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GovernmentSecuritiesMarketinIndiaAPrimer

ForeignExchange
GovernmentSecuritiesMarket

Publications

(UpdateduptoOctober17,2014)
Sl.No

Question

NBFCs
Others
PaymentSystems

WhatisaGovernmentsecurity?

WhyshouldoneinvestinGovernmentsecurities?

HowaretheGovernmentsecuritiesissued?

Whatarethedifferenttypesofauctionsusedforissueofsecurities?

WhatareOpenMarketOperations(OMOs)?

WhatisLiquidityAdjustmentFacility(LAF)?

HowandinwhatformcanGovernmentsecuritiesbeheld?

HowdoesthetradinginGovernmentsecuritiestakeplace?

WhoarethemajorplayersintheGovernmentsecuritiesmarket?

10

What are the Dos and Donts prescribed by RBI for the Cooperative banks
dealinginGovernmentsecurities?

11

Howarethedealingtransactionsrecordedbythedealingdesk?

12

Whataretheimportantconsiderationswhileundertakingsecuritytransactions?

13

WhydoesthepriceofGovernmentsecuritychange?

14

HowdoesonegetinformationaboutthepriceofaGovernmentsecurity?

15

HowaretheGovernmentsecuritiestransactionsreported?

16

HowdotheGovernmentsecuritiestransactionssettle?

17

Whatisshutperiod?

18

WhatisDeliveryversusPayment(DvP)settlement?

19

WhatistheroleoftheClearingCorporationofIndiaLimited(CCIL)?

20

WhatistheWhenIssuedmarket?

21

What are the basic mathematical concepts one should know for calculations
involvedinbondpricesandyields?

22

HowisthePriceofabondcalculated?Whatisthetotal consideration amount

ofatradeandwhatisaccruedinterest?

23

Whatistherelationshipbetweenyieldandpriceofabond?

24

Howistheyieldofabondcalculated?

25

Whatarethedaycountconventionsusedincalculatingbondyields?

26

HowistheyieldofaTreasuryBillcalculated?

27

WhatisDuration?

28

Whataretheimportantguidelinesforvaluationofsecurities?

29

What are the risks involved in holding Government securities? What are the
techniquesformitigatingsuchrisks?

30

Whatismoneymarket?

31

WhatistheroleofFIMMDA?

32

WhatarethevariouswebsitesthatgiveinformationonGovernmentsecurities?

Annex1

SpecimenofaGovernmentsecurity

Annex2

ListofPrimaryDealers

Annex3

Specimenofdealslip

Annex4

ImportantExcelfunctionsforbondrelatedcalculations

Annex5

Glossaryofimportanttermsandcommonlyusedmarketterminologies

Disclaimer
The contents of this primer are for general information and guidance purpose only. The Reserve Bank will not be liable for actions
and/ordecisionstakenbasedonthisPrimer.ReadersareadvisedtorefertothespecificcircularsissuedbyReserveBankofIndia
fromtimetotime.Whileeveryefforthasbeenmadetoensurethattheinformationsetoutinthisdocumentisaccurate,theReserve
Bank of India does not accept any liability for any action taken, or reliance placed on, any part, or all, of the information in this
documentorforanyerrorinoromissionfrom,thisdocument.
PREFACE
The Government securities market has witnessed significant changes during the past decade. Introduction of an electronic screen
based trading system, dematerialized holding, straight through processing, establishment of the Clearing Corporation of India Ltd.
(CCIL) as the central counterparty (CCP) for guaranteed settlement, new instruments, and changes in the legal environment are
someofthemajoraspectsthathavecontributedtotherapiddevelopmentofthemarket.
MajorparticipantsintheGovernmentsecuritiesmarkethistoricallyhavebeenlargeinstitutionalinvestors.Withthevariousmeasures
for development, the market has also witnessed the entry of smaller entities such as cooperative banks, small pension and other
fundsetc.TheseentitiesaremandatedtoinvestinGovernmentsecuritiesthroughrespectiveregulations.However,someofthese
new entrants have often found it difficult to understand and appreciate various aspects of the Government securities market. The
Reserve Bank of India has, therefore, taken several initiatives to bring awareness about the Government securities market among
small investors. These include workshops on the basic concepts relating to fixed income securities/ bonds like Government
securities,existingtradingandinvestmentpractices,therelatedregulatoryaspectsandtheguidelines.
ThisprimerisyetanotherinitiativeoftheReserveBanktodisseminateinformationrelatingtotheGovernmentsecuritiesmarketto
thesmallerinstitutionalplayersaswellasthepublic.Anefforthasbeenmadeinthisprimertopresentacomprehensiveaccountof
the market and the various processes and operational aspects related to investing in Government securities in an easyto
understand, questionanswer format. The primer also has, as annexes, a list of primary dealers (PDs), useful excel functions and
glossary of important market terminology. I hope the investors particularly the smaller institutional investors will find the primer
usefulintakingdecisionsoninvestmentinGovernmentsecurities.ReserveBankofIndiawouldwelcomesuggestionsinmaking this
primermoreuserfriendly.
SMTS.GOPINATH
DeputyGovernor
1.WhatisaGovernmentSecurity?
1.1AGovernmentsecurityisatradableinstrumentissuedby the Central Government or the State Governments. It acknowledges
the Governments debt obligation. Such securities are short term (usually called treasury bills, with original maturities of less than
oneyear)orlongterm(usuallycalledGovernmentbondsordatedsecuritieswithoriginalmaturityofoneyearormore).InIndia,the
CentralGovernmentissuesboth,treasurybillsandbondsordatedsecuritieswhiletheStateGovernmentsissueonlybondsordated
securities, which are called the State Development Loans (SDLs). Government securities carry practically no risk of default and,
hence, are called riskfree giltedged instruments. Government of India also issues savings instruments (Savings Bonds, National
Saving Certificates (NSCs), etc.) or special securities (oil bonds, Food Corporation of India bonds, fertiliser bonds, power bonds,
etc.).Theyare,usuallynotfullytradableandare,therefore,noteligibletobeSLRsecurities.
a.TreasuryBills(Tbills)
1.2TreasurybillsorTbills,whicharemoneymarketinstruments,areshorttermdebtinstrumentsissuedbytheGovernmentofIndia
andarepresentlyissuedinthreetenors,namely,91day,182dayand364day.Treasurybillsarezerocouponsecuritiesandpayno
interest.Theyareissuedatadiscountandredeemedatthefacevalueatmaturity.Forexample,a91dayTreasurybillofRs.100/
(face value) may be issued at say Rs. 98.20, that is, at a discount of say, Rs.1.80 and would be redeemed at the face value of
Rs.100/. The return to the investors is the difference between the maturity value or the face value (that is Rs.100) and the issue
price(forcalculationofyieldonTreasuryBillspleaseseeanswertoquestionno.26).TheReserveBankofIndiaconducts auctions
usually every Wednesday to issue Tbills. Payments for the Tbills purchased are made on the following Friday. The 91 day Tbills
areauctionedoneveryWednesday.TheTreasurybillsof182daysand364daystenureareauctionedonalternateWednesdays.T
bills of of 364 days tenure are auctioned on the Wednesday preceding the reporting Friday while 182 Tbills are auctioned on the
WednesdaypriortoanonreportingFridays.TheReserveBankreleasesanannualcalendarofTbillissuancesforafinancialyearin
the last week of March of the previous financial year. The Reserve Bank of India announces the issue details of Tbills through a
pressreleaseeveryweek.
b.CashManagementBills(CMBs)
1.3GovernmentofIndia,inconsultationwiththeReserveBankofIndia,hasdecidedtoissueanewshortterminstrument,knownas
Cash Management Bills (CMBs), to meet the temporary mismatches in the cash flow of the Government. The CMBs have the
generic character of Tbills but are issued for maturities less than 91 days. Like Tbills, they are also issued at a discount and
redeemedatfacevalueatmaturity. The tenure, notified amount and date of issue of the CMBs depends upon the temporary cash
requirement of the Government. The announcement of their auction is made by Reserve Bank of India through a Press Release
whichwillbeissuedonedaypriortothedateofauction.ThesettlementoftheauctionisonT+1basis.Thenoncompetitivebidding
scheme (referred to in paragraph number 4.3 and 4.4 under question No. 4) has not been extended to the CMBs. However, these
instruments are tradable and qualify for ready forward facility. Investment in CMBs is also reckoned as an eligible investment in
Government securities by banks for SLR purpose under Section 24 of the Banking Regulation Act, 1949. First set of CMBs were
issuedonMay12,2010.
c.DatedGovernmentSecurities
1.4 Dated Government securities are long term securities and carry a fixed or floating coupon (interest rate) which is paid on the
facevalue,payableatfixedtimeperiods(usuallyhalfyearly).Thetenorofdatedsecuritiescanbeupto30years.

The Public Debt Office (PDO) of the Reserve Bank of India acts as the registry /
depositoryofGovernmentsecuritiesanddealswiththeissue,interestpaymentand
repayment of principal at maturity. Most of the dated securities are fixed coupon
securities.
ThenomenclatureofatypicaldatedfixedcouponGovernmentsecuritycontainsthefollowingfeaturescoupon,nameoftheissuer,
maturityandfacevalue.Forexample,7.49%GS2017wouldmean:
Coupon:7.49%paidonfacevalue
NameofIssuer:GovernmentofIndia
DateofIssue:April16,2007
Maturity:April16,2017
CouponPaymentDates:Halfyearly(October16andApril16)everyyear
MinimumAmountofissue/sale:Rs.10,000
In case there are two securities with the same coupon and are maturing in the same year, then one of the securities will have the
month attached as suffix in the nomenclature. For example, 6.05% GS 2019 FEB, would mean that Government security having
coupon 6.05 % that mature in February 2019 along with the other security with the same coupon, namely,, 6.05% 2019 which is
maturinginJune2019.
If the coupon payment date falls on a Sunday or a holiday, the coupon payment is made on the next working day. However, if the
maturitydatefallsonaSundayoraholiday,theredemptionproceedsarepaidonthepreviousworkingdayitself.
1.5 The details of all the dated securities issued by the Government of India are available on the RBI website at
http://www.rbi.org.in/Scripts/financialmarketswatch.aspx.JustasinthecaseofTreasuryBills,datedsecuritiesofboth,Government
ofIndiaandStateGovernments,areissuedbyReserveBankthroughauctions.TheReserveBankannouncestheauctionsaweek
inadvancethroughpressreleases.GovernmentSecurityauctionsarealsoannouncedthroughadvertisementsinmajordailies.The
investors,arethus,givenadequatetimetoplanforthepurchaseofgovernmentsecuritiesthroughsuchauctions.
AspecimenofadatedsecurityinphysicalformisgivenatAnnex1.
1.6Instruments:
i. Fixed Rate Bonds These are bonds on which the coupon rate is fixed for the entire life of the bond. Most Government
bondsareissuedasfixedratebonds.
Forexample8.24%GS2018wasissuedonApril22,2008foratenorof10yearsmaturingonApril22,2018.Coupononthis
securitywillbepaidhalfyearlyat4.12%(halfyearlypaymentbeingthehalfoftheannualcouponof8.24%)ofthefacevalue
onOctober22andApril22ofeachyear.
ii. FloatingRateBondsFloatingRateBondsaresecuritieswhichdonothaveafixedcouponrate.Thecouponisresetatpre
announcedintervals(say,everysixmonthsoroneyear)byaddingaspreadoverabaserate.Inthecaseofmostfloatingrate
bondsissuedbytheGovernmentofIndiasofar,thebaserateistheweightedaveragecutoffyieldofthelastthree364day
TreasuryBillauctionspreceding the coupon reset date and the spread is decided through the auction. Floating Rate Bonds
werefirstissuedinSeptember1995inIndia.
For example, a Floating Rate Bond was issued on July 2, 2002 for a tenor of 15 years, thus maturing on July 2, 2017. The
baserateonthebondforthecouponpaymentswasfixedat6.50%beingtheweightedaveragerateofimplicityieldon364
dayTreasuryBillsduringtheprecedingsixauctions.Inthebondauction,acutoffspread(markupoverthebenchmarkrate)
of34basispoints(0.34%)wasdecided.Hencethecouponforthefirstsixmonthswasfixedat6.84%.
iii. Zero Coupon Bonds Zero coupon bonds are bonds with no coupon payments. Like Treasury Bills, they are issued at a
discount to the face value. The Government of India issued such securities in the nineties, It has not issued zero coupon
bondafterthat.
iv. Capital Indexed Bonds These are bonds, the principal of which is linked to an accepted index of inflation with a view to
protecting the holder from inflation. A capital indexed bond, with the principal hedged against inflation, was issued in
December1997.Thesebondsmaturedin2002.ThegovernmentiscurrentlyworkingonafreshissuanceofInflationIndexed
Bonds wherein payment of both, the coupon and the principal on the bonds, will be linked to an Inflation Index (Wholesale
PriceIndex).Intheproposedstructure,theprincipalwillbeindexedandthecouponwillbecalculatedontheindexedprincipal.
Inordertoprovidetheholdersprotectionagainstactualinflation,thefinalWPIwillbeusedforindexation.
v. BondswithCall/PutOptionsBondscanalsobeissuedwithfeaturesofoptionalitywhereintheissuercanhavetheoptionto
buyback(calloption)ortheinvestorcanhavetheoptiontosellthebond(putoption)totheissuerduringthecurrencyofthe
bond.6.72%GS2012wasissuedonJuly18,2002foramaturityof10yearsmaturingonJuly18,2012.Theoptionalityonthe
bondcouldbeexercisedaftercompletionoffiveyearstenurefromthedateofissuanceonanycoupondatefallingthereafter.
TheGovernmenthastherighttobuybackthebond(calloption)atparvalue(equaltothefacevalue)whiletheinvestor has
therighttosellthebond(putoption)totheGovernmentatparvalueatthetimeofanyofthehalfyearlycoupondatesstarting
fromJuly18,2007.
vi. Special Securities In addition to Treasury Bills and dated securities issued by the Government of India under the market
borrowingprogramme,theGovernmentofIndiaalsoissues,fromtimetotime,specialsecuritiestoentitieslikeOilMarketing
Companies, Fertilizer Companies, the Food Corporation of India, etc. as compensation to these companies in lieu of cash
subsidies.Thesesecuritiesareusuallylongdatedsecuritiescarryingcouponwithaspreadofabout 2025 basis points over
the yield of the dated securities of comparable maturity. These securities are, however, not eligible SLR securities but are
eligibleascollateralformarketrepotransactions.Thebeneficiaryoilmarketingcompaniesmaydivestthesesecuritiesinthe
secondarymarkettobanks,insurancecompanies/PrimaryDealers,etc.,forraisingcash.
vii. Steps are being taken to introduce new types of instruments like STRIPS (Separate Trading of Registered Interest and
Principal of Securities). Accordingly, guidelines for stripping and reconstitution of Government securities have been issued.
STRIPS are instruments wherein each cash flow of the fixed coupon security is converted into a separate tradable Zero
Coupon Bond and traded. For example, when Rs.100 of the 8.24%GS2018 is stripped, each cash flow of coupon (Rs.4.12
each half year) will become coupon STRIP and the principal payment (Rs.100 at maturity) will become a principal STRIP.
Thesecashflowsaretradedseparatelyasindependentsecuritiesinthesecondarymarket.STRIPSinGovernmentsecurities
will ensure availability of sovereign zero coupon bonds, which will facilitate the development of a market determined zero
coupon yield curve (ZCYC). STRIPS will also provide institutional investors with an additional instrument for their asset
liability management. Further, as STRIPS have zero reinvestment risk, being zero coupon bonds, they can be attractive to
retail/noninstitutionalinvestors.Theprocessofstripping/reconstitutionofGovernmentsecuritiesiscarriedoutatRBI,Public
Debt Office (PDO) in the PDONDS (Negotiated Dealing System) at the option of the holder at any time from the date of
issuance of a Government security till its maturity. All dated Government securities, other than floating rate bonds, having
coupon payment dates on 2nd January and 2nd July, irrespective of the year of maturity are eligible for
Stripping/Reconstitution. Eligible Government securities held in the Subsidiary General Leger (SGL)/Constituent Subsidiary

