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Fixed Income
Fixed income refers to any type of investment that is not equity, which obligates the borrower/issuer to make payments on a fixed schedule, even if the number of the payments may be variable.
The RBI raised the key policy rates (repo and reverse repo) by 50 basis points each to eight and seven percent respectively. The inflation rate has started showing signs of coming down and the economic data points show a negative impact of the existing high interest rates on consumer sentiment and industrial growth. The rate hike by the RBI will reduce the overall potential of equity-based instruments, especially the high beta and highly leveraged companies.
On the other hand, the potential of debt instruments will increase as their yields will go up due to the interest rate hardening. Sectors that are comparatively less-impacted by the RBI's interest rate hikes and provide potential investment opportunities for investors in the current market conditions.
WHAT IS A BOND?
A bond is a debt security, in which the authorized issuer owes the holders a debt and, depending on the terms of the bond, is obliged to pay interest (the coupon) to use and/or to repay the principal at a later date, termed maturity. A bond is a formal contract to repay borrowed money with interest at fixed intervals.
Government bonds/securities
The Government securities comprise dated securities issued by the Government of India and state governments as also, treasury bills issued by the Government of India. Reserve Bank of India manages and services these securities through its public debt offices located in various places as an agent of the Government.
Treasury Bills
Treasury Bill is a negotiable debt obligation issued by a government. Treasury bills are considered to be shortterm, as the period of maturity is one year or less. They are exempt from local and state taxes. They are the safest form of marketable investment.
AUCTIONS
TYPES OF T-BILLS DAY OF AUCTION DAY OF PAYMENT 91 DAYS WEDNESDAY FOLLOWING FRIDAY
182 DAYS
FOLLOWING FRIDAY
364 DAYS
FOLLOWING FRIDAY
Amounts
The minimum amount available is for Rs. 25,000 (US $579.72, as of 7 July, 2008). They are further available in denominations of Rs. 25,000. They are redeemed at par and are issued at a discounted rate. Treasury bills in India are issued under the Market Stabilization Scheme (MSS) as well.
Municipal Bond
Issued by local governments Started - 1997 $335 mn raised since 1997 Tamil Nadu and Karnataka - most promising states.
Advantages
Tax exemptions. Credit ratings. Liquidity. Insurance.
Interest 14% payable semi-annually. Redemption at the end of 6,7 and 8th year. Listed NSE Credit rating AA(SO).
Corporate bonds
Corporate bonds have more credit risk than treasury notes and bonds, they will sell at higher yields. Corporate bond market in India grew from Rs 55,000 crore in 2000 to Rs 199,000 crore in 2010.
Types
Secured debt vs Unsecure debt Senior debt vs Subordinated debt