal amount borrowed is repaid to the investors. The date on which the term ends and proceeds are paid out is known as the Maturity date. It is specified in the “Term of the Issue” along with other important in formations which are relevant to the investor.
On reaching the date of maturity, the issuer repays the money borrowed from the investors. This is known as Redemption or Repayment of the bond/debenture. Most of the bonds in India are redeemed at par.
This is the yield or return derived by the investor on purchase of the instrument (yield related to purchase price)
The yield or the return on the instrument is held till its maturity is known as the Yield-to-maturity (YTM). It basically measures the total income earned by the investor over the entire life of the Security.
This total income consists of the following:
G-Sec/Bonds/Debentures keep changing hands in the secondary market. The issuer pays interest to the holders registered in its register on a certain date. Such date is known as the record date. Securities are not transferred in the books of the issuer during the period in which such records are updated for payment of interest etc. Such period is called a shut period. For G-Secs held in Demat form (SGL) shut period is 3 working days.
Cum-interest means the price of security is inclusive of the interest accrued for the interim period between last interest payment date and purchase date.
Security with ex-interest means the accrued interest has to be paid separately
Securities are generally issued in denominations of 10, 100 or 1000. This is known as the Face Value or Par Value of the security. When a security is sold above its face value, it is said to be issued at a Premium and if it is sold at less than its face value, then it is said to be issued at a Discount
The market uses quite a few conventions for calculation of the number of days that has elapsed between two dates. It is interesting to note that these conventions were designed prior to the emergence of sophisticated calculating devices and the main objective was to reduce the math in complicated formulae. The conventions are still in place even though calculating functions are readily available even in hand-held devices. The ultimate aim of any convention is to calculate (days in a month)/(days in a year). The conventions used are as below. We take the example of a bond with Face Value 100, coupon 12.50%, the last coupon paid on 15th June 2000 and traded for value 5th October 2000.
A/360(Actual by 360)
In this method, the actual number of days elapsed between the two dates is divided by 360, i.e. the year is assumed to have 360 days. Using this method, accrued interest is 3.8888.
A/365 (Actual by 365)
In this method, the actual number of days elapsed between the two dates is divided by 365, i.e. the year is assumed to have 365 days. Using this method, accrued interest is 3.8356
A/A (Actual by Actual)
In this method, the actual number of days elapsed between the two dates is divided by the actual days in the year. If the year is a leap year AND the 29th of February is included between the two dates, then 366 is used in the denominator, else 365 is used. Using this method, accrued interest is 3.8356
30/360 ( 30 by 360 - American )
This is how this convention is used in the US. Break up the earlier date as D(1)/M(1)/Y(1) and the later date as D(2)/M(2)/Y(2). If D(1) is 31, change D(1) to 30. If D(2) is 31 AND D(1) is 30, change D(2) to 30. The days elapsed is calculated as Y(2)-Y(1)*360+M(2)-M(1)*30+D(2)-D(1)
30/360 ( 30 by 360 - Europian )
This is the variation of the above convention outside of the United States. Break up the earlier date as D(1)/M(1)/Y(1) and the later date as D(2)/M(2)/Y(2). If D(1) is 31, change D(1) to 30. If D(2) is 31, change D(2) to 30. The days elapsed is calculated as Y(2)-Y(1)*360+M(2)-M(1)*30+D(2)-D(1)
G-Secs are usually referred to as risk-free securities. However, these securities are subject to only one type of risk i.e., interest-rate risk. Subject to changes in the overall interest rate scenario, the price of these securities may appreciate or depreciate.
(i) Interest Rate risk: Interest rate risk, market risk or price risk are essentially one and the same. Theses are typical of any fixed coupon security with a fixed period-to-maturity. This is on account of an inverse relation between price and interest. As interest rates rise, the price of a security will fall. However, this risk can be completely eliminated in case an investor's investment horizon identically matches the term of the security.