General Ledger (CSGL) accounts maintained at the PDO, RBI, Mumbai. Physical securities shall not be eligible for
stripping/reconstitution. Minimum amount of securities that needs to be submitted for stripping/reconstitution will be Rs. 1
crore(FaceValue)andmultiplesthereof.
d.StateDevelopmentLoans(SDLs)
1.7StateGovernmentsalsoraiseloansfromthemarket.SDLsaredatedsecuritiesissuedthroughanauctionsimilartotheauctions
conductedfordatedsecuritiesissuedbytheCentralGovernment(seequestion3below).Interestisservicedathalfyearlyintervals
andtheprincipalisrepaidonthematuritydate.LikedatedsecuritiesissuedbytheCentralGovernment,SDLsissuedbytheState
GovernmentsqualifyforSLR.Theyarealsoeligibleascollateralsforborrowingthroughmarketrepoaswellasborrowingby eligible
entitiesfromtheRBIundertheLiquidityAdjustmentFacility(LAF).
1.8DoSDLscarryanycreditrisk?
TheSDLsdonotcarryanycreditrisk.Inthisregard,theyaresimilartosecuritiesissuedbytheGovernmentofIndia(GoI).Thiscan
also be seen from the fact that the risk weights assigned to the investments in SDLs by the commercial banks is zero for the
calculation of CRAR under the Basel III (Refer para 5.2.2 of Master Circular Basel III Capital Regulations dated July 1, 2014)
capitalregulationsasinthecaseofGoIsecurities.
2.WhyshouldoneinvestinGovernmentsecurities?
2.1 Holding of cash in excess of the daytoday needs of a bank does not give any return to it. Investment in gold has attendant
problems in regard to appraising its purity, valuation, safe custody, etc. Investing in Government securities has the following
advantages:
Besides providing a return in the form of coupons (interest), Government securities offer the maximum safety as they carry
theSovereignscommitmentforpaymentofinterestandrepaymentofprincipal.
Theycanbeheldinbookentry,i.e.,dematerialized/scriplessform,thus,obviatingtheneedforsafekeeping.
Governmentsecuritiesareavailableinawiderangeofmaturitiesfrom91daystoaslongas30yearstosuitthedurationofa
bank'sliabilities.
Governmentsecuritiescanbesoldeasilyinthesecondarymarkettomeetcashrequirements.
Governmentsecuritiescanalsobeusedascollateraltoborrowfundsintherepomarket.
The settlement system for trading in Government securities, which is based on Delivery versus Payment (DvP), is a very
simple,safeandefficientsystemofsettlement.TheDvPmechanismensurestransferofsecuritiesbythesellerofsecurities
simultaneouslywithtransferoffundsfromthebuyerofthesecurities,therebymitigatingthesettlementrisk.
Government security prices are readily available due to a liquid and active secondary market and a transparent price
disseminationmechanism.
Besides banks, insurance companies and other large investors, smaller investors like Cooperative banks, Regional Rural
Banks,ProvidentFundsarealsorequiredtoholdGovernmentsecuritiesasindicatedbelow:
A.Primary(Urban)CooperativeBanks
2.2 Section 24 of the Banking Regulation Act 1949, (as applicable to cooperative societies) provides that every primary (urban)
cooperativebankshallmaintainliquidassets,whichatthecloseofbusinessonanyday,shouldnotbelessthan25percentofits
demandandtimeliabilitiesinIndia(inadditiontotheminimumcashreserverequirement).Suchliquidassetsshallbeintheformof
cash,goldorunencumberedGovernmentandotherapprovedsecurities.ThisiscommonlyreferredtoastheStatutoryLiquidityRatio
(SLR)requirement.
2.3All primary (urban) cooperative banks (UCBs) are presently required to invest a certain minimum level of their SLR holdings in
theformofGovernmentandotherapprovedsecuritiesasindicatedbelow:
a. ScheduledUCBshavetohold25percentoftheirSLRrequirementinGovernmentandotherapprovedsecurities.
b. Nonscheduled UCBs with Demand and Time Liabilities (DTL) more than Rs. 25 crore have to hold 15 per cent of their SLR
requirementinGovernmentandotherapprovedsecurities.
c. NonscheduledUCBswithDTLlessthanRs.25crorehavetohold10percentoftheirSLRrequirementsinGovernmentand
otherapprovedsecurities.
B.RuralCooperativeBanks
2.4 As per Section 24 of the Banking Regulation Act 1949, the State Cooperative Banks (SCBs) and the District Central Co
operative Banks (DCCBs) are required to maintain in cash, gold or unencumbered approved securities, valued at a price not
exceedingthecurrentmarketprice,anamountwhichshallnot,atthecloseofbusinessonanyday,belessthan25percentofits
demandandtimeliabilitiesaspartofthe SLR requirement. DCCBs are allowed to meet their SLR requirement by maintaining cash
balanceswiththeirrespectiveStateCooperativeBank.
C.RegionalRuralBanks(RRBs)
2.5 Since April 2002, all the RRBs are required to maintain their entire Statutory Liquidity Ratio (SLR) holdings in Government and
otherapprovedsecurities.ThecurrentSLRrequirementfortheRRBsis24percentoftheirDemandandTimeLiabilities(DTL).
2.6 Presently, RRBs have been exempted from the 'mark to market' norms in respect of their SLRsecurities. Accordingly, RRBs
have been given freedom to classify their entire investment portfolio of SLRsecurities under 'Held to Maturity' and value them at
bookvalue.
D.Providentfundsandotherentities
2.7ThenonGovernmentprovidentfunds,superannuationfundsandgratuityfundsarerequiredbytheCentralGovernment,effective
fromJanuary24,2005,toinvest40percentoftheirincrementalaccretionsinCentralandStateGovernmentsecurities,and/orunits
of gilt funds regulated by the Securities and Exchange Board of India (SEBI) and any other negotiable security fully and
unconditionallyguaranteedbytheCentral/StateGovernments.Theexposureofatrusttoanyindividualgiltfund,however,shouldnot
exceedfivepercentofitstotalportfolioatanypointoftime.TheinvestmentguidelinesfornongovernmentPFshavebeenrecently
revised in terms of which investments up to 55% of the investible funds are permitted in a basket of instruments consisting of
CentralGovernmentsecurities,StateGovernmentsecuritiesandunitsofgiltfunds,effectivefromApril2009.
3.HowaretheGovernmentSecuritiesissued?
3.1 Government securities are issued through auctions conducted by the RBI. Auctions are conducted on the electronic platform
called the NDS Auction platform. Commercial banks, scheduled urban cooperative banks, Primary Dealers (a list of Primary
Dealers with their contact details is given in Annex 2), insurance companies and provident funds, who maintain funds account
(current account) and securities accounts (SGL account) with RBI, are members of this electronic platform. All members of PDO
NDS can place their bids in the auction through this electronic platform. All nonNDS members including nonscheduled urban co
operativebankscanparticipateintheprimaryauctionthroughscheduledcommercialbanksorPrimaryDealers.Forthispurpose, the
urbancooperativebanksneedtoopenasecuritiesaccountwithabank/PrimaryDealersuchanaccountiscalledaGiltAccount.
AGiltAccountisadematerializedaccountmaintainedbyascheduledcommercialbankorPrimaryDealerforitsconstituent(e.g.,a
nonscheduledurbancooperativebank).

3.2 The RBI, in consultation with the Government of India, issues an indicative halfyearly auction calendar which contains
informationabouttheamountofborrowing,thetenorofsecurityandthelikelyperiodduringwhichauctionswillbeheld.ANotification
andaPressCommuniquegivingexactparticularsofthesecurities,viz.,name,amount,typeofissueandprocedureofauctionare
issuedbytheGovernmentofIndiaaboutaweekpriortotheactualdateofauction.RBIplacesthenotificationandaPress Release
onitswebsite(www.rbi.org.in)andalsoissuesanadvertisementinleadingEnglishandHindinewspapers.Informationaboutauctions
isalsoavailablewiththeselectbranchesofpublicandprivatesectorbanksandthePrimaryDealers.
4.Whatarethedifferenttypesofauctionsusedforissueofsecurities?
Prior to introduction of auctions as the method of issuance, the interest rates were administratively fixed by the Government. With
theintroductionofauctions,therateofinterest(couponrate)getsfixedthroughamarketbasedpricediscoveryprocess.
4.1Anauctionmayeitherbeyieldbasedorpricebased.
i.YieldBasedAuction:AyieldbasedauctionisgenerallyconductedwhenanewGovernmentsecurityisissued. Investors bid
inyieldtermsuptotwodecimalplaces(forexample,8.19percent,8.20percent,etc.).Bidsarearrangedinascendingorder
andthecutoffyieldisarrivedattheyieldcorrespondingtothenotifiedamountoftheauction.Thecutoffyieldistakenasthe
couponrateforthesecurity.Successfulbiddersarethosewhohavebidatorbelowthecutoffyield.Bidswhicharehigherthan
thecutoffyieldarerejected.Anillustrativeexampleoftheyieldbasedauctionisgivenbelow:
Yieldbasedauctionofanewsecurity
MaturityDate:September8,2018
Coupon:Itisdeterminedintheauction(8.22%asshownintheillustrationbelow)
Auctiondate:September5,2008
Auctionsettlementdate:September8,2008*
NotifiedAmount:Rs.1000crore
*September6and7beingholidays,settlementisdoneonSeptember8,2008under
T+1cycle.

Detailsofbidsreceivedintheincreasingorderofbidyields

BidNo.

BidYield

Amountofbid
(Rs.crore)

Cummulative
amount(Rs.Cr)

Price*with
couponas
8.22%

8.19%

300

300

100.19

8.20%

200

500

100.14

8.20%

250

750

100.13

8.21%

150

900

100.09

8.22%

100

1000

100

8.22%

100

1100

100

8.23%

150

1250

99.93

8.24%

100

1350

99.87

The issuer would get the notified amount by accepting bids up to 5. Since the
bidnumber6alsoisatthesameyield,bidnumbers5and6wouldgetallotment
prorata so that the notified amount is not exceeded. In the above case each
would get Rs. 50 crore. Bid numbers 7 and 8 are rejected as the yields are
higherthanthecutoffyield.
*Price corresponding to the yield is determined as per the relationship given
underYTMcalculationinquestion24.
ii.Price Based Auction: A price based auction is conducted when Government of India reissues securities issued earlier.
BiddersquoteintermsofpriceperRs.100offacevalueofthesecurity(e.g.,Rs.102.00,Rs.101.00,Rs.100.00,Rs.99.00, etc.,
perRs.100/).Bidsarearrangedindescendingorderandthesuccessfulbiddersarethosewhohavebidatorabovethecutoff
price.Bidswhicharebelowthecutoffpricearerejected.Anillustrativeexampleofpricebasedauctionisgivenbelow:
Pricebasedauctionofanexistingsecurity8.24%GS2018
MaturityDate:April22,2018
Coupon:8.24%
Auctiondate:September5,2008
Auctionsettlementdate:September8,2008*
NotifiedAmount:Rs.1000crore
*September6and7beingholidays,settlementisdoneonSeptember8,2008underT+1cycle.

Detailsofbidsreceivedinthedecreasingorderofbidprice
Bidno.

