Corporate Debt Markets

The Debt Market

• The Debt Market is the market where fixed income securities of various types and
features are issued and traded. Debt Markets are therefore, markets for fixed income
securities issued by Central and State Governments, Municipal Corporations, Govt.
bodies and commercial entities like Financial Institutions, Banks, Public Sector Units,
Public Ltd. companies and also structured finance instruments.

Classification of Indian Debt Market

• Government Securities Market (G-Sec Market): It consists of central and state
government securities. It means that, loans are being taken by the central and state
government. It is also the most dominant category in the India debt market.

• Bond Market: It consists of Financial Institutions bonds, Corporate bonds and

debentures and Public Sector Units bonds. These bonds are issued to meet financial
requirements at a fixed cost and hence remove uncertainty in financial costs.
Government Security (G-Sec)
• Government Security (G-Sec) is a tradeable instrument issued by the Central
Government or the State Governments. It acknowledges the Government’s 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). G-Secs carry practically no risk of default and, hence, are
called risk-free gilt-edged instruments.

The Bond markets

• A bond is a debt instrument in which an investor loans money to an entity (typically
corporate or government) which borrows the funds for a defined period of time at a
variable or fixed interest rate. Bonds are used by companies, municipalities, states and
sovereign governments to raise money to finance a variety of projects and activities.
Owners of bonds are debt holders, or creditors, of the issuer.
• Bonds are long-term fixed-income securities that are issued by the government and
corporations.
• The coupon, maturity, principal, and ownership are the important features of a bond.
• The coupon of a bond indicates the income that the binds investors receive over the life
of the bond.
 • The term to maturity specifies the date or the number of years a bond matures. There
are two different types of maturities associated with the bond. The most common is the
term bond, which has a single maturity date, and a series of obligation bonds which has
a series of maturity dates.
• Bonds are investment securities where an investor lends money to a company or a
government for a set period of time, in exchange for regular interest payments. Once
the bond reaches maturity, the bond issuer returns the investor’s money.
• Companies sell bonds to finance ongoing operations, new projects or acquisitions.
Governments sell bonds for funding purposes, and also to supplement revenue from
taxes. When you invest in a bond, you are a debtholder for the entity that is issuing the
bond.

Why Issue Debt

• Firm wants to raise capital
• Does not want to dilute ownership
• Can earn more money on the use of the funds in the business than the cost of interest
on the debt.

Why invest in a bond?

• To distribute risk across a diversity of investments holdings.
• Investors want a steady reliable interest payment and return of their full capital or
investment at the end of the term of the bond

Key Terms
• Maturity: The date on which the bond issuer returns the money lent to them by bond
investors. Bonds have short, medium or long maturities.
• Face value: Also known as par, face value is the amount your bond will be worth at
maturity. A bond’s face value is also the basis for calculating interest payments due to
bondholders. Most commonly bonds have a par value of $1,000.
• Coupon: The fixed rate of interest that the bond issuer pays its bondholders. Using the
$1,000 example, if a bond has a 3% coupon, the bond issuer promises to pay investors
$30 per year until the bond’s maturity date (3% of $1,000 par value = $30 per annum).
• Yield: The rate of return on the bond. While coupon is fixed, yield is variable and
depends on a bond’s price in the secondary market and other factors. Yield can be
expressed as current yield, yield to maturity and yield to call.
• Price: Many if not most bonds are traded after they’ve been issued. In the market, bonds
have two prices: bid and ask. The bid price is the highest amount a buyer is willing to
pay for a bond, while ask price is the lowest price offered by a seller.
 • Duration risk: This is a measure of how a bond’s price might change as market interest
rates fluctuate. Experts suggest that a bond will decrease 1% in price for every 1%
increase in interest rates. The longer a bond’s duration, the higher exposure its price has
to changes in interest rates.
• Rating: Ratings agencies assign ratings to bonds and bond issuers, based on their
creditworthiness. Bond ratings help investors understand the risk of investing in bonds.
Investment-grade bonds have ratings of BBB or better.
How Bond Markets Facilitate the Flow of Funds

Participation of Financial Institutions in Bond Markets

How Are Bonds Priced?

