• Principle features of a bond:-

• By
• AJI
• Kollam
• Zero Coupon Bond
• In such a bond, no coupons are paid. The bond is
instead issued at a discount to its face value, at which
it will be redeemed. There are no intermittent
payments of interest. When such a bond is issued for a
very long tenor, the issue price is at a steep discount to
the redemption value. Such a zero coupon bond is also
called a deep discount bond. The effective interest
earned by the buyer is the difference between the face
value and the discounted price at which the bond is
bought. There are also instances of zero coupon bonds
being issued at par, and redeemed with interest at a
premium.
• Floating Rate Bonds
• Instead of a pre-determined rate at which coupons are paid, it is
possible to structure bonds, where the rate of interest is re-set
periodically, based on a benchmark rate. Such bonds whose
coupon rate is not fixed, but reset with reference to a
benchmark rate, are called floating rate bonds. For example,
IDBI issued a 5 year floating rate bond, in July 1997, with the
rates being reset semi-annually with reference to the 10 year
yield on Central Government securities and a 50 basis point
mark-up. In this bond, every six months, the 10-year benchmark
rate on government securities is ascertained. The coupon rate
IDBI would pay for the next six months is this benchmark rate,
plus 50 basis points. The coupon on a floating rate bond thus
varies along with the benchmark rate, and is reset periodically.
• Callable Bonds
• Bonds that allow the issuer to alter the tenor
of a bond, by redeeming it prior to the
original maturity date, are called callable
bonds. The inclusion of this feature in the
bond’s structure provides the issuer the right
to fully or partially retire the bond, and is
therefore in the nature of call option on the
bond.
• Puttable Bonds
• Bonds that provide the investor with the right to
seek redemption from the issuer, prior to the
maturity date, are called puttable bonds. The put
options embedded in the bond provides the
investor the rights to partially or fully sell the
bonds back to the issuer, either on or before pre-
specified dates. The actual terms of the put option
are stipulated in the original bond indenture.
• Convertible Bonds
• A convertible bond provides the investor the
option to convert the value of the
outstanding bond into equity of the borrowing
firm, on pre-specified terms.
• MARKET SEGMENTS
• There are three main segments in the debt markets in India, viz.,
Government Securities, Public Sector Units (PSU) bonds, and corporate
securities. The market for Government Securities comprises the Centre,
State and State-sponsored securities. In the recent past, local bodies such as
municipalities have also begun to tap the debt markets for funds. The PSU
bonds are generally treated as surrogates of sovereign paper, sometimes
due to explicit guarantee and often due to the comfort of public ownership.
Some of the PSU bonds are tax free, while most bonds including
government securities are not tax-free. The RBI also issues tax-free bonds,
called the 6.5% RBI relief bonds, which is a popular category of tax-free
bonds in the market. Corporate bond markets comprise of commercial
paper and bonds. These bonds typically are structured to suit the
requirements of investors and the issuing corporate, and include a variety of
tailor- made features with respect to interest payments and redemption.
The less dominant fourth segment comprises of short term paper issued by
banks, mostly in the form of certificates of deposit.
• SECONDARY MARKET FOR DEBT INSTRUMENTS
• The NSE- WDM segment provides the formal trading platform for
trading of a wide range of debt securities. Initially, government
securities, treasury bills and bonds issued by public sector
undertakings (PSUs) were made available for trading. This range
has been widened to include non-traditional instruments like,
floating rate bonds, zero coupon bonds, index bonds, commercial
papers, certificates of deposit, corporate debentures, state
government loans, SLR and non-SLR bonds issued by financial
institutions, units of mutual funds and securitized debt. The WDM
trading system, known as NEAT (National Exchange for Automated
Trading), is a fully automated screen based trading system that
enables members across the country to trade simultaneously with
enormous ease and efficiency. The trading system is an order
driven system, which matches best buy and sell orders on a
price/time priority.
• CENTRAL GOVERNMENT SECURITIES: T-BILLS
• Treasury bills are short-term debt instruments
issued by the Central government. There are
3 types of T-bills which are issued: 91-day,
182-day and 364-day, representing the 4
types of tenors for which these instruments
are issued.
• Until 1988, the only kind of Treasury bill that was available
was the 91-day bill, issued on tap; at a fixed rate of 4.5% (the
rates on these bills remained unchanged at 4.5% since
1974!). 182-day T-bills were introduced in 1987, and the
auction process for T-bills was started. 364 day T-bill was
introduced in April 1992, and in July 1997, the 14-day T-bill
was also introduced. RBI had suspended the issue of 182-day
T- bills from April 1992, and revived their issuance since May
1999. RBI did away with 14-day and 182-day Treasury Bills
from May 2001. It was decided in consultation with the
Central Government to re-introduce, 182 day TBs from April
2005. All T-bills are now sold through an auction process
according to a fixed auction calendar, announced by the RBI.