Priceofbid

Amountofbid
(Rs.Cr)

Implicit
yield

Cumulative
amount

100.31

300

8.1912%

300

100.26

200

8.1987%

500

100.25

250

8.2002%

750

100.21

150

8.2062%

900

100.20

100

8.2077%

1000

100.20

100

8.2077%

1100

100.16

150

8.2136%

1250

100.15

100

8.2151%

1350

The issuer would get the notified amount by accepting bids up to 5. Since the
bidnumber6alsoisatthesameprice,bidnumbers5and6wouldgetallotment
in proportion so that the notified amount is not exceeded. In the above case
each would get Rs. 50 crore. Bid numbers 7 and 8 are rejected as the price
quotedislessthanthecutoffprice.
4.2 Depending upon the method of allocation to successful bidders, auction could be classified as Uniform Price based and
MultiplePricebased.InaUniformPriceauction,allthesuccessfulbiddersarerequiredtopayfortheallottedquantityofsecurities
at the same rate, i.e., at the auction cutoff rate, irrespective of the rate quoted by them. On the other hand, in a Multiple Price
auction,thesuccessfulbiddersarerequiredtopayfortheallottedquantityofsecuritiesattherespectiveprice/yieldatwhich they
havebid.Intheexampleunder(ii)above,iftheauctionwasUniformPricebased,allbidderswouldgetallotmentatthecutoffprice,
i.e.,Rs.100.20.Ontheotherhand,iftheauctionwasMultiplePricebased,eachbidderwouldgettheallotmentatthepricehe/she
hasbid,i.e.,bidder1atRs.100.31,bidder2atRs.100.26andsoon.
4.3Aninvestormaybidinanauctionundereitherofthefollowingcategories:
i.CompetitiveBidding:Inacompetitivebidding,aninvestorbidsataspecificprice/yieldandisallottedsecuritiesiftheprice/
yield quoted is within the cutoff price / yield. Competitive bids are made by well informed investors such as banks, financial
institutions, primary dealers, mutual funds, and insurance companies. The minimum bid amount is Rs.10,000 and in multiples of
Rs.10,000thereafter.Multiplebiddingisalsoallowed,i.e.,aninvestormayputinseveralbidsatvariousprice/yieldlevels.
ii. NonCompetitive Bidding : With a view to providing retail investors, who may lack skill and knowledge to participate in the
auctiondirectly,anopportunitytoparticipateintheauctionprocess,theschemeofnoncompetitivebiddingindatedsecuritieswas
introduced in January 2002. Noncompetitive bidding is open to individuals, HUFs, RRBs, cooperative banks, firms, companies,
corporate bodies, institutions, provident funds, and trusts. Under the scheme, eligible investors apply for a certain amount of
securitiesinanauctionwithoutmentioningaspecificprice/yield.Suchbiddersareallottedsecuritiesattheweightedaverageprice/
yield of the auction. In the illustration given under 4.1 (ii) above, the notified amount being Rs.1000 crore, the amount reserved for
noncompetitive bidding will be Rs.50 crore (5 per cent of the notified amount as indicated below). Noncompetitive bidders will be
allotted at the weighted average price which is Rs.100.26 in the given illustration. The participants in noncompetitive bidding are,
however, required to hold a gilt account with a bank or PD. Regional Rural Banks and cooperative banks which hold SGL and
CurrentAccountwiththeRBIcanalsoparticipateundertheschemeofnoncompetitivebiddingwithoutholdingagiltaccount.
4.4Ineveryauctionofdatedsecurities,amaximumof5percentofthenotifiedamountisreservedforsuchnoncompetitivebids.In
thecaseofauctionforTreasuryBills,theamountacceptedfornoncompetitivebidsisoverandabovethenotifiedamountandthere
isnolimitplaced.However,noncompetitivebiddinginTreasuryBillsisavailableonlytoStateGovernmentsandotherselectentities
and is not available to the cooperative banks. Only one bid is allowed to be submitted by an investor either through a bank or
Primary Dealer. For bidding under the scheme, an investor has to fill in an undertaking and send it along with the application for
allotment of securities through a bank or a Primary Dealer. The minimum amount and the maximum amount for a single bid is
Rs.10,000 and Rs.2 crore respectively in the case of an auction of dated securities. A bank or a Primary Dealer can charge an
investor up to maximum of 6 paise per Rs.100 of application money as commission for rendering their services. In case the total
applications received for noncompetitive bids exceed the ceiling of 5 per cent of the notified amount of the auction for dated
securities,thebiddersareallottedsecuritiesonaproratabasis.
4.5 Noncompetitive bidding scheme has been introduced in the State Government securities (SDLs) from August 2009. The
aggregateamountreservedforthepurposeinthecaseofSDLsis10%ofthenotifiedamount(Rs.100Croreforanotifiedamountof
Rs.1000Crore)andthemaximumamountaninvestor can bid per auction is capped at 1% of the notified amount (as against Rs.2
CroreinCentralGovernmentsecurities).ThebiddingandallotmentprocedureissimilartothatofCentralGovernmentsecurities.
5.WhataretheOpenMarketOperations(OMOs)?
OMOs are the market operations conducted by the Reserve Bank of India by way of sale/ purchase of Government securities to/
fromthemarketwithanobjectivetoadjusttherupeeliquidityconditionsinthemarketonadurablebasis.WhentheRBIfeelsthere
is excess liquidity in the market, it resorts to sale of securities thereby sucking out the rupee liquidity. Similarly, when the liquidity
conditionsaretight,theRBIwillbuysecuritiesfromthemarket,therebyreleasingliquidityintothemarket.
5(b)WhatismeantbybuybackofGovernmentsecurities?
Buyback of Government securities is a process whereby the Government of India and State Governments buy back their existing
securitiesfromtheholders.Theobjectivesofbuybackcanbereductionofcost(bybuyingbackhighcouponsecurities),reductionin
thenumberofoutstandingsecuritiesandimprovingliquidityintheGovernmentsecuritiesmarket(bybuyingbackilliquidsecurities)
andinfusionofliquidityinthesystem.Governmentsmakeprovisionsintheirbudgetforbuyingbackofexistingsecurities.Buyback
canbedonethroughanauctionprocessorthroughthesecondarymarketroute,i.e.,NDS/NDSOM.
6.WhatisLiquidityAdjustmentFacility(LAF)?
LAFisafacilityextendedbytheReserveBankofIndiatothescheduledcommercialbanks(excludingRRBs)andprimarydealersto
availofliquidityincaseofrequirementorparkexcessfundswiththeRBIincaseofexcessliquidityonanovernight basis against
thecollateralofGovernmentsecuritiesincludingStateGovernmentsecurities.BasicallyLAFenablesliquiditymanagementonaday
to day basis. The operations of LAF are conducted by way of repurchase agreements (repos and reverse repos please refer to
paragraph numbers 30.4 to 30.8 under question no. 30 for details) with RBI being the counterparty to all the transactions. The
interest rate in LAF is fixed by the RBI from time to time. Currently the rate of interest on repo under LAF (borrowing by the
participants) is 6.25% and that of reverse repo (placing funds with RBI) is 5.25%. LAF is an important tool of monetary policy and
enablesRBItotransmitinterestratesignalstothemarket.
7.HowandinwhatformcanGovernmentSecuritiesbeheld?
7.1 The Public Debt Office (PDO) of the Reserve Bank of India, Mumbai acts as the registry and central depository for the
Government securities. Government securities may be held by investors either as physical stock or in dematerialized form. From
May20,2002,itismandatoryforalltheRBIregulatedentitiestoholdandtransactinGovernmentsecuritiesonlyindematerialized
(SGL)form.Accordingly,UCBsarerequiredtoholdallGovernmentsecuritiesindematform.

a. Physicalform:Governmentsecuritiesmaybeheldintheformofstockcertificates.Astockcertificateisregisteredinthe
books of PDO. Ownership in stock certificates can not be transferred by way of endorsement and delivery. They are
transferredbyexecutingatransferformastheownershipandtransferdetailsarerecordedinthebooksofPDO.Thetransfer
ofastockcertificateisfinalandvalidonlywhenthesameisregisteredinthebooksofPDO.
b. Demat form: Holding government securities in the dematerialized or scripless form is the safest and the most convenient
alternative as it eliminates the problems relating to custody, viz., loss of security. Besides, transfers and servicing are
electronicandhasslefree.Theholderscanmaintaintheirsecuritiesindematerialsedformineitherofthetwoways:
i. SGL Account: Reserve Bank of India offers Subsidiary General Ledger Account (SGL) facility to select entities who
canmaintaintheirsecuritiesinSGLaccountsmaintainedwiththePublicDebtOfficesoftheReserveBankofIndia.
ii.GiltAccount:AstheeligibilitytoopenandmaintainanSGLaccountwiththeRBIisrestricted,aninvestorhastheoption
of opening a Gilt Account with a bank or a Primary Dealer which is eligible to open a Constituents' Subsidiary General
LedgerAccount(CSGL)withtheRBI.Underthisarrangement,thebankorthePrimaryDealer,asacustodianoftheGilt
Account holders, would maintain the holdings of its constituents in a CSGL account (which is also known as SGL II
account)withtheRBI.TheservicingofsecuritiesheldintheGiltAccountsisdoneelectronically,facilitatinghasslefree
trading and maintenance of the securities. Receipt of maturity proceeds and periodic interest is also faster as the
proceedsarecreditedtothecurrentaccountofthecustodianbank/PDwiththeRBIandthecustodian(CSGLaccount
holder)immediatelypassesonthecredittotheGiltAccountHolders(GAH).
7.2 Investors also have the option of holding Government securities in a dematerialized account with a depository (NSDL / CDSL,
etc.).ThisfacilitatestradingofGovernmentsecuritiesonthestockexchanges.
8.HowdoesthetradinginGovernmentsecuritiestakeplace?
8.1 There is an active secondary market in Government securities. The securities can be bought / sold in the secondary market
either (i) Over the Counter (OTC) or (ii) through the Negotiated Dealing System (NDS) or (iii) the Negotiated Dealing SystemOrder
Matching(NDSOM).
i.OvertheCounter(OTC)/TelephoneMarket
8.2 In this market, a participant, who wants to buy or sell a government security, may contact a bank / Primary Dealer / financial
institution either directly or through a broker registered with SEBI and negotiate for a certain amount of a particular security at a
certainprice.Suchnegotiationsareusuallydoneontelephoneandadealmaybestruckifbothcounterpartiesagreeontheamount
andrate.Inthecaseofabuyer,likeanurbancooperativebankwishingtobuyasecurity,thebank'sdealer(whoisauthorized by
the bank to undertake transactions in Government Securities) may get in touch with other market participants over telephone and
obtainquotes.Shouldadealbestruck,thebankshouldrecordthedetailsofthetradeinadealslip(specimengivenatAnnex3)and
send a trade confirmation to the counterparty. The dealer must exercise due diligence with regard to the price quoted by verifying
with available sources (See question number 14 for information on ascertaining the price of Government securities). All trades
undertaken in OTC market are reported on the secondary market module of the NDS, the details of which are given under the
questionnumber15.
ii.NegotiatedDealingSystem
8.3 The Negotiated Dealing System (NDS) for electronic dealing and reporting of transactions in government securities was
introduced in February 2002. It facilitates the members to submit electronically, bids or applications for primary issuance of
GovernmentSecuritieswhenauctionsareconducted.NDSalsoprovidesaninterfacetotheSecuritiesSettlementSystem(SSS)of
the Public Debt Office, RBI, Mumbai thereby facilitating settlement of transactions in Government Securities (both outright and
repos) conducted in the secondary market. Membership to the NDS is restricted to members holding SGL and/or Current Account
withtheRBI,Mumbai.
8.4InAugust,2005,RBIintroducedananonymousscreenbasedordermatchingmoduleonNDS,calledNDSOM.Thisisanorder
driven electronic system, where the participants can trade anonymously by placing their orders on the system or accepting the
ordersalreadyplacedbyotherparticipants.NDSOMisoperatedbytheClearingCorporationofIndiaLtd.(CCIL)onbehalfoftheRBI
(Please see answer to the question no.19 about CCIL). Direct access to the NDSOM system is currently available only to select
financial institutions like Commercial Banks, Primary Dealers, Insurance Companies, Mutual Funds, etc. Other participants can
accessthissystemthroughtheircustodians,i.e.,withwhomtheymaintainGiltAccounts.Thecustodiansplacetheordersonbehalf
oftheircustomersliketheurbancooperativebanks.TheadvantagesofNDSOMarepricetransparencyandbetterpricediscovery.
8.5 Gilt Account holders have been given indirect access to NDS through custodian institutions. A member (who has the direct
access) can report on the NDS the transaction of a Gilt Account holder in government securities. Similarly, Gilt Account holders
have also been given indirect access to NDSOM through the custodians. However, currently two gilt account holders of the same
custodianarenotpermittedtoundertakerepotransactionsbetweenthemselves.
iii.StockExchanges
8.6 Facilities are also available for trading in Government securities on stock exchanges (NSE, BSE) which cater to the needs of
retailinvestors.
9.WhoarethemajorplayersintheGovernmentSecuritiesmarket?
MajorplayersintheGovernmentsecuritiesmarketincludecommercialbanksandprimarydealersbesidesinstitutionalinvestorslike
insurance companies. Primary Dealers play an important role as market makers in Government securities market . Other
participants include cooperative banks, regional rural banks, mutual funds, provident and pension funds. Foreign Institutional
Investors(FIIs)areallowedtoparticipateintheGovernmentsecuritiesmarketwithinthequantitativelimitsprescribed from time to
time.Corporatesalsobuy/sellthegovernmentsecuritiestomanagetheiroverallportfoliorisk.
10.WhataretheDo'sandDontsprescribedbyRBIfortheCooperativebanksdealinginGovernmentsecurities?
While undertaking transactions in securities, urban cooperative banks should adhere to the instructions issued by the RBI. The
guidelinesontransactionsingovernmentsecuritiesbytheUCBshavebeencodifiedinthemastercircularUBD.BPD.(PCB).MC.No
12/16.20.000/201011 dated July 1, 2010 which is updated from time to time. This circular can also be accessed from the RBI
website under the Notifications Master circulars section (http://rbi.org.in/scripts/BS_CircularIndexDisplay.aspx?Id=3686). The
important guidelines to be kept in view by the UCBs relate to formulation of an investment policy duly approved by their Board of
Directors,definingobjectivesofthepolicy,authoritiesandprocedurestoputthroughdeals,dealingsthroughbrokers,preparingpanel
of brokers and review thereof at annual intervals, and adherence to the prudential ceilings fixed for transacting through each of the
brokers,etc.
TheimportantDos&DontsaresummarizedintheBoxIbelow.
BOXI
Dos&DontsforDealinginGovernmentSecurities
Dos
Segregate dealing and backup functions. Officials deciding about purchase and sale transactions should be separate from
thoseresponsibleforsettlementandaccounting.

