DEBT MARKET

Debt Market
Market for trading fixed income securities
Securities issued by central/state/Government/muncipal corporation/ Govt

bodies/FI/Banks/corporates etc
Bond can be defined as a loan for which an investor is the lender

Debt Vs Equity
When a person invests via equity he becomes an owner of the corporate issuing the

equity
He gets voting rights and a share in the future profits

Debt Market
In debt
The investor becomes a creditor to the issuing entity
Has higher claims to the assets of the entity
Debt instruments assure fixed income by way of pre-determined interest
Face value /Par value
The amount the issuer will get back from the issuer once the debt

instrument matures
Bonds may be issued at face value or at a discount to the face value

Debt Market
Price of a bond keep fluctuating, through out its life, based on market forces
It may be traded at a premium or discount to its face value
Coupon or interest rate
The interest payments received on the debt instruments
It may be paid monthly/quarterly/ semi-annul or annual basis.
Interest is calculated on the face value of the instrument
The coupon may be fixed or floating

Debt Market
Maturity in debt market
The date on which the investor is repaid the principal by the issuer
The tenure can range from 1 day to 30 years
Money market
It is a market to issue and trade securities with short term maturity, like

treasury bills, certificate of deposit, commercial paper, bill of exchange etc.

T bills are issued at a discount to the face value

Debt Market
Regulation of fixed income market
G secs and bonds, instruments issued by banks and Financial institutions are

regulated by RBI
Issues of non-government securities (issued by corporates) are regulated by

SEBI
Government securities (G Secs)
The investor has zero default risk
Most stable fixed income instrument
Sovereign guarantee
No TDS on interest payments

Types of G secs
Treasury bills
Zero coupon securities
Three tenors 91 days, 182 days, 364 days
Cash Management Bills
Generic characteristics of T bills
Issued for < 91 days
Dated Govt securities
Long term securities that carry fixed or floating interest rates
Tenor can be up to 30 years
State Govt loans
State level loans are dated securities issued thro an auction

Types of dated G secs

Fixed rate bonds (most G secs are fixed rated)
Floating rate bonds
Zero coupon bonds
Capital indexed bonds (principal is indexed to an accepted index of inflation)
Bonds with call/ put options
Issuer has option to buy back (call) or option to sell (put option) to the issuer

during the currency of the bond

Conversion. Allow investor to convert the bonds into equity

Instruments in corporate debt market

Non- convertible debentures (NCD)
Partly- convertible/ fully -convertible debentures
Secured premium notes (NCD)
Debentures with warrants
Deep discount bonds
PSU Bonds/ Tax free bonds

Debt Market
Corporate debt market
Indian primary market in corporate debt is basically a private placement

market
Placement is made among wholesale investors

Debt Market
Risks of debt securities
Default risk (credit risk) inability of the issuer to meet obligations

Interest rate risk changes in yield. Bond trading prices are inversely

proportional to interest rates

Reinvestment rate risk lack of options to invest the interest received

Debt Market
Secondary debt market
Wholesale debt market
Investors are banks, FIs, RBI, insurance companies, mutual funds,

corporates and FIIs

Retail debt market
Investors are individuals, pension funds, private trusts, NBFCs, private

trusts, HFCs, corporate treasuries, HUF etc

Debt Market
Trading structure
Globally Govt securities dominate 50 to 75% of the trading volumes
In India, Central Govt securities constitutes 90% and State Govt securities

constitute 3 to 4% of the volumes

G Secs are issued by RBI, on either yield based or price based auction

Debt Market
Types of trade in Wholesale Debt market (WDM)
An out right sale or purchase
Buy or sell transaction is an independent trade
A repo trade (ready forward trade)
Repurchase agreement

Bond analytics
Current yield
Annual interest income/ Market price of Bond
Yield to Maturity (YTM)
Also called book yield or redemption yield
It is the IRR (internal rate return) earned by an investor who buys the bond

today at market price, assuming that the bond will be held until maturity
YTM is the interest rate an investor would earn by reinvesting every

coupon payment from the bond at a constant interest rate until the bonds
maturity date, the present value of all these future cash flows equals the
bonds market price.
Bond price = cash flow 1/(1+yield)1 + Cash flow 2/(1+ yield)2 + .last
Cash flow/ (1+ yield)n