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HOME INVESTMENTS DEBT INSTRUMENTS
Debt Instruments
By Adnan Ali
Updated on: Jun 19th, 2024 | 6 min read
What are Debt Instruments?
Debt instruments are legally obligated contracts issued to repay the borrowed principal
amount with interest within the specified time to the investor. These bonds have fixed or
variable rates of returns, and the variable-rate instrument is connected to market rates. A few
examples of debt instruments are debentures, bonds, certificates of deposits, notes, and
commercial paper.
Investors usually invest in these, expecting a return of the principal amount with interest. The
amount and the interest duration, however, vary on the type of instrument.
Who Issues Debt Instruments in India?
In India Debt instruments, often also known as fixed-income securities, are issued by
Government, Government Entities and statutory corporations or bodies, corporate bodies, and
financial institutions.
Type of Debt Instruments

Listed below are the different types of debt instruments you can find in India:
#1. Bonds
These are the most common and are created through bond indenture. The investor buys
corporate or government bonds for a fixed return. Bonds are backed by collateral and physical
assets. Generally they have a maturity range of 5 to 40 years. They are appreciated when the
market rate is low. Governments, corporations, and local governments all issue bonds.
Corporate bonds, government securities bonds, convertible bonds, RBI bonds, sovereign gold
bonds, inflation-linked bonds, and zero-coupon bonds are among the several bond categories
in India that you can invest in.
#2. Debentures
They are similar to bonds, but their securitisation differs as they are unsecured and rely on the
issuer’s creditworthiness. They are not backed by any collateral and physical assets. Major
corporations and the government issue them to raise funds. Since it hardly creates any claim on
the assets, it is a significant advantage to the issuer. Hence leaving them available for future
funding. They appear on the balance sheet and are included in share capital.
#3. T-Bills
The government and RBI issue T-bills, or treasury bills, which are money market instruments. It is
a liability to the Indian government and is paid within a fixed time. With a maximum maturity of
up to 364 days, it carries no risk and may be quickly turned into cash in an emergency.
These bills are auctioned weekly by non-competitive bidding, creating a higher cash flow to
the capital market. The tenure structure of these bills determines their discount rates and face
value. These are subject to fluctuations based on financing requirements, reserve bank policies,
and the total number of bids received.
#4. Certificates of Deposits
CDs or certificates of deposits are time-specific deposits and are provided by banks. They are
equivalent to conventional bank savings accounts. They are risk-free, insurance-covered, and
cannot be issued for less than one year or more than three years. CDs have fixed interest rates
mostly and differ from savings as they have a set term period.
#5. Commercial Papers
CPs are issued when organisations have to raise capital over one year, hence short-term
instruments. These are unprotected instruments issued as promissory notes with a minimum of
seven days and a maximum one-year maturity period from the issue date. They are available
for INR 5 lakh or in their multiples and are issued by financial institutions to help companies raise
money.
#6. Mortgages
A mortgage is a type of loan backed by real estate. People usually use these loans to purchase
homes, commercial buildings, land, and other real estate. They are annualised over time,
allowing borrowers to pay until the debt is paid. On the other hand, the lenders receive interest
until it is paid. If the borrower defaults, the lender seizes and sells the assets to get its funds.
#7. Government Securities
These are issued on behalf of the government by RBI and include State and Central
government securities and treasury bills. To cover its budgetary shortfalls, the Central
government takes out loans. The issuance of dated securities and 364-day treasury bills, either
by loan floatation or auction, increases the government's market borrowing.
In addition, 91-day treasury notes are created to help the government easily handle short-term
cash imbalances. There is no default risk since government securities are issued at face value
and are backed by a sovereign guarantee. Interest payments are provided on a half-yearly
basis at face value.
The investor has the option to sell the asset on the secondary market. Investors can redeem the
securities at face value at maturity, and tax is not withheld at the source. Two to thirty years is
the maturity range.
What is the Difference Between Convertible and Non-Convertible Security?
Parameter Convertible Non-Convertible
Definition These can be converted into a company’s They cannot be converted into
equity shares. equity shares.

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Products

Confused by the New Income

Updated on: Jun 19th, 2024 | 6 min read

What are Debt Instruments?

Who Issues Debt Instruments in India?

Type of Debt Instruments

in India that you can invest in.

and the total number of bids received.

#4. Certificates of Deposits

#7. Government Securities

by loan floatation or auction, increases the government's market borrowing.

basis at face value.

the maturity range.

What is the Difference Between Convertible and Non-Convertible Security?

Parameter Convertible Non-Convertible

equity shares. equity shares.

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