Monitoralltransactionstoseethatdeliverytakesplaceonsettlementday.Thefundsaccountandinvestmentaccountshould
bereconciledonthesamedaybeforecloseofbusiness.
Keep a proper record of the SGL forms received/issued to facilitate counterchecking by their internal control systems/RBI
inspectors/otherauditors.
Seek a Scheduled Commercial Bank (SCB), a Primary Dealer (PD) or a Financial Institution (FI) as counterparty for
transactions.
Givepreferencefordirectdealswithcounterparties.
Use CSGL/ Gilt Accounts for holding the securities and maintain such accounts in the same bank with whom the cash
accountismaintained.
InsistonDeliveryversusPaymentforalltransactions.
Take advantage of the noncompetitive bidding facility for acquiring Government of India securities in the primary auctions
conductedbytheReserveBankofIndia.
Restricttheroleofthebrokertothatofbringingthetwoparties to the deal together, if a deal is put through with the help of
broker.
Havealistofapprovedbrokers.UtilizeonlybrokersregisteredwithNSEorBSEorOTCEIforactingasintermediary.
Place a limit of 5% of total transactions (both purchases and sales) entered into by a bank during a year as the aggregate
uppercontractlimitforeachoftheapprovedbrokers.Adisproportionatepartofthebusinessshouldnotbetransactedwithor
throughoneorafewbrokers.
MaintainandtransactinGovernment securities only in dematerialized form in SGL Account or Gilt Account maintained with
theCSGLAccountholder.
OpenandmaintainonlyoneGiltordematerializedaccount.
Open a funds account for securities transactions with the same Scheduled Commercial bank or the State Cooperative bank
withwhomtheGiltAccountismaintained.
EnsureavailabilityofclearfundsinthedesignatedfundsaccountsforpurchasesandsufficientsecuritiesintheGiltAccount
forsalesbeforeputtingthroughthetransactions.
Observe prudential limits for investment in permitted nonSLR securities (bonds of nationalized banks, unlisted securities,
unlistedsharesofallIndiaFinancialInstitutionsandprivatelyplaceddebtsecurities).
TheBoardofDirectorstoperuseallinvestmenttransactionsatleastonceamonth
Donts
Donotundertakeanypurchase/saletransactionswithbrokingfirmsorotherintermediariesonprincipaltoprincipalbasis.
Donotusebrokersinthesettlementprocessatall,i.e.,bothfundssettlementanddeliveryofsecuritiesshouldbedonewith
thecounterpartiesdirectly.
Do not give power of attorney or any other authorisation under any circumstances to brokers/intermediaries to deal on your
behalfinthemoneyandsecuritiesmarkets.
DonotundertakeGovernmentSecuritiestransactioninthephysicalformwithanybroker.
Do not routinely make investments in nonSLR securities (e.g., corporate bonds, etc) issued by companies or bodies other
thaninthecooperativesector.
11.Howarethedealingtransactionsrecordedbythedealingdesk?
11.1 For every transaction entered into by the trading desk, a deal slip should be generated which should contain data relating to
nature of the deal, name of the counterparty, whether it is a direct deal or through a broker (if it is through a broker, name of the
broker),detailsofsecurity,amount,price,contractdateandtimeandsettlementdate.Thedealslipsshouldbeseriallynumbered
and verified separately to ensure that each deal slip has been properly accounted for. Once the deal is concluded, the deal slip
should be immediately passed on to the back office (it should be separate and distinct from the front office) for recording and
processing. For each deal, there must be a system of issue of confirmation to the counterparty. The timely receipt of requisite
writtenconfirmationfromthecounterparty,whichmustincludeallessentialdetailsofthecontract,shouldbemonitoredbytheback
office. With The need for counterparty confirmation of deals matched on NDSOM will not arise, as NDSOM is an anonymous
automatedordermatchingsystem.However,incaseoftradesfinalizedintheOTCmarketandreportedonNDS,confirmationshave
tobesubmittedbythecounterpartiesinthesystemi.e.,NDS.Also,pleaseseequestionno.15.
11.2 Once a deal has been concluded through a broker, there should not be any substitution of the counterparty by the broker.
Similarly,thesecuritysold/purchasedinadealshouldnotbesubstitutedbyanothersecurityunderanycircumstances.Amaker
checkerframeworkshouldbeimplementedtopreventanyindividualmisdemeanor.Itshouldbeensuredthatthesamepersonisnot
carryingoutthefunctionsofmaker(onewhoinputsthedata)andchecker(onewhoverifiesandauthorizesthedata)onthesystem.
11.3Onthebasisofvouchers passed by the back office (which should be done after verification ofactual contract notes received
from the broker / counter party and confirmation of the deal by the counter party), the books of account should be independently
prepared.
12.Whataretheimportantconsiderationswhileundertakingsecuritytransactions?
Thefollowingstepsshouldbefollowedinpurchaseofasecurity:
i. WhichsecuritytoinvestinTypicallythisinvolvesdecidingonthematurityandcoupon.Maturityisimportantbecausethis
determines the extent of risk an investor like an UCB is exposed to higher the maturity, higher the interest rate risk or
marketrisk.Iftheinvestmentislargelytomeetstatutoryrequirements,itmaybeadvisabletoavoidtakingunduemarketrisk
andbuysecuritieswithshortermaturity.Withintheshortermaturityrange(say510years)itwouldbesafertobuysecurities
which are liquid, that is, securities which trade in relatively larger volumes in the market. The information about such
securities can be obtained from the website of the CCIL (http://www.ccilindia.com/OMMWCG.aspx), which gives realtime
secondarymarkettradedataonNDSOM.Sincepricingismoretransparentinliquidsecurities,pricesforthesesecuritiesare
easilyobtainabletherebyreducingthechancesofbeingmisled/misinformedonthepriceinthesecases.Thecouponrateof
the security is equally important for the investor as it affects the total return from the security. In order to determine which
securitytobuy,theinvestormustlookattheYieldtoMaturity(YTM)ofasecurity(pleaserefertoBoxIIIunderpara24.4for
adetaileddiscussiononYTM).Thus,oncethematurityandyield(YTM)isdecided,theUCBmayselectasecuritybylooking
attheprice/yieldinformationofsecuritiestradedonNDSOMorbynegotiatingwithbankorPDorbroker.
ii. WhereandWhomtobuyfromIntermsoftransparentpricing,theNDSOMisthesafestbecauseitisaliveandanonymous
platform where the trades are disseminated as they are struck and where counterparties to the trades are not revealed. In
case the trades are conducted on the telephone market, it would be safe to trade directly with a bank or a PD. In case one
uses a broker, care must be exercised to ensure that the broker is registered on NSE or BSE or OTC Exchange of India.
Normally, the active debt market brokers may not be interested in deal sizes which are smaller than the market lot (usually

Rs.5crore).Soitisbettertodeal directly with bank / PD or on NDSOM, which also has a screen for oddlots. Wherever a
broker is used, the settlement should not happen through the broker. Trades should not be directly executed with any
counterpartiesotherthanabank,PDorafinancialinstitution,tominimizetheriskofgettingadverseprices.
iii. HowtoensurecorrectpricingSinceinvestorslikeUCBshaveverysmallrequirements,theymaygetaquote/price,whichis
worsethanthepriceforstandardmarketlots.Tobesureofprices,onlyliquidsecuritiesmaybechosenforpurchase.Asafer
alternative for investors with small requirements is to buy under the primary auctions conducted by RBI through the non
competitiveroute.Sincetherearebondauctionsabouttwiceeverymonth,purchasescanbeconsideredtocoincide with the
auctions.Pleaseseequestion14fordetailsonascertainingthepricesoftheGovernmentsecurities.
13.WhydoesthepriceofGovernmentsecuritychange?
The price of a Government security, like other financial instruments, keeps fluctuating in the secondary market. The price is
determinedbydemandandsupplyofthesecurities.Specifically,thepricesofGovernmentsecuritiesareinfluencedbytheleveland
changes in interest rates in the economy and other macroeconomic factors, such as, expected rate of inflation, liquidity in the
market, etc. Developments in other markets like money, foreign exchange, credit and capital markets also affect the price of the
Government securities. Further, developments in international bond markets, specifically the US Treasuries affect prices of
Government securities in India. Policy actions by RBI (e.g., announcements regarding changes in policy interest rates like Repo
Rate,CashReserveRatio,OpenMarketOperations,etc.)canalsoaffectthepricesofGovernmentsecurities.
14.HowdoesonegetinformationaboutthepriceofaGovernmentsecurity?
14.1Thereturnonasecurityisacombinationoftwoelements(i)couponincomethatis,interestearnedonthesecurityand(ii)the
gain/lossonthesecurityduetopricechangesandreinvestmentgainsorlosses.
14.2PriceinformationisvitaltoanyinvestorintendingtoeitherbuyorsellGovernmentsecurities. Information on traded prices of
securities is available on the RBI website http://www.rbi.org.in under the path Home Financial Markets Watch Government
securitiesmarketNDS.Thiswillshowatablecontaining the details of the latest trades undertaken in the market along with the
prices.Additionally,tradeinformationcanalsobeseenonCCILwebsitehttp://www.ccilindia.com/OMHome.aspx.Thispagecanalso
be accessed from the RBI website through the link provided. In this page, the list of securities and the summary of trades is
displayed. The total traded amount (TTA) on that day is shown against each security. Typically liquid securities are those with the
largest amount of TTA. Pricing in these securities is efficient and hence UCBs can choose these securities for their transactions.
Since the prices are available on the screen they can invest in these securities at the current prices through their custodians.
Participants can thus get realtime information on traded prices and make informed decision while buying / selling government
securities.Thescreenshotsoftheabovewebsitepagesaregivenbelow:
NDSMarket

NDSOMMarket

ThewebsiteoftheFixedIncome,MoneyMarketandDerivativesAssociation(FIMMDA),(www.fimmda.org)isalsoasourceofprice
information,especiallyonsecuritiesthatarenottradedfrequently.
15.HowaretheGovernmentsecuritiestransactionsreported?
15.1 Transactions undertaken between market participants in the OTC/telephone market are expected to be reported on the NDS
platformwithin15minutesafterthedealisputthroughovertelephone.AllOTCtradesarerequiredtobemandatorilyreportedonthe
secondarymarketmoduleoftheNDSforsettlement.ReportingonNDSisafourstageprocesswhereinthesellerofthesecurityhas
to initiate the reporting followed by confirmation by the buyer. This is further followed by issue of confirmation by the sellers back
office on the system and reporting is complete with the last stage wherein the buyers back office confirms the deal. The system
architectureincorporatesmakercheckermodeltopreemptindividualmistakesaswellasmisdemeanor.
15.2Reportingonbehalfofentitiesmaintaininggiltaccountswiththecustodiansisdonebytherespectivecustodiansinthesame
mannerastheydoincaseoftheirowntradesi.e.,proprietarytrades.ThesecuritieslegofthesetradessettleintheCSGLaccount
ofthecustodian.Oncethereportingiscomplete,theNDSsystemacceptsthetrade.Informationonallsuchsuccessfullyreported
tradesflowtotheclearinghousei.e.,theCCIL.
15.3 In the case of NDSOM, participants place orders (price and quantity) on the system. Participants can modify / cancel their
orders.Ordercouldbeabidforpurchaseorofferforsaleofsecurities.Thesystem,inturnwillmatchtheordersbasedonpriceand
timepriority.Thatis,itmatchesbidsandoffersofthesamepriceswithtimepriority.TheNDSOMsystemhasseparatescreenfor
theCentralGovernment,StateGovernmentandTreasurybilltrading.Inaddition,thereisascreenforoddlottradingforfacilitating
trading by small participants in smaller lots of less than Rs. 5 crore (i.e., the standard market lot). The NDSOM platform is an
anonymousplatformwhereintheparticipantswill not know the counterparty to the trade. Once an order is matched, the deal ticket
gets generated automatically and the trade details flow to the CCIL. Due to anonymity offered by the system, the pricing is not
influencedbytheparticipantssizeandstanding.
16.HowdotheGovernmentsecuritiestransactionssettle?
PrimaryMarket
16.1 Once the allotment process in the primary auction is finalized, the successful participants are advised of the consideration
amounts that they need to pay to the Government on settlement day. The settlement cycle for dated security auction is T+1,
whereas for that of Treasury bill auction is T+2. On the settlement date, the fund accounts of the participants are debited by their
respectiveconsiderationamountsandtheirsecuritiesaccounts(SGLaccounts)arecreditedwiththeamountofsecurities that they
wereallotted.
SecondaryMarket
16.2 The transactions relating to Government securities are settled through the members securities / current accounts maintained
withtheRBI,withdeliveryofsecuritiesandpaymentoffundsbeingdoneonanetbasis. The Clearing Corporation of India Limited
(CCIL) guarantees settlement of trades on the settlement date by becoming a central counterparty to every trade through the
processofnovation,i.e.,itbecomessellertothebuyerandbuyertotheseller.
16.3 All outright secondary market transactions in Government Securities are settled on T+1 basis. However, in case of repo
transactionsinGovernmentsecurities,themarketparticipantswillhavethechoiceofsettlingthefirstlegoneitherT+0basisorT+1
basisaspertheirrequirement.
17.Whatisshutperiod?
Shutperiodmeanstheperiodforwhichthesecuritiescannotbedelivered.Duringtheperiodundershut,nosettlements/delivery of
thesecuritywhichisundershutwillbeallowed.Themainpurposeofhavingashutperiodistofacilitateservicingofthesecurities
viz., finalizing the payment of coupon and redemption proceeds and to avoid any change in ownership of securities during this
process.Currentlytheshutperiod for the securities held in SGL accounts is one day. For example, the coupon payment dates for
thesecurity6.49%CG2015areJune8andDecember8ofeveryyear.TheshutperiodwillfallonJune7andDecember7forthis
securityandtradinginthissecurityforsettlementonthesetwodatesisnotallowed.
18.WhatisDeliveryversusPayment(DvP)Settlement?
Delivery versus Payment (DvP) is the mode of settlement of securities wherein the transfer of securities and funds happen
simultaneously. This ensures that unless the funds are paid, the securities are not delivered and vice versa. DvP settlement
eliminatesthesettlementriskintransactions.Therearethreetypes of DvP settlements, viz., DvP I, II and III which are explained
below
i.DvPIThesecuritiesandfundslegsofthetransactionsaresettledonagrossbasis,thatis,thesettlementsoccurtransactionby
transactionwithoutnettingthepayablesandreceivablesoftheparticipant.
ii.DvPIIInthismethod,thesecuritiesaresettledongrossbasiswhereasthefundsaresettledonanetbasis,thatis,thefunds
payableandreceivableofalltransactionsofapartyarenettedtoarriveatthefinalpayableorreceivablepositionwhichissettled.
iii. DvP III In this method, both the securities and the funds legs are settled on a net basis and only the final net position of all
transactionsundertakenbyaparticipantissettled.
Liquidityrequirementinagrossmodeishigherthanthatofanetmodesincethepayablesandreceivablesaresetoffagainsteach
otherinthenetmode.
19.WhatistheroleoftheClearingCorporationofIndiaLimited(CCIL)?
The CCIL is the clearing agency for Government securities. It acts as a Central Counter Party (CCP) for all transactions in
Governmentsecuritiesbyinterposingitselfbetweentwocounterparties.Ineffect,duringsettlement,theCCPbecomestheseller to
the buyer and buyer to the seller of the actual transaction. All outright trades undertaken in the OTC market and on the NDSOM
platformareclearedthroughtheCCIL.OnceCCILreceivesthetradeinformation,itworksoutparticipantwisenetobligationsonboth
thesecuritiesandthefundsleg.Thepayable/receivablepositionoftheconstituents(giltaccountholders)isreflectedagainsttheir
respective custodians. CCIL forwards the settlement file containing net position of participants to the RBI where settlement takes
place by simultaneous transfer of funds and securities under the Delivery versus Payment system. CCIL also guarantees
settlement of all trades in Government securities. That means, during the settlement process, if any participant fails to provide
funds/ securities, CCIL will make the same available from its own means. For this purpose, CCIL collects margins from all
participantsandmaintainsSettlementGuaranteeFund.
20.WhatistheWhenIssuedmarket?
'WhenIssued',ashorttermof"when,asandifissued",indicatesaconditionaltransactioninasecuritynotifiedforissuancebutnot
yet actually issued. All "When Issued" transactions are on an "if" basis, to be settled if and when the security is actually issued.
'When Issued' transactions in the Central Government securities have been permitted to all NDSOM members and have to be
undertakenonlyontheNDSOMplatform.WhenIssuedmarkethelpsinpricediscoveryofthesecuritiesbeingauctionedaswellas
betterdistributionoftheauctionstock.Forurbancooperativebanks,detailedguidelineshavebeenissuedintheRBImastercircular
UBD.BPD.(PCB).MC.No/16.20.000/200910datedJuly01,2009.
21.Whatarethebasicmathematicalconceptsoneshouldknowforcalculationsinvolvedinbondpricesandyields?
ThetimevalueofmoneyfunctionsrelatedtocalculationofPresentValue(PV),FutureValue(FV),etc.areimportantmathematical
conceptsrelatedtobondmarket.AnoutlineofthesamewithillustrationsisprovidedintheBoxIIbelow.
BoxII