• Bonds are priced in the secondary market based on their face value, or par.
 • Bonds that are priced above par—higher than face value—are said to trade at a
premium, while bonds that are priced below their face value—below par—trade at a
discount.
• Like any other asset, bond prices depend on supply and demand. But credit ratings and
market interest rates play big roles in pricing, too.

Relation Between Coupon Rate, Discount Rate, Value Of The Bond And Par Value

Valuation of Bond
Different Types of Bonds
• Corporate bonds are issued by public and private companies to fund day-to-day
operations, expand production, fund research or to finance acquisitions. Corporate
bonds are subject to federal and state income taxes.
• U.S. government bonds are issued by the federal government. They are commonly
known as treasuries, because they are issued by the U.S. Treasury Department. Money
raised from the sale of treasuries funds every aspect of government activity. They are
subject to federal tax but exempt from state and local taxes.
• Municipal bonds: States, cities and counties issue municipal bonds to fund local
projects. Interest earned on municipal bonds is tax-free at the federal level and often at
the state level as well, making them an attractive investment for high-net-worth
investors and those seeking tax-free income during retirement.
• Zero-Coupon Bonds: As their name suggests, zero-coupon bonds do not make periodic
interest payments. Instead, investors buy zero-coupon bonds at a discount to their face
value and are repaid the full face value at maturity.
• Callable Bonds:These bonds let the issuer pay off the debt—or “call the bond”—before
the maturity date. Call provisions are agreed to before the bond is issued.
• Puttable Bonds: Investors have the option to redeem a puttable bond—also known as a
put bond—earlier than the maturity date. Put bonds can offer single or several different
dates for early redemption.
 • Convertible Bonds: These corporate bonds may be converted into shares of the issuing
company’s stock prior to maturity.

Classification of Bonds
https://www.bondsindia.com/bonds.html
https://www.forbes.com/advisor/investing/what-is-a-bond/
https://www.indiabonds.com/news-and-insight/types-of-bonds-in-india/
https://www.samco.in/knowledge-center/articles/what-are-bonds/

How Do Bond Ratings Work?

• All bonds carry the risk of default. If a corporate or government bond issuer declares
bankruptcy, that means they will likely default on their bond obligations, making it
difficult for investors to get their principal back.

• Bond credit ratings help you understand the default risk involved with your bond
investments. They also suggest the likelihood that the issuer will be able to reliably pay
investors the bond’s coupon rate.
• Generally speaking, the higher a bond’s rating, the lower the coupon needs to be
because of lower risk of default by the issuer.
• The lower a bond’s ratings, the more interest an issuer has to pay investors in order to
entice them to make an investment and offset higher risk.
 • a highly rated, investment grade bond pays a smaller coupon (a lower fixed interest
rate) than a low-rated, below investment grade bond.
• That smaller coupon means the bond has a lower yield, giving you a lower return on
your investment. But if demand for your highly rated bond suddenly craters, then it
would start trading at a discount to par in the market. However, its yield would increase,
and buyers would earn more over the life of the bond—because the fixed coupon rate
represents a larger portion of a lower purchase price.

Changes in market interest rates add to the complexity.

• As market interest rates rise, bond yields increase as well, depressing bond prices.
• For example, a company issues bonds with a face value of $1,000 that carry a 5%
coupon. But a year later, interest rates rise and the same company issues a new bond
with a 5.5% coupon, to keep up with market rates. There would be less demand for the
bond with a 5% coupon when the new bond pays 5.5%.

How to Invest in Bonds

• You invest in bonds by buying new issues, purchasing bonds on the secondary market,
or by buying bond mutual funds or exchange traded funds (ETFs).
• New bonds: You can buy bonds during their initial bond offering via many online
brokerage accounts.
• Secondary market: Your brokerage account may offer the option to purchase bonds on
the secondary market.
• Mutual funds: You can buy shares of bond funds. These mutual funds typically
purchase a variety of bonds under the umbrella of a particular strategy. These include
long-term bond funds or high-yield corporate bonds, among many other strategies.
Bond funds charge you management fees that compensate the fund’s portfolio
managers.
• Bond ETFs: You can buy and sell shares of ETFs like stocks. Bond ETFs typically have
lower fees than bond mutual funds.

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https://www1.nseindia.com/products/content/equities/equities/sec_for_trading.htm
https://www1.nseindia.com/corporates/content/debt_public_issue.htm
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