Ad hoc treasury bills, which enabled the automatic
monetisation of central government budget deficits, have
been eliminated in 1997. All T-bill issuances now represent
market borrowings of the central government.
• T-bills are sold through an auction process
announced by the RBI at a discount to its face
value. RBI issues a calendar of T-bill auctions.
It also announces the exact dates of auction,
the amount to be auctioned and payment
dates. T-bills are available for a minimum
amount of Rs. 25,000 and in multiples of Rs.
25,000. Banks and PDs are major bidders in
the T-bill market.
• The government securities market also
benefited from emergence of liquidity
arrangement through the Liquidity Adjustment
Facility (LAF), expansion of the repo markets,
and emergence of self regulatory bodies, such
as, the Primary Dealers Association of India
(PDAI) and the Fixed Income Money Markets
and Derivatives Association (FIMMDA)..
• To enhance liquidity and efficiency, some
important initiatives have been taken such as:
(i) introduction of repo/reverse repo operations
in government securities to facilitate
participants of manage short term liquidity
mismatches (ii) operationalisation of
Negotiated Dealing system (NDS), an
automated electronic trading platform
• (c) establishment of Clearing Corporation of
India Ltd. (CCIL) for providing an efficient
and guaranteed settlement platform
• (d) introduction of G-secs in stock exchanges
• (e) introduction of Real time Gross
Settlement System (RTGS) which addresses
settlement risk and facilitates liquidity
management,
• (g) adoption of a modified Delivery-versus-
Payment mode of settlement which provides
for net settlement of both funds and securities
legs and
• (h) announcement of an indicative auction
calendar for Treasury Bills and Dated
Securities
• G-SECS: TRENDS IN VOLUMES, TENOR
AND YIELDS
• The government raises resources in the debt
markets, through market borrowings, pre-
dominantly to fund the fiscal deficit. Market
borrowings, which funded about 18% of the
gross fiscal deficits in 1990-91, constituted
77.1% of the gross fiscal deficit in 2007-08,
and have emerged as the dominant source
of funding of the deficit.
• During 2007-08, there was no primary
issuance of dated securities with maturity
of 5 years. Around 42.9% of Central
Government borrowings were effected
through securities with maturities above
10 years. The maximum maturity of
primary issuance increased to 30 years.
• The year 2007-08 witnessed an increase
in the cost of borrowings. The yields on
primary issues of dated government
securities eased during the year with the
cut-off yield varying between 7.55% and
8.64% during 2007-08 as against the
range of 7.06 to 8.75% during the
preceding year.
 PRIMARY ISSUANCE PROCESS
• RBI announces the auction of government
securities through a press notification, and
invites bids. The sealed bids are opened at
an appointed time, and the allotment is
based on the cut-off price decided by the
RBI. Successful bidders are those that
bid at a higher price, exhausting the
accepted amount at the cut-off price.
• Central Government Securities, which qualify
for SLR The prices as well as the yield curve
for the Central Government Securities is
published by FIMMDA. The curve is termed
as the Base Yield Curve for the purpose of
valuation. The Base Yield Curve starts from
six month tenor. The yield for six- month
tenor would also be applicable for maturities
less than six months.
• Traditionally, debt market has been an
institutional market all over the world. In
India, banks, financial institutions (FIs),
mutual funds (MFs), provident funds,
insurance companies and corporates are
the main investors. Banks have been
investing in this market mainly due to
statutory requirement of meeting
Statutory Liquidity Ratio (SLR).
• Liquidity Adjustment Facility (LAF)
• The liquidity Adjustment Facility introduced
in June 2000, allows the Reserve Bank of
India to manage market liquidity on a daily
basis and also transmit interest rate signals to
the market. The LAF, initially recommended
by Narsimhan Committee was introduced in
stages in consonance with the level of market
development and technological advances in
payment and settlement systems.
• RBI undertakes reverse repo transactions
to mop up liquidity and repos to supply
liquidity in the market. The two rates are
different and the reverse repo rate is
lower than the repo rate. The LAF
transactions are currently being
conducted on overnight basis.
• CENTRAL GOVERNMENT
SECURITIES:
• T-BILLS
• Treasury bills are short-term debt
instruments issued by the Central
government. There are 3 types of T-bills
which are issued: 91-day, 182-day and
364-day, representing the 4 types of tenors
for which these instruments are issued.
• SBI and its associates are the single largest
owners of state government securities. The
banking system as a whole is a large investor
in government securities. One of the reasons
for banks to invest in state government bonds
is the relatively lower risk-weighting on these
bonds, compared to the risk weighting in case
of corporate lending. The prudential
investment norms of LIC and provident funds
have also enabled a sizeable holding of state
government securities by these entities.
• High Investment Grades
• AAA – (Triple A) Highest Safety
• Debentures rated ‘AAA’ are judged to
offer highest safety of timely payment of
interest and principal.