TimeValueofMoney
MoneyhastimevalueasaRupeetodayismorevaluableandusefulthanaRupeeayearlater.
The concept of time value of money is based on the premise that an investor prefers to receive a payment of a fixed amount of
moneytoday,ratherthananequalamountinthefuture,allelsebeingequal.Inparticular,ifonereceivesthepaymenttoday,onecan
then earn interest on the money until that specified future date. Further, in an inflationary environment, a Rupee today will have
greaterpurchasingpowerthanafterayear.
Presentvalueofafuturesum
Thepresentvalueformulaisthecoreformulaforthetimevalueofmoney.
Thepresentvalue(PV)formulahasfourvariables,eachofwhichcanbesolvedfor:
PresentValue(PV)isthevalueattime=0
FutureValue(FV)isthevalueattime=n
iistherateatwhichtheamountwillbecompoundedeachperiod
nisthenumberofperiods

Anillustration
Takingthecashflowsas
Period(inYrs)
Amount

100

100

3
100

Assumingthattheinterestrateisat10%perannum
Thediscountfactorforeachyearcanbecalculatedas1/(1+interestrate)^no.ofyears
ThepresentvaluecanthenbeworkedoutasAmountxdiscountfactor
ThePVofRs.100accruingafter
Year

Amount

discountfactor

P.V.

100

0.9091

90.91

100

0.8264

82.64

100

0.7513

75.13

Thecumulativepresentvalue=90.91+82.64+75.13=Rs.248.69
NetPresentValue(NPV)
Netpresentvalue(NPV)ornetpresentworth(NPW)isdefinedasthepresentvalueofnetcashflows.Itisastandardmethod for
using the time value of money to appraise longterm projects. Used for capital budgeting, and widely throughout economics, it
measures the excess or shortfall of cash flows, in present value (PV) terms, once financing charges are met. Use Advanced
FinancialCalculators.
Formula
Eachcashinflow/outflowisdiscountedbacktoitspresentvalue(PV).Thentheyaresummed.Therefore

In the illustration given above under the Present value, if the three cash flows accrues on a deposit of Rs. 240, the NPV of the
investmentisequalto248.69240=Rs.8.69
22.HowisthePriceofabondcalculated?Whatisthetotalconsiderationamountofatradeandwhatisaccruedinterest?
Thepriceofabondisnothingbutthesumofpresentvalueallfuturecashflowsofthebond.Theinterestrateusedfordiscounting
thecashflowsistheYieldtoMaturity(YTM)(explainedindetailinquestionno.24)ofthebond.Pricecanbecalculatedusingthe
excelfunctionPrice(pleaserefertoAnnex4,serialno5.).
Accruedinterestistheinterestcalculatedforthebrokenperiodfromthelastcoupondaytilladaypriortothesettlementdateofthe
trade.Sincethesellerofthesecurityisholdingthesecurityfortheperioduptothedaypriortothesettlementdateofthetrade,heis
entitledtoreceivethecouponfortheperiodheld.Duringsettlementofthetrade,thebuyerofsecuritywillpaytheaccruedinterest in
additiontotheagreedpriceandpaystheconsiderationamount.
Anillustrationisgivenbelow
For a trade of Rs.5 crore (face value) of security 6.49%2015 for settlement date August 26, 2009 at a price of Rs.96.95, the
considerationamountpayabletothesellerofthesecurityisworkedoutbelow
Herethepricequotediscalledcleanpriceastheaccruedinterestcomponentisnotaddedtoit.
Accruedinterest:
ThelastcoupondatebeingJune8,2009,thenumberofdaysinbrokenperiodtillAugust25,2009(onedaypriortosettlementdate)
are78.

TheaccruedinterestonRs.100facevaluefor78days

=6.49x(78/360)

=Rs.1.4062

Whenweaddtheaccruedinterestcomponenttothecleanprice,theresultantpriceiscalledthedirtyprice.Intheinstantcase,it
is96.95+1.4062=Rs.98.3562
Thetotalconsiderationamount

=Facevalueoftradexdirtyprice

=5,00,00,000x(98.3562/100)

=Rs.4,91,78,083.33

23.Whatistherelationshipbetweenyieldandpriceofabond?
Ifinterestratesormarketyieldsrise,thepriceofabondfalls.Conversely,ifinterestratesormarketyieldsdecline,thepriceofthe
bondrises.Inotherwords,theyieldofabondisinverselyrelatedtoitsprice.Therelationshipbetweenyieldtomaturityandcoupon
rateofbondmaybestatedasfollows:
When the market price of the bond is less than the face value, i.e., the bond sells at a discount, YTM > current yield >
couponyield.
Whenthemarketpriceofthebondismorethanitsfacevalue,i.e.,thebondsellsatapremium,couponyield>currentyield
>YTM.
Whenthemarketpriceofthebondisequaltoitsfacevalue,i.e.,thebondsellsatpar,YTM=currentyield=couponyield.
24.Howistheyieldofabondcalculated?
24.1Aninvestorwhopurchasesabondcanexpecttoreceiveareturnfromoneormoreofthefollowingsources:
Thecouponinterestpaymentsmadebytheissuer
Anycapitalgain(orcapitalloss)whenthebondissoldand
Incomefromreinvestmentoftheinterestpaymentsthatisinterestoninterest.
Thethreeyieldmeasurescommonlyusedbyinvestorstomeasurethepotentialreturnfrominvestinginabondarebrieflydescribed
below:
i)CouponYield
24.2 The coupon yield is simply the coupon payment as a percentage of the face value. Coupon yield refers to nominal interest
payable on a fixed income security like Government security. This is the fixed return the Government (i.e., the issuer) commits to
paytotheinvestor.Couponyieldthusdoesnotreflecttheimpactofinterestratemovementandinflationonthenominalinterestthat
theGovernmentpays.
Couponyield=CouponPayment/FaceValue
Illustration:
Coupon:8.24
FaceValue:Rs.100
MarketValue:Rs.103.00
Couponyield=8.24/100=8.24%
ii)CurrentYield
24.3Thecurrentyieldissimplythecouponpaymentasapercentageofthebondspurchasepriceinotherwords,itisthereturna
holderofthebondgetsagainstitspurchasepricewhichmaybemoreorlessthanthefacevalueortheparvalue.Thecurrent yield
doesnottakeintoaccountthereinvestmentoftheinterestincomereceivedperiodically.
Currentyield=(Annualcouponrate/Purchaseprice)X100
Illustration:
Thecurrentyieldfora10year8.24%couponbondsellingforRs.103.00perRs.100parvalueiscalculatedbelow:
Annualcouponinterest=8.24%xRs.100=Rs.8.24
Currentyield=(8.24/Rs.103)X100=8.00%
Thecurrentyieldconsidersonlythecouponinterestandignoresothersourcesofreturnthatwillaffectaninvestorsreturn.
iii)YieldtoMaturity
24.4YieldtoMaturity(YTM)istheexpectedrateofreturnonabondifitishelduntilitsmaturity.Thepriceofabondissimply the
sumofthepresentvaluesofallitsremainingcashflows.Presentvalueiscalculatedbydiscountingeachcashflowataratethis
rateistheYTM.ThusYTMisthediscountratewhichequatesthepresentvalueofthefuturecashflowsfromabondtoitscurrent
marketprice.Inotherwords,itistheinternalrateofreturnonthebond.ThecalculationofYTMinvolvesatrialanderrorprocedure.
Acalculatororsoftwarecanbeusedtoobtainabondsyieldtomaturityeasily(pleaseseetheBoxIII).
BoxIII
YTMCalculation
YTMcouldbecalculatedmanuallyaswellasusingfunctionsinanystandardspreadsheetlikeMSExcel.
Manual(TrialandError)Method
Manual or trial and error method is complicated because Government securities have many cash flows running into future. This is
explainedbytakinganexamplebelow.
Takeatwoyearsecuritybearingacouponof8%andapriceofsayRs.102perfacevalueofRs.100theYTMcouldbecalculated
bysolvingforrbelow.Typicallyitinvolvestrialanderrorbytakingavalueforrandsolvingtheequationandiftherighthandside
ismorethan102,takeahighervalueofrandsolveagain.Linearinterpolationtechniquemayalsobeusedtofindoutexactronce
wehavetworvaluessothatthepricevalueismorethan102foroneandlessthan102fortheothervalue.
102=4/(1+r/2)1+4/(1+r/2)2+4/(1+r/2)3+104/(1+r/2)4
SpreadSheetMethodusingMSExcel
In the MS Excel programme, the following function could be used for calculating the yield of periodically coupon paying securities,
giventheprice.
YIELD(settlement,maturity,rate,price,redemption,frequency,basis)
Wherein
Settlement is the security's settlement date. The security settlement date is the date on which the security and funds are
exchanged.Maturityisthesecurity'smaturitydate.Thematuritydateisthedatewhenthesecurityexpires.

