SEMINAR PRESENTATION ON

:- DEBT INSTUMENTS :- STRUCTURE OF INTREST RATES IN INDIA :- FIXED DEPOSITS :- BOND VALUATION

Presented By
Mr. Ravindra Mr. Ajinkya Mr. Furquan Mr. Sangram

Debt Instruments
In most of the countries, the debt market is more popular than the equity market. This is due to the sophisticated bond instruments that have return-reaping assets as their underlying. In the US, for instance, the corporate bonds (like mortgage bonds) became popular in the 1980s. However, in India, equity markets are more popular than the debt markets due to the dominance of the government securities in the debt markets. Moreover, the government is borrowing at a pre-announced coupon rate targeting a captive group of investors, such as banks. This, coupled with the automatic monetization of fiscal deficit, prevented the emergence of a deep and vibrant government securities market. The bond markets exhibit a much lower volatility than equities, and all bonds are priced based on the same macroeconomic information. The bond market liquidity is normally much higher than the stock market liquidity in most of the countries. The performance of the market for debt is directly related to the interest rate movement as it is reflected in the yields of government bonds, corporate debentures, MIBORrelated commercial papers, and non-convertible debentures.

Advantages of Debt Instruments

Reduction in the borrowing cost of the Government and enable mobilization of resources at a reasonable cost. Provide greater funding avenues to public-sector and private sector projects and reduce the pressure on institutional financing. Enhanced mobilization of resources by unlocking illiquid retail investments like gold. Development of heterogeneity of market participants Assist in development of a reliable yield curve and the term structure of interest rates.

Risks associated with debt securities

The debt market instrument is not entirely risk free. Specifically, two main types of risks are involved, i.e., default risk and the interest rate risk. The following are the risks associated with debt securities: Default Risk: This can be defined as the risk that an issuer of a bond may be unable to make timely payment of interest or principal on a debt security or to otherwise comply with the provisions of a bond indenture and is also referred to as credit risk. Interest Rate Risk: can be defined as the risk emerging from an adverse change in the interest rate prevalent in the market so as to affect the yield on the existing instruments. A good case would be an upswing in the prevailing interest rate scenario leading to a situation where the investors' money is locked at lower rates whereas if he had waited and invested in the changed interest rate scenario, he would have earned more. Reinvestment Rate Risk: can be defined as the probability of a fall in the interest rate resulting in a lack of options to invest the interest received at regular intervals at higher rates at comparable rates in the market.

The following are the risks associated with trading in debt securities:

Counter Party Risk: is the normal risk associated with any transaction and refers to the failure or inability of the opposite party to the contract to deliver either the promised security or the sale-value at the time of settlement. Price Risk: refers to the possibility of not being able to receive the expected price on any order due to a adverse movement in the prices.

CLASSIFIACTION OF INDIAN DEBT MARKET

Government Securities Market (G-Sec Market): It consists of central and state government securities. It means that, loans are being taken by the central and state government. It is also the most dominant category in the India debt market. Bond Market: It consists of Financial Institutions bonds, Corporate bonds and debentures and Public Sector Units bonds. These bonds are issued to meet financial requirements at a fixed cost and hence remove uncertainty in financial costs.

DEBT INSTRUMENTS

Government Securities

Corporate Bonds

Certificate of Deposit

Commercial Papers

Government Securities
It is the Reserve Bank of India that issues Government Securities or GSecs on behalf of the Government of India.

These securities have a maturity period of 1 to 30 years. G-Secs offer fixed interest rate, where interests are payable semi-annually.
For shorter term, there are Treasury Bills or T-Bills, which are issued by the RBI for 91 days, 182 days and 364 days.

Corporate Bonds

These bonds come from PSUs and private corporations and are offered for an extensive range of tenures up to 15 years. Comparing to G-Secs, corporate bonds carry higher risks, which depend upon the corporation, the industry where the corporation is currently operating, the current market conditions, and the rating of the corporation

Certificate of Deposit
Certificate of Deposits (CDs), which usually offer higher returns than Bank term deposits, are issued in demat form

Banks can offer CDs which have maturity between 7 days and 1 year.
CDs from financial institutions have maturity between 1 and 3 years

Commercial Papers

There are short term securities with maturity of 7 to 365 days.

Structured Debt
structured debt is some type of debt instrument that the lender has created and adapted to fit the needs and circumstances of the borrower A debt package of this type usually includes one or more incentives that encourage the debtor to do business with the lender, rather than seeking to develop a working relationship with other lenders. While the overall structure of the debt is adapted to the needs of the borrower, the terms also benefit the lender in the long term. The main goal of structured debt is to create a debt situation that provides the debtor with as many benefits as possible, while also keeping the overall debt load as low as possible At the same time, the lender receives an equitable return for the structured debt arrangement

A fixed deposit (FD) is a financial instrument provided by Indian banks which provides investors with a higher rate of interest than a regular savings account, until the given maturity date . It may or may not require the creation of a separate account. It is known as a term deposit or time deposit in Canada, Australia, New Zealand, and the US, and as a bond in the United Kingdom. They are considered to be very safe investments. Term deposits in India is used to denote a larger class of investments with varying levels of liquidity. The defining criteria for a fixed deposit is that the money cannot be withdrawn for the FD as compared to a recurring deposit or a demand deposit before maturity

Some banks may offer additional services to FD holders such as loans against FD certificates at competitive interest rates. It's important to note that banks may offer lesser interest rates under uncertain economic conditions. The interest rate varies between 4 and 11 percent. The tenure of an FD can vary from 10, 15 or 45,60,90,180, days to 1.5 years and can be as high as 10 years. These investments are safer than Post Office Schemes as they are covered under the Deposit Insurance & Credit Guarantee Scheme of India. They also offer income tax and wealth tax benefits.

Fixed Deposit, also called Term Deposit is an investment where the interest rate is guaranteed not to change for the nominated term, so you know exactly what your investment is worth Taxability Tax is deducted by the banks on FDs if interest paid to a customer at any branch exceeds Rs. 10,000 in a financial year. This is applicable to both interest payable or reinvested per customer or per branch. This is called Tax deducted at Source and is presently fixed at 10% of the interest. Banks issue Form 16 A every quarter to the customer, as a receipt for Tax Deducted at Source If the total income for a year does not fall within the overall taxable limits, customers can submit a Form 15 G (below 65 years of age) or Form 15 H (above 65 years of age).

Benefits of FD
1.Customers can avail loans against FDs up to 80 to 90 per cent of the value of deposits. The rate of interest on the loan could be 1 to 2 per cent over the rate offered on the deposit 2.Non resident Indians and a Person of Indian Origin can also open these accounts.