• AA – (Double A) High Safety
• Debentures rated ‘AA’ are judged to offer
high safety of timely payment of interest
and principal..
• Investment Grades
• A – Adequate Safety
• Debentures rated ‘A’ are judged to offer adequate
safety of time ly payment of interest and principal.
BBB (Triple B) Moderate Safety
• Debentures rated ‘BBB’ are judged to offer moderate
safety of timely payment of interest and principal for
the present;
• Speculative Grades
• BB (Double B) Inadequate Safety
• Debentures rated ‘BB’ are judged to carry
inadequate safety and principal,
• B - High Risk
• Debentures rated ‘B’ are judged to have
greater susceptibility to default
• – Substantial Risk
• Debentures rated ‘C’ are judged to have
factors present that make them vulnerable
to default; timely payment of interest and
principal is possible only if favourable
circumstances continue.
• D – Default
• Debentures rated ‘D’ are in default and in
arrears of interest or principal payments or
are expected to default on maturity..
• Commercial paper (CP) is a short-term
instrument, introduced in 1990, to enable
non-banking companies to borrow short-term
funds through liquid money market
instruments. CPs were intended to be part of
the working capital finance for corporates,
and were therefore part of the working capital
limits as set by the maximum permissible bank
finance (MPBF).
• CP issues are regulated by RBI
Guidelines issued from time to time
stipulating term, eligibility, limits and
amount and method of issuance. It is
mandatory for CPs to be credit rated.
• Commercial Paper (CP) is an unsecured
money market instrument issued in the form
of a promissory note. CP, as a privately placed
instrument, was introduced in India in 1990
with a view to enabling highly rated corporate
borrowers to diversify their sources of short-
term borrowings and to provide an additional
instrument to investors.
• Subsequently, primary dealers,and all-
India financial institutions were also
permitted to issue CP to enable them to
meet their short-term funding
requirements for their operations.
Guidelines for issue of CP are presently
governed by various directives issued by
the Reserve Bank of India, as amended
from time to time.
• Who can Issue Commercial Paper
(CP)?
• Corporates and primary dealers (PDs),
and the all-India financial institutions
(FIs) that have been permitted to raise
short-term resources under the umbrella
limit fixed by Reserve Bank of India are
eligible to issue CP.
• A corporate would be eligible to issue CP
provided: (a) the tangible net worth of
the company, as per the latest audited
balance sheet, is not less than Rs. 4
crore; (b) company has been sanctioned
working capital limit by bank/s or all-
India financial institution/s; and (c) the
borrowal account of the company is
classified as a Standard Asset by the
financing bank/s/ institution/s.
• All eligible participants shall obtain the credit
rating for issuance of Commercial Paper from
either the Credit Rating Information Services
of India Ltd. (CRISIL) or the Investment
Information and Credit Rating Agency of
India Ltd. (ICRA) or the Credit Analysis and
Research Ltd. (CARE) or the FITCH Ratings
India Pvt. Ltd. or such other credit rating
agencies as may be specified by the Reserve
Bank of India .The minimum credit rating
shall be P-2 of CRISIL or such equivalent
rating by other agencies.
• Certificates of Deposits (CDs) are short-term
borrowings by banks. CDs differ from term
deposit because they involve the creation of
paper, and hence have the facility for transfer
and multiple ownerships before maturity. CD
rates are usually higher than the term deposit
rates, due to the low transactions costs. Banks
use the CDs for borrowing during a credit pick-
up, to the extent of shortage in incremental
deposits. Most CDs are held until maturity, and
there is limited secondary market activity.
• Certificates of Deposit (CDs) is a negotiable
money market instrument and issued in
dematerialised form or as a Usance Promissory
Note, for funds deposited at a bank or other
eligible financial institution for a specified time
period. CDs can be issued by (i) scheduled
commercial banks excluding Regional Rural
Banks (RRBs) and Local Area Banks (LABs);
and (ii) select all-India Financial Institutions that
have been permitted by RBI to raise short-term
resources within the umbrella limit fixed by RBI.
• I-BEX: SOVEREIGN BOND INDEX
• THE FIMMDA NSE MIBID-MIBOR
• The NSE MIBOR is a polled benchmark,
whose polling and sample mean
estimation techniques explicitly account
for the above issues in creating a market
benchmark for debt markets.
• NSE disseminates the average bid rate (MIBID)
and the average offer rates (MIBOR) and the
standard deviation of sample quotes from these
means.
• This data provides a benchmark of market rates,
which is used for a variety of pricing, trading
and valuation applications. Since the data is
captured and processed by an independent
agency, which has no direct trading interest in
the markets, the NSE benchmarks are widely
used by market participants.
• The NSE MIBID/MIBOR is used as a
benchmark rate for majority of deals
struck for interest rate swaps, forward
rate agreements, floating rate debentures
and term deposits. Bankers, issuers and
investors are using the NSE
MIBID/MIBOR extensively