Rateisthesecurity'sannualcouponrate.
Priceisthesecurity'spriceperRs.100facevalue.
Redemptionisthesecurity'sredemptionvalueperRs.100facevalue.
Frequencyisthenumberofcouponpaymentsperyear.(2forGovernmentbondsinIndia)
Basisisthetypeofdaycountbasistouse.(4forGovernmentbondsinIndiawhichuses30/360basis)
25.Whatarethedaycountconventionsusedincalculatingbondyields?
Daycountconventionreferstothemethodusedforarrivingattheholdingperiod(numberofdays)ofabondtocalculatetheaccrued
interest.Astheuseofdifferentdaycountconventionscanresultindifferentaccruedinterestamounts,itisappropriatethatallthe
participantsinthemarketfollowauniformdaycountconvention.
Forexample,theconventionsfollowedinIndianmarketaregivenbelow.
Bondmarket:Thedaycountconventionfollowedis30/360,whichmeansthatirrespectiveoftheactualnumberofdaysinamonth,
thenumberofdaysinamonthistakenas30andthenumberofdaysinayearistakenas360.
Moneymarket:Thedaycountconventionfollowedisactual/365,whichmeansthattheactualnumberofdays in a month is taken
for number of days(numerator) whereas the number of days in a year is taken as 365 days. Hence, in the case of Treasury bills,
whichareessentiallymoneymarketinstruments,moneymarketconventionisfollowed.
26.HowistheyieldofaTreasuryBillcalculated?
Itiscalculatedasperthefollowingformula

Wherein
PPurchaseprice
DDaystomaturity
DayCount:ForTreasuryBills,D=[actualnumberofdaystomaturity/365]
Illustration
Assumingthatthepriceofa91dayTreasurybillatissueisRs.98.20,theyieldonthesamewouldbe

Aftersay,41days,ifthesameTreasurybillistradingatapriceofRs.99,theyieldwouldthenbe

Notethattheremainingmaturityofthetreasurybillis50days(9141).
27.WhatisDuration?
27.1Duration(alsoknownasMacaulayDuration)ofabondisameasureofthetimetakentorecovertheinitialinvestmentinpresent
valueterms.Insimplestform,durationreferstothepaybackperiodofabondtobreakeven,i.e.,thetimetakenforabondtorepay
itsownpurchaseprice.Durationisexpressedinnumberofyears.Astepbystepapproachforworkingoutdurationisgiveninthe
BoxIVbelow.
Box:IV
CalculationforDuration
First,eachofthefuturecashflowsisdiscountedtoitsrespectivepresentvalueforeachperiod.Sincethecouponsarepaidout
everysixmonths,asingleperiodisequaltosixmonthsandabondwithtwoyearsmaturitywillhavefourtimeperiods.
Second,thepresentvaluesoffuturecashflowsaremultipliedwiththeirrespectivetimeperiods(thesearetheweights).Thatisthe
PVofthefirstcouponismultipliedby1,PVofsecondcouponby2andsoon.
Third,theaboveweightedPVsofallcashflowsisaddedandthesumisdividedbythecurrentprice(totalofthePVsinstep1)of
thebond.Theresultantvalueisthedurationinno.ofperiods.Sinceoneperiodequalstosixmonths,togetthedurationinno.of
year,divideitbytwo.Thisisthetimeperiodwithinwhichthebondisexpectedtopaybackitsownvalueifheldtillmaturity.
Illustration:
Takingabondhaving2yearsmaturity,and10%coupon,andcurrentpriceofRs.102,thecashflowswillbe(prevailing2yearyield
being9%):
Timeperiod(years)

105

PVatanyieldof9%

4.78

4.58

4.38

88.05

101.79

PV*time

4.78

9.16

13.14

352.20

379.28

Inflows(Rs.Cr)

Total

Durationinnumberofperiods=379.28/101.79=3.73
Durationinyears=3.73/2=1.86years
Moreformally,durationrefersto:
a.theweightedaverageterm(timefromnowtopayment)ofabond'scashflowsorofanyseriesoflinkedcashflows.
b.Thehigherthecouponrateofabond,theshortertheduration(ifthetermofthebondiskeptconstant).
c.Durationisalwayslessthanorequaltotheoveralllife(tomaturity)ofthebond.
d.Onlyazerocouponbond(abondwithnocoupons)willhavedurationequaltoitsmaturity.
e.thesensitivityofabond'spricetointerestrate(i.e.,yield)movements.
Duration is useful primarily as a measure of the sensitivity of a bond's market price to interest rate (i.e., yield) movements. It is
approximatelyequaltothepercentagechangeinpriceforagivenchangeinyield.Forexample,forsmallinterestratechanges,the
durationistheapproximatepercentagebywhichthevalueofthebondwillfallfora1%perannumincreaseinmarketinterestrate.

Soa15yearbondwithadurationof7yearswouldfallapproximately7%invalueiftheinterestrateincreasedby1%perannum.In
otherwords,durationistheelasticityofthebond'spricewithrespecttointerestrates.
WhatisModifiedDuration?
27.2 Modified duration (MD) is a modified version of Macaulay Duration. It refers to the change in value of the security to one per
centchangeininterestrates(Yield).Theformulais

Illustration
IntheaboveexamplegiveninBoxIV,MD=1.86/(1+0.09/2)=1.78
WhatisPV01?
27.3 PV01 describes the actual change in price of a bond if the yield changes by one basis point (equal to one hundredth of a
percentage point). It is the present value impact of 1 basis point (0.01%) movement in interest rate. It is often used as a price
alternativetoduration(atimemeasure).HigherthePV01,thehigherwouldbethevolatility(sensitivityofpricetochangeinyield).
Illustration
Fromthemodifiedduration(givenintheillustrationunder27.2),weknowthatthesecurityvaluewillchangeby1.78%forachangeof
100basispoint(1%)changeintheyield.Invaluetermsthatisequalto1.78*(102/100)=Rs.1.81.
Hence the PV01 = 1.81/100 = Rs. 0.018, which is 1.8 paise. Thus, if the yield of a bond with a Modified Duration of 1.78 years
moves from say 9% to 9.05% (5 basis points), the price of the bond moves from Rs.102 to Rs.101.91 (reduction of 9 paise, i.e.,
5x1.8paise).
WhatisConvexity?
27.4Calculationofchangeinpriceforchangeinyieldsbasedon duration works only for small changes in prices. This is because
therelationshipbetweenbondpriceandyieldisnotstrictlylineari.e.,theunitchangeinpriceofthebondisnotproportionatetounit
changeinyield.Overlargevariationsinprices,therelationshipiscurvilineari.e.,thechangeinbondpriceiseitherlessthanormore
thanproportionatetothechangeinyields.Thisismeasuredbyaconceptcalledconvexity,whichisthechangeindurationofabond
perunitchangeintheyieldofthebond.
28.Whataretheimportantguidelinesforvaluationofsecurities?
28.1FortheCooperative banks, investments classified under 'Held to Maturity' (HTM) category need not be marked to market and
will be carried at acquisition cost unless it is more than the face value, in which case the premium should be amortized over the
periodremainingtomaturity.TheindividualscripintheAvailableforSale(AFS)categoryinthebooksofthecooperativebankswill
bemarkedtomarketattheyearendoratmorefrequentintervals.TheindividualscripintheHeldforTrading(HFT)categorywillbe
markedtomarketatmonthlyoratmorefrequentintervals.ThebookvalueofindividualsecuritiesinAFSandHFTcategorieswould
notundergoanychangeaftermarkingtomarket.
28.2 Central Government securities should be valued by taking the prices/ yields put out by the Fixed Income Money Market and
Derivatives Association of India (FIMMDA) and the Primary Dealers Association of India (PDAI) jointly on the website of the
FIMMDA.PricesofallCentralGovernmentsecuritiesaregivenouteverydaywhilepricesandyieldcurveforvaluationaregivenat
the end of every month. For example, the FIMMDA valuation of a Central Government security, 7.46%2017 as on March 31, 2009
wasRs.101.69.IfacooperativebankwasholdingthesamesecurityinAFSorHFTcategoriesatabookvalueofRs.102,thebank
wouldberequiredtobookadepreciationofRs.0.31perRs.100facevalueofholding.Ifthe total holding was Rs. 1 crore, the total
depreciationtobebookedwouldbeRs.31,000/.
28.3 State Government and other securities are to be valued by adding a spread on the Central Government security yield of the
correspondingresidualmaturity.Currently,aspreadof25basispoints(0.25%)isaddedwhilevaluingStateGovernmentsecurities,
specialsecurities(oilbonds,fertilizerbonds,SBIbonds,etc.)whereasforcorporatebondsthespreadsgivenbytheFIMMDAneed
tobeadded.AnillustrationofvaluationtakingaStateGovernmentbondisgivenintheBoxVbelow.
Box:V
Valuationofsecurities
IllustrationforvaluationofStateGovernmentBonds
Security7.32%A.P.SDL2014
IssuedateDecember10,2004
MaturitydateDecember10,2014
Coupon7.32%
DateofvaluationMarch31,2008
Procedure
Valuationoftheabovebondinvolvesthefollowingsteps
i.Findtheresidualmaturityofthebondtobevalued.
ii.FindtheCentralGovernmentsecurityyieldfortheaboveresidualmaturity.
iii.Addappropriatespreadtotheaboveyieldtogettheyieldforthesecurity
iv.Calculatethepriceofthesecurityusingthederivedyieldabove.
Stepi.
SincevaluationisbeingdoneonMarch31,2008,weneedtofindoutthenumberofyearsfromthisdatetothematuritydateofthe
security, December 10, 2014 to get the residual maturity of the security. This could be done manually by counting the number of
years and months and days. However, an easier method is to use MS. Excel function Yearfrac wherein we specify the two dates
andbasis(pleaserefertoAnnex4onExcelfunctionsfordetails).Thisgivesustheresidualmaturityof6.69yearsforthesecurity.
Stepii.
TofindtheCentralGovernmentyieldfor6.69years,wederiveitbyinterpolatingtheyieldsbetween6yearsand7years,whichare
givenoutbyFIMMDA.AsonMarch31,2008,FIMMDAyieldsfor6and7yearsare7.73%and7.77%respectively.Theyieldforthe
6.69yearsisderivedbyusingthefollowingformula.

Herewearefindingtheyielddifferencefor0.69yearandaddingthesametotheyieldfor6yearstogettheyieldfor6.69years.Also
noticethattheyieldhastobeusedindecimalform(e.g.,7.73%isequalto7.73/100whichis0.0773)
Stepiii.
HavingfoundtheCentralGovernmentyieldfortheparticularresidualmaturity,wehavetonowloadtheappropriatespreadtogetthe
yieldofthesecuritytobevalued.SincethesecurityisStateGovernmentsecurity,theapplicablespreadis25basispoints(0.25%).
Hencetheyieldwouldbe7.76%+0.25%=8.01%.
Stepiv.
ThepriceofthesecuritywillbecalculatedusingtheMSExcelfunctionPrice(PleaseseethedetailsinAnnex4).Here,wespecify
the valuation date as March 31, 2008, maturity date as December 10, 2014, rate as 7.32% which is the coupon, yield as 8.01%,
redemptionas100whichisthefacevalue,frequencyofcouponpaymentas2andbasisas4(Pl.seeexample3inAnnex4).The
pricewegetintheformulaisRs.96.47whichisthevalueofthesecurity.
IfthebankisholdingRs.10croreofthissecurityinitsportfolio,thetotalvaluewouldbe10*(96.47/100)=9.647crore.
28.4Inthecaseofcorporatebonds,theprocedureofvaluationissimilartotheillustrationgiveninBoxVabove.Theonlydifference
isthespreadthatneedtobeaddedtothecorrespondingyieldoncentralgovernmentsecuritywillbehigher(insteadofthefixed25
bps for State Government securities), as published by the FIMMDA from time to time. FIMMDA gives out the information on
corporatebondsspreadsforvariousratedbonds.Whilevaluingabond,theappropriatespreadhastobeaddedtothecorresponding
CGyieldandthebondhastobevaluedusingthestandardPriceformula.
Forexample,assumingthataAAAratedcorporatebondishavingsamematurityasthatoftheStateGovernmentbondinBoxV,
the applicable yield for valuation will be 7.73%+ 2.09% (being the spread given by FIMMDA) which is 9.82%. With the same
parametersasintheBoxV,thevalueofthebondworksouttoRs.87.92.
29.WhataretherisksinvolvedinholdingGovernmentsecurities?Whatarethetechniquesformitigatingsuchrisks?
Governmentsecuritiesaregenerallyreferredtoasriskfreeinstrumentsassovereignsarenotexpectedtodefaultontheirpayments.
However,asisthecasewithanyfinancialinstrument,therearerisksassociatedwithholdingtheGovernmentsecurities.Hence,itis
importanttoidentifyandunderstandsuchrisksandtakeappropriatemeasuresformitigationofthesame.Thefollowingarethemajor
risksassociatedwithholdingGovernmentsecurities.
29.1 Market risk Market risk arises out of adverse movement of prices of the securities that are held by an investor due to
changesininterestrates.Thiswillresultinbookinglossesonmarkingtomarketorrealizingalossifthesecurities are sold at the
adverseprices.Smallinvestors,tosomeextent,canmitigatemarketriskbyholdingthebondstillmaturitysothattheycanrealize
theyieldatwhichthesecuritieswereactuallybought.
29.2ReinvestmentriskCashflowsonaGovernmentsecurityincludesfixedcouponeveryhalfyearandrepaymentofprincipalat
maturity.Thesecashflowsneedtobereinvestedwhenevertheyarepaid.Hencethereisariskthattheinvestormaynotbeableto
reinvesttheseproceedsatprofitableratesduetochangesininterestratescenario.
29.3LiquidityriskLiquidityriskreferstotheinabilityofaninvestortoliquidate(sell)hisholdingsduetononavailabilityofbuyers
for the security, i.e., no trading activity in that particular security. Usually, when a liquid bond of fixed maturity is bought, its tenor
gets reduced due to time decay. For example, a 10 year security will become 8 year security after 2 years due to which it may
become illiquid. Due to illiquidity, the investor may need to sell at adverse prices in case of urgent funds requirement. However, in
suchcases,eligibleinvestorscanparticipateinmarketrepoandborrowthemoneyagainstthecollateralofthesecurities.
RiskMitigation
29.4Holdingsecuritiestillmaturitycouldbeastrategythroughwhichonecouldavoidmarketrisk.Rebalancingtheportfoliowherein
thesecuritiesaresoldoncetheybecomeshorttermandnewsecuritiesoflongertenorareboughtcouldbefollowed to manage the
portfolio risk. However, rebalancing involves transaction and other costs and hence needs to be used judiciously. Market risk and
reinvestmentriskcouldalsobemanagedthroughAssetLiabilityManagement(ALM)bymatchingthecashflowswithliabilities.ALM
couldalsobeundertakenbymatchingthedurationofthecashflows.
Advancedriskmanagement techniques involve use of derivatives like Interest Rate Swaps (IRS) through which the nature of cash
flows could be altered. However, these are complex instruments requiring advanced level of expertise for proper understanding.
Adequate caution, therefore, need to be observed for undertaking the derivatives transactions and such transactions should be
undertakenonlyafterhavingcompleteunderstandingoftheassociatedrisksandcomplexities.
30.WhatisMoneyMarket?
30.1 While the Government securities market generally caters to the investors with a long term investment horizon, the money
marketprovidesinvestmentavenuesofshorttermtenor.Moneymarkettransactionsaregenerallyusedforfundingthetransactions
inothermarketsincludingGovernmentsecuritiesmarketandmeetingshorttermliquiditymismatches.Bydefinition,money market
isforamaximumtenorofuptooneyear.Withintheoneyear,dependinguponthetenors,moneymarketisclassifiedinto:
i.OvernightmarketThetenoroftransactionsisoneworkingday.
ii.NoticemoneymarketThetenorofthetransactionsisfrom2daysto14days.
Iii.TermmoneymarketThetenorofthetransactionsisfrom15daystooneyear.
Whatarethedifferentmoneymarketinstruments?
30.2 Money market instruments include call money, repos, Treasury bills, Commercial Paper, Certificate of Deposit and
CollateralizedBorrowingandLendingObligations(CBLO).
Callmoneymarket
30.3Callmoneymarketisamarketforuncollateralizedlendingandborrowingoffunds.Thismarketispredominantlyovernight and
isopenforparticipationonlytoscheduledcommercialbanksandtheprimarydealers.
Repomarket
30.4 Repo or ready forward contact is an instrument for borrowing funds by selling securities with an agreement to repurchase the
saidsecuritiesonamutuallyagreedfuturedateatanagreedpricewhichincludesinterestforthefundsborrowed.
30.5 The reverse of the repo transaction is called reverse repo which is lending of funds against buying of securities with an
agreementtoresellthesaidsecuritiesonamutuallyagreedfuturedateatanagreedpricewhichincludesinterestforthefundslent.
30.6 It can be seen from the definition above that there are two legs to the same transaction in a repo/ reverse repo. The duration
between the two legs is called the repo period. Predominantly, repos are undertaken on overnight basis, i.e., for one day period.
Settlementofrepotransactionshappensalongwiththeoutrighttradesingovernmentsecurities.
30.7Theconsiderationamountinthefirstlegoftherepotransactionsistheamountborrowedbythesellerofthesecurity.Onthis,
interestattheagreedreporateiscalculatedandpaidalongwiththeconsiderationamountofthesecondlegofthetransactionwhen
theborrowerbuysbackthesecurity.Theoveralleffectoftherepotransactionwouldbeborrowingoffundsbackedbythecollateralof
Governmentsecurities.
30.8ThemoneymarketisregulatedbytheReserveBank of India. All the above mentioned money market transactions should be
reportedontheelectronicplatformcalledtheNegotiatedDealingSystem(NDS).