(ii) Reinvestment risk: This risk is again akin to all those securities, which generate intermittent cash flows in the form of periodic coupons. The most prevalent tool deployed to measure returns over a period of time is the yield-to-maturity (YTM) method. The YTM calculation assumes that the cash flows generated during the life of a security is reinvested at the rate of the YTM. The risk here is that the rate at which the interim cash flows are reinvested may fall thereby affecting the returns.
(iii) Default risk: This kind of risk in the context of a Government security is always zero. However, these securities suffer from a small variant of default risk i.e., maturity risk. Maturity risk is the risk associated with the likelihood of the government issuing a new security in place of redeeming the existing security. In the case of Corporate Securities, it is referred to as Credit Risk.
A Repo deal is one where eligible parties enter into a contract with another to borrow money against at a pre-determined rate against the collateral of eligible security for a specified period of time. The legal title of the security does change. The motive of the deal is to fund a position. Though the mechanics essentially remain the same and the contract virtually remains the same, in the case of a reverse Repo deal the underlying motive of the deal is to meet the security/instrument specific needs or to lend the money. Indian Repo Market is governed by Reserve Bank of India. At present Repo is permitted between permitted 64 players against Central & State Government Securities (including T-Bills) only at Mumbai.
OMO or Open Market Operations is a market regulating mechanism often resorted to by Reserve Bank of India. Under OMO Operations Reserve Bank of India as a market, regulator keeps buying or/and selling securities through its open market window. Its decision to sell or/and buy securities is influenced by factors such as overall liquidity in the system, disciplining a sentiment-driven market, signaling of likely movements in interest rate structure, etc.
A Constituent Subsidiary General Ledger Account (CSGL) is a service provided by Reserve Bank of India through Primary Dealers and Banks to those entities who are not allowed to hold direct SGL Accounts with it. This account provides for holding off Central/State Government Securities and Treasury bills in book entry/dematerialized form. Individuals are also allowed to hold a Constituent SGL Account.
Bootstrapping is an iterative process of generating a Zero Coupon Yield Curve from the observed prices/yields of coupon-bearing securities. The process starts from observing the yield for the shortest-term money market discount instrument (i.e. one that carries no coupon). This yield is used to discount the coupon payment falling on the same maturity for a coupon-bearing bond of the next higher maturity. The resulting equation is solved to give the zero yield (also called spot yield) for the higher maturity period.
This process is continued for all securities across the time series. If represented algebraically, the process would lead to an nth degree polynomial that is generally solved using numerical methods.
The relationship between time and yield on a homogenous risk class of securities is called the Yield Curve. The relationship represents the time value of money - showing that people would demand a positive rate of return on the money they are willing to part today for a payback into the future. It also shows that a Rupee payable in the future is worth less today because of the relationship between time and money. A yield curve can be positive, neutral or flat. A positive yield curve, which is most natural, is when the slope of the curve is positive, i.e. the yield at the longer end is higher than that at the shorter end of the time axis. This results, as people demand higher compensation for parting their money for a longer time into the future. A neutral yield curve is that which has a zero slope, i.e. is flat across time. T his occurs when people are willing to accept more or less the same returns across maturities. The negative yield curve (also called an inverted yield curve) is one of which the slope is negative, i.e. the long-term yield is lower than the short-term yield.
The Zero Coupon Yield Curve (also called the Spot Curve) is a relationship between maturity and interest rates. It differs from a normal yield curve by the fact that it is not the YTM of coupon-bearing securities, which gets plotted. Represented against time are the yields on zero-coupon instruments across maturities. The benefit of having zero coupon yields (or spot yields) is that the deficiencies of the YTM approach (See Yield to Maturity) is removed. However, zero coupon bonds are generally not available across the entire spectrum of time and hence statistical estimation processes are used. The zero coupon yield curve is useful in the valuation of even coupon bearing securities and can be extended to other risk classes as well after adjusting for the spreads. It is also an important input for robust measures of Value at Risk (VaR)
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