30.9Aspartofthemeasurestodevelopthecorporatedebtmarket,RBIhaspermittedselectentities(scheduledcommercialbanks
excluding RRBs and LABs, PDs, allIndia FIs, NBFCs, mutual funds, housing finance companies, insurance companies) to
undertakerepoincorporatedebtsecurities.ThisissimilartorepoinGovernmentsecuritiesexceptthatcorporatedebtsecuritiesare
used as collateral for borrowing funds. Only listed corporate debt securities that are rated AA or above by the rating agencies are
eligible to be used for repo. Commercial paper, certificate of deposit, nonconvertible debentures of original maturity less than one
yeararenoteligibleforthepurpose.ThesetransactionstakeplaceintheOTCmarketandarerequiredtobereportedonFIMMDA
platformwithin15minutesofthetradefordisseminationofinformation.Theyarealsotobereportedontheclearinghouseofanyof
theexchangesforthepurposeofclearingandsettlement.
CollateralisedBorrowingandLendingObligation(CBLO)
30.10 CBLO is another money market instrument operated by the Clearing Corporation of India Ltd. (CCIL), for the benefit of the
entitieswhohaveeithernoaccesstotheinterbankcallmoneymarketorhaverestrictedaccessintermsofceilingoncallborrowing
and lending transactions. CBLO is a discounted instrument available in electronic book entry form for the maturity period ranging
from one day to ninety days (up to one year as per RBI guidelines). In order to enable the market participants to borrow and lend
funds, CCIL provides the Dealing System through Indian Financial Network (INFINET), a closed user group to the Members of the
NegotiatedDealingSystem(NDS)whomaintainCurrentaccountwithRBIandthroughInternetforotherentitieswhodonotmaintain
CurrentaccountwithRBI.
30.11 Membership to the CBLO segment is extended to entities who are RBI NDS members, viz., Nationalized Banks, Private
Banks, Foreign Banks, Cooperative Banks, Financial Institutions, Insurance Companies, Mutual Funds, Primary Dealers, etc.
Associate Membership to CBLO segment is extended to entities who are not members of RBI NDS, viz., Cooperative Banks,
MutualFunds,Insurancecompanies,NBFCs,Corporates,Provident/PensionFunds,etc.
30.12 By participating in the CBLO market, CCIL members can borrow or lend funds against the collateral of eligible securities.
Eligible securities are Central Government securities including Treasury Bills, and such other securities as specified by CCIL from
timetotime.BorrowersinCBLOhavetodeposittherequiredamountofeligiblesecuritieswiththeCCILbasedonwhichCCILfixes
the borrowing limits. CCIL matches the borrowing and lending orders submitted by the members and notifies them. While the
securities held as collateral are in custody of the CCIL, the beneficial interest of the lender on the securities is recognized through
properdocumentation.
CommercialPaper(CP)
30.13 Commercial Paper (CP) is an unsecured money market instrument issued in the form of a promissory note. Corporates,
primary dealers (PDs) and the allIndia financial institutions (FIs) that have been permitted to raise shortterm resources under the
umbrellalimitfixedbytheReserveBankofIndiaareeligibletoissueCP.CPcanbeissuedformaturitiesbetweenaminimumof7
daysandamaximumuptooneyearfromthedateofissue.
CertificateofDeposit(CD)
30.14 Certificate of Deposit (CD) is a negotiable money market instrument and issued in dematerialised form or as a Usance
PromissoryNote,forfundsdepositedatabankorothereligiblefinancialinstitutionforaspecifiedtimeperiod.BankscanissueCDs
formaturitiesfrom7daystooneayearwhereaseligibleFIscanissueformaturities1yearto3years.
31.WhataretheroleandfunctionsofFIMMDA?
31.1 The Fixed Income Money Market and Derivatives Association of India (FIMMDA), an association of Scheduled Commercial
Banks,PublicFinancialInstitutions,PrimaryDealersandInsuranceCompanieswasincorporatedasaCompanyundersection25of
the Companies Act,1956 on June 3rd, 1998. FIMMDA is a voluntary market body for the bond, money and derivatives markets.
FIMMDA has members representing all major institutional segments of the market. The membership includes Nationalized Banks
such as State Bank of India, its associate banks and other nationalized banks Private sector banks such as ICICI Bank, HDFC
Bank,IDBIBankForeignBankssuchasBankofAmerica,ABNAmro,Citibank,FinancialinstitutionssuchasIDFC,EXIMBank,
NABARD, Insurance Companies like Life Insurance Corporation of India (LIC), ICICI Prudential Life Insurance Company, Birla Sun
LifeInsuranceCompanyandallPrimaryDealers.
31.2TheFIMMDArepresentsmarketparticipantsandaidsthedevelopmentofthebond,moneyandderivativesmarkets.Itactsas
an interface with the regulators on various issues that impact the functioning of these markets. It also undertakes developmental
activities, such as, introduction of benchmark rates and new derivatives instruments, etc. FIMMDA releases rates of various
Government securities that are used by market participants for valuation purposes. FIMMDA also plays a constructive role in the
evolutionofbestmarketpracticesbyitsmemberssothatthemarketasawholeoperatestransparentlyaswellasefficiently.
32.WhatarethevariouswebsitesthatgiveinformationonGovernmentsecurities?
32.1.RBIfinancialmarketwatchhttp://www.rbi.org.in/Scripts/financialmarketswatch.aspx
ThissiteprovideslinkstoinformationonpricesofGovernmentsecuritiesonNDS(OTCmarket),NDSOM,moneymarketandother
informationonGovernmentsecuritieslikeoutstandingstocketc.

32.2.NDSOMmarketwatchhttp://www.ccilindia.com/OMHome.aspx
This site provides realtime information on traded as well as quoted prices of Government securities. In addition prices of When
Issued(WI)(whenevertradingtakesplace)segmentarealsoprovided.

32.3.NDSmarketwatchhttp://www.rbi.org.in/Scripts/NdsUserXsl.aspx
This site provides information on prices of Government securities in OTC market. Facility is provided for searching the prices of
particularsecuritiesinadaterange.

32.4FIMMDAhttp://www.fimmda.org/
ThissiteprovideshostofinformationonmarketpracticesforallthefixedincomesecuritiesincludingGovernmentsecurities.Details
ofvariouspricingmodelsadoptedbyFIMMDAareprovidedinthissite.Inaddition,thedetailsofdaily,monthlyandyearlyclosing
prices of Government securities, corporate bond spreads etc. are made available by FIMMDA through this site. Accessing
informationfromthissiterequiresavalidloginandpasswordwhichareprovidedbyFIMMDAtotheeligibleentities.

Annex1

Annex2
ListofPrimaryDealers
A

BankPDs

Contactno.inMumbai

CitibankN.A.,MumbaiBranch

StandardCharteredBank

BankofAmericaN.A.

(022)66323040/3140/3192

JPMorganChaseBank,N.A.

(022)66393084/66392944

HSBCBank

BankofBaroda

CanaraBank

KotakMahindraBankLtd.

CorporationBank

10

HDFCBank

11

ABNAMROBankN.V.

(022)66386132/128

12

AxisBank

(022)22181836/2765

StandalonePDs

IDBIGilts

ICICISecPDLtd.

PNBGiltsLtd.

(022)40015453/40015378
(022)622303/22652875/22683695

(022)22623329/22681031/34/33
(022)66363682/83
(022)22800101105/22661348
(022)67836107&66596235/6454
(022)22832429/22022796/22871054
(022)66521372/9892975232

Contactno.inMumbai
(022)66177900/911
(022)66377421/22882460/70
(022)22693315/17

SBIDFHILtd

(022)22610490/66364696

STCIPDLtd

DeutscheSecurities(India)PvtLtd

Morgan Stanley Primary Dealer Pvt.

Ltd.

(022)22096600

Nomura Fixed Income Securities Pvt.

Ltd.

(022)67855111/67855118

(022)66202261/2200
(022)67063068/3066/67063115

*BankPDsarethosewhichtakeupPDbusinessdepartmentallyaspartofthebankitself.
**StandalonePDsareNonBankingFinancialCompanies(NBFCs)thatexclusivelytakeupPDbusiness.
UpdatetothelistofPrimarydealersisavailableontheRBIwebsiteat
http://www.rbi.org.in/commonman/English/Scripts/PrimaryDealers.aspx
Annex3

Annex4
ImportantExcelfunctionsforbondrelatedcalculations
Function

Syntax

1.PresentValue

PV(rate,nper,pmt,fv,type)

Thisfunctionisusedtofindthepresentvalueofaseriesoffuturepaymentsgiventhediscountrate.Thisformsthebasisforpricing
abond
Rateistheinterestrateperperiod.
Nperisthetotalnumberofpaymentperiodsinanannuity.
Pmtisthepaymentmadeeachperiodandcannotchangeoverthelifeoftheannuity.
Fvisthefuturevalue,oracashbalanceyouwanttoattainafterthelastpaymentismade.Iffvisomitted,itisassumedtobe0
(thefuturevalueofaloan,forexample,is0).
Typeisthenumber0or1andindicateswhenpaymentsaredue.
Settypeequalto

Ifpaymentsaredue

0oromitted

Attheendoftheperiod

Atthebeginningoftheperiod

Example:TocalculatethepresentvalueofRs.100aftereveryyearforthreeyearsataninterestrateof9%,thevalueswouldbe

Rate9%or0.09Nper3(3years)Pmt100Fv0asthereisnobalanceleftattheendofthreeyearsType0(attheendof
theperiod)
Theanswerwouldbe253.13
2.FutureValue

FV(rate,nper,pmt,pv,type)

Thisfunctionisusedtocalculatethefuturevalueofaseriesofinvestmentsmade,giventheinterestrate.
Rateistheinterestrateperperiod.
Nperisthetotalnumberofpaymentperiodsinanannuity.
Pmtisthepaymentmadeeachperioditcannotchangeoverthelifeoftheannuity.Typically,pmtcontainsprincipalandinterestbut
nootherfeesortaxes.Ifpmtisomitted,youmustincludethepvargument.
Pvisthepresentvalue,orthelumpsumamountthataseriesoffuturepaymentsisworthrightnow.Ifpvisomitted,itisassumed
tobe0(zero),andyoumustincludethepmtargument.
Typeisthenumber0or1andindicateswhenpaymentsaredue.Iftypeisomitted,itisassumedtobe0.
Example:TocalculatethefuturevalueofRs.100paideveryyearforthreeyearsataninterestrateof9%,thevalueswouldbe
Rate 9% or 0.09 Nper 3 (3 years) Pmt 100 Pv 0 as there is no lumpsum payment at the beginning Type 1 (at the
beginningoftheperiod)Theanswerwouldbe357.31
3.Coupondays

COUPDAYBS(settlement,maturity,frequency,basis)

Thisfunctionisusedtoworkoutthenumberofdaysfromthebeginningtotheendofthecouponperiodthatcontainsthesettlement
date.
Settlement is the security's settlement date. The security settlement date is the date after the issue date when the security is
tradedtothebuyer.
Maturityisthesecurity'smaturitydate.Thematuritydateisthedatewhenthesecurityexpires.
Frequency is the number of coupon payments per year. For annual payments, frequency = 1 for semiannual, frequency = 2 for
quarterly,frequency=4.
Basisisthetypeofdaycountbasistouse.Appropriatecodeforthedaycountconventionhastobeprovidedasshownbelow
Basis

Daycountbasis

Basis

Daycountbasis

0oromitted

US(NASD)30/360

Actual/365

Actual/actual

European30/360

Actual/360

Example:InthecaseofsecuritymaturingonFebruary2,2019,andsettlementdateMay27,2009,thevaluesintheformulawould
be
Maturity2/2/2019settlement27/5/2009frequency2(halfyearlycoupon)andbasis4(daycountconvention30/360)
Theresultwouldbe180(numberofcoupondaysinthecouponperiod)
4.Yearfrac

YEARFRAC(start_date,end_date,basis)(tofindresidualmaturity)

Thisfunctionisusedtofindtheresidualmaturityofasecurityinyears.
Start_dateisadatethatrepresentsthestartdate.
End_dateisadatethatrepresentstheenddate.
Basisisthetypeofdaycountbasistouse.
Example: For a security maturing on February 6, 2019, the residual maturity in number of years as on May 27, 2009 can be
calculatedas
StartdateMay27,2009Enddate2/2/2019,basis4
Theresultwouldbe9.68years
5.PRICE

PRICE(settlement,maturity,rate,yld,redemption,frequency,basis)

Thisfunctionisusedtofindthepriceofsecuritythatpaysperiodicinterest.
Settlement is the security's settlement date. The security settlement date is the dateon which the security and funds are
exchanged.
Maturityisthesecurity'smaturitydate.Thematuritydateisthedatewhenthesecurityexpires.
Rateisthesecurity'sannualcouponrate.
Yldisthesecurity'sannualyield.
Redemptionisthesecurity'sredemptionvalueperRs.100facevalue.
Frequency is the number of coupon payments per year. For annual payments, frequency = 1 for semiannual, frequency = 2 for
quarterly,frequency=4.
Basisisthetypeofdaycountbasistouse.
Example:6.05%2019securitymaturingonFebruary2,2019.Itisyielding6.68%insecondarymarketonJune1,2009.Settlement
dateisJune2,2009.Valuesinthepriceformulawouldbe
Settlement2/6/2009maturity2/2/2019rate6.05%Yield6.68%Redemption100(facevalue)frequency2(halfyearly
coupon)basis4.Theresultwouldbe95.55
6.YIELD

YIELD(settlement,maturity,rate,pr,redemption,frequency,basis)

ThisfunctionisusedtofindtheYieldtoMaturityofasecuritygiventhepriceofthesecurity.
Settlement is the security's settlement date. The security settlement date is the date on which the security and funds are
exchanged.Maturityisthesecurity'smaturitydate.Thematuritydateisthedatewhenthesecurityexpires.
Rateisthesecurity'sannualcouponrate.
Pristhesecurity'spriceperRs.100facevalue.
Redemptionisthesecurity'sredemptionvalueperRs.100facevalue.
Frequency is the number of coupon payments per year. For annual payments, frequency = 1 for semiannual, frequency = 2 for
quarterly,frequency=4.
Basisisthetypeofdaycountbasistouse.

Takingthesameexampleasabove,andpriceat95.55,theresultfortheyieldwouldbe6.68%.
7.
DURATION

DURATION(settlement,maturity,coupon,yld,frequency,basis)

ThisfunctionisusedtofindtheDurationofasecurityinnumberofyears.
Settlement is the security's settlement date. The security settlement date is the date on which the security and funds are
exchanged.Maturityisthesecurity'smaturitydate.Thematuritydateisthedatewhenthesecurityexpires.
Couponisthesecurity'sannualcouponrate.
Yldisthesecurity'sannualyield.
Frequency is the number of coupon payments per year. For annual payments, frequency = 1 for semiannual, frequency = 2 for
quarterly,frequency=4.
Basisisthetypeofdaycountbasistouse.
Example:6.05%2019securitymaturingonFebruary2,2019.Itisyielding6.68%insecondarymarketonJune1,2009.Settlement
dateisJune2,2009.ValuesintheDurationformulawouldbe
Settlement2/6/2009maturity2/2/2019Coupon6.05%Yield6.68%frequency2(halfyearlycoupon)basis4.
Theresultwillbe7.25years.
8.ModifiedDuration

MDURATION(settlement,maturity,coupon,yld,frequency,basis)

ThisfunctionisusedtocalculatetheModifiedDurationofasecurity.
Settlement is the security's settlement date. The security settlement date is the date on which the security and funds are
exchanged.Maturityisthesecurity'smaturitydate.Thematuritydateisthedatewhenthesecurityexpires.
Couponisthesecurity'sannualcouponrate.
Yldisthesecurity'sannualyield.
Frequency is the number of coupon payments per year. For annual payments, frequency = 1 for semiannual, frequency = 2 for
quarterly,frequency=4.
Basisisthetypeofdaycountbasistouse.
TakingthesameexamplegivenaboveforDurationandfeedingthevaluesintheexcelfunction,theformularesultwillbe7.01
Annex5
GlossaryofImportantTermsAndCommonlyUsedMarketTerminology
AccruedInterest
The accrued interest on a bond is the amount of interest accumulated on a bond since the last coupon payment. The interest has
been earned, but because coupons are paid only on coupon dates, the investor has not gained the money yet. In India day count
conventionforGSecsis30/360.
BidPrice/Yield
Theprice/yieldbeingofferedbyapotentialbuyerforasecurity.
BigFigure
WhenthepriceisquotedasRs.102.35,theportionotherthandecimals(102)iscalledthebigfigure.
CompetitiveBid
Competitivebidreferstothebidforthestockatthepricestatedbyabidderinanauction.
Coupon
Therateofinterestpaidonadebtsecurityascalculatedonthebasisofthesecuritysfacevalue.
CouponFrequency
Coupon payments are made at regular intervals throughout the life of a debt security and may be quarterly, semiannual (twice a
year)orannualpayments.
Discount
Whenthe price of a security is below the par value, it is said to be trading at discount. The value of the discount is the difference
betweentheFVandthePrice.Forexample,ifasecurityistradingatRs.99,thediscountisRs.1.
Duration(MacaulayDuration)
Durationofabondisthenumberofyearstakentorecovertheinitialinvestmentofabond.Itiscalculatedastheweightedaverage
number of years to receive the cash flow wherein the present value of respective cash flows are multiplied with the time to that
respectivecashflows.Thetotalofsuchvaluesisdividedbythepriceofthesecuritytoarriveattheduration.RefertoBoxIVunder
question27.
FaceValue
Face value is the amount that is to be paid to an investor at the maturity date of the security. Debt securities can be issued at
varying face values, however in India they typically have a face value of Rs.100. The face value is also known as the repayment
amount.Thisamountisalsoreferredasredemptionvalue,principalvalue(orsimplyprincipal),maturityvalueorparvalue.
FloatingRateBond
Bondswhosecouponrateisresetatpredefinedintervalsandisbasedonaprespecifiedmarketbasedinterestrate.
Gilt/GovernmentSecurities
Governmentsecuritiesarealsoknownasgiltsorgiltedgedsecurities.Governmentsecuritymeansasecuritycreatedandissued
by the Government for the purpose of raising a public loan or for any other purpose as may be notified by the Government in the
OfficialGazetteandhavingoneoftheformsmentionedinTheGovernmentSecuritiesAct,2006.
MarketLot
Market lot refers to the standard value of the trades that happen in the market. The standard market lot size in the Government
securitiesmarketisRs.5croreinfacevalueterms.
MaturityDate
Thedatewhentheprincipal(facevalue)ispaidback.Thefinalcouponandthefacevalueofadebtsecurityisrepaidtotheinvestor
onthematuritydate.Thetimetomaturitycanvaryfromshortterm(1year)tolongterm(30years).
NonCompetitiveBid

Noncompetitivebiddingmeansthebidderwouldbeabletoparticipateintheauctionsofdatedgovernmentsecuritieswithouthaving
to quote the yield or price in the bid. The allotment to the noncompetitive segment will be at the weighted average rate that will
emergeintheauctiononthebasisofcompetitivebidding.Itisanallocatingfacilitywhereinapartoftotalsecuritiesareallocatedto
biddersataweightedaveragepriceofsuccessfulcompetitivebid.(Pleasealsoseeparagraphno.4.3underthequestionno.4).
OddLot
TransactionsofanyvalueotherthanthestandardmarketlotsizeofRs.5crorearereferredtoasoddlot.Generallythevalueisless
thantheRs.5crorewithaminimumofRs.10,000/.Oddlottransactionsaregenerallydonebytheretailandsmallparticipantsinthe
market.
Par
Parvalue is nothing but the face value of the security which is Rs. 100 for Government securities. When the price of a security is
equaltofacevalue,thesecurityissaidtobetradingatpar.
Premium
Whenthepriceofasecurityisabovetheparvalue,thesecurityissaidtobetradingatpremium.Thevalueofthepremiumisthe
differencebetweenthepriceandthefacevalue.Forexample,ifasecurityistradingatRs.102,thepremiumisRs.2.
Price
ThepricequotedisforperRs.100offacevalue.Thepriceofanyfinancialinstrumentisequaltothepresentvalueofallthefuture
cashflows.Thepriceonepaysforadebtsecurityisbasedonanumberoffactors.Newlyissueddebtsecuritiesusuallysellat,or
closeto,theirfacevalue.Inthesecondarymarket,wherealreadyissueddebtsecuritiesareboughtandsoldbetweeninvestors,the
price one pays for a bond is based on a host of variables, including market interest rates, accrued interest, supply and demand,
creditquality,maturitydate,stateofissuance,marketeventsandthesizeofthetransaction.
PrimaryDealers
Inorder to accomplish the objective of meeting the government borrowing needs as cheaply and efficiently as possible, a group of
highly qualified financial firms/ banks are appointed to play the role of specialist intermediaries in the government security market
between the issuer on the one hand and the market on the other. Such entities are generally called Primary dealers or market
makers.Inreturnofasetofobligations,suchasmakingcontinuousbidsandofferpriceinthemarketablegovernmentsecuritiesor
submittingreasonablebidsintheauctions,thesefirmsreceiveasetofprivilegesintheprimary/secondarymarket.
RealTimeGrossSettlement(RTGS)system
RTGSsystemisafundstransfermechanismfortransferofmoneyfromonebanktoanotheronarealtimeandongrossbasis.
This is the fastest possible money transfer system through the banking channel. Settlement in real time means payment
transaction is not subjected to any waiting period. The transactions are settled as soon as they are processed. Gross settlement
means the transaction is settled on one to one basis without bunching with any other transaction. Considering that money transfer
takesplaceinthebooksoftheReserveBankofIndia,thepaymentistakenasfinalandirrevocable.
RepoRate
Reporateisthereturnearnedonarepotransactionexpressedasanannualinterestrate.
Repo/ReverseRepo
Repo means an instrument for borrowing funds by selling securities of the Central Government or a State Government or of such
securitiesofalocalauthorityasmaybespecifiedinthisbehalfbytheCentralGovernmentorforeignsecurities,withanagreement
torepurchasethesaidsecuritiesonamutuallyagreedfuturedateatanagreedpricewhichincludesinterestforthefundborrowed.
ReverseRepomeansaninstrumentforlendingfundsbypurchasingsecuritiesoftheCentralGovernmentoraStateGovernmentor
of such securities of a local authority as may be specified in this behalf by the Central Government or foreign securities, with an
agreementtoresellthesaidsecuritiesonamutuallyagreedfuturedateatanagreedpricewhichincludesinterestforthefundlent.
ResidualMaturity
Theremaining period until maturity date of a security is its residual maturity. For example, a security issued for an original term to
maturityof10years,after2years,willhavearesidualmaturityof8years.
SecondaryMarket
Themarketinwhichoutstandingsecuritiesaretraded.Thismarketisdifferentfromtheprimaryorinitialmarketwhensecuritiesare
soldforthefirsttime.Secondarymarketreferstothebuyingandsellingthatgoesonaftertheinitialpublicsaleofthesecurity.
TapSale
UnderTapsale,acertainamountofsecuritiesiscreatedandmadeavailableforsale,generallywithaminimumprice,andissoldto
the market as bids are made. These securities may be sold over a period of day or even weeks and authorities may retain the
flexibilitytoincreasethe(minimum)priceifdemandprovestobestrongortocutitifdemandweakens.Tapandcontinuoussaleare
very similar, except that with Tap sale the debt manager tends to take a more proactive role in determining the availability and
indicativepricefortapsales.Continuoussaleareessentiallyattheinitiativeofthemarket.
TreasuryBills
DebtobligationsofthegovernmentthathavematuritiesofoneyearorlessisnormallycalledTreasuryBillsorTBills.TreasuryBills
are shortterm obligations of the Treasury/Government. They are instruments issued at a discount to the face value and form an
integralpartofthemoneymarket.
Underwriting
Thearrangementbywhichinvestmentbankersundertaketoacquireanyunsubscribedportionofaprimaryissuanceofasecurity.
WeightedAveragePrice/Yield
Itistheweightedaveragemeanoftheprice/yieldwhereweightbeingtheamountusedatthatprice/yield.Theallotmenttothenon
competitivesegmentwillbeattheweightedaverageprice/yieldthatwillemergeintheauctiononthebasisofcompetitivebidding.
Yield
Theannualpercentagerateofreturnearnedonasecurity.Yieldisafunctionofasecurityspurchasepriceandcouponinterestrate.
Yieldfluctuatesaccordingtonumerousfactorsincludingglobalmarketsandtheeconomy.
YieldtoMaturity(YTM)
Yieldtomaturityisthetotalreturnonewouldexcepttoreceiveifthesecurityisbeinghelduntilmaturity.Yieldtomaturityis
essentiallythediscountrateatwhichthepresentvalueoffuturepayments(investmentincomeandreturnofprincipal)equalsthe
priceofthesecurity.
YieldCurve
Thegraphicalrelationshipbetweenyieldandmaturityamongbondsofdifferentmaturitiesandthesamecreditquality.Thislineshows
thetermstructureofinterestrates.Italsoenablesinvestorstocomparedebtsecuritieswithdifferentmaturitiesandcoupons.
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