AGENDA

Introduction of Debt Market Participants and products of

debt market Few terms in Debt Market Types of Bonds Repo and Reverse Repo Duration in Bond Market Relation between YTM and Bond Price

Introduction To Debt Market

o Debt market : A market where fixed income securities are issued and trade o Share of debt market is much larger than equity market in US, i.e. is close to $31.4 trillion which is nearly equal to the total GDP of all countries taken together o Total size of Indian debt market is in the range of $92 billion to $100 billion i.e. approximately 30% of Indian GDP.

o Debt market consists of three segments Government security market Public sector undertaking bond market(PSU) Corporate security market o Govt. securities market accounts for more than 90% of the total turnover

Few terms in Debt Market

o Maturity o Coupon rate o Principle o Yield to Maturity (YTM) o Current yield

Debt Instruments & Features

Contract between lender and the

borrower Bonds Debentures Features Maturity Coupon Principal

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Modifying
Coupon

Zero Coupon Bond Treasury Strips Floating Rate Bond Others

Cont.
Term to Maturity

Callable Bonds Puttable Bonds Convertible Bonds

Principal Repayment
Amortizing Bonds Bonds with sinking fund

Provisions
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Indian Debt Market

Market Segments

Government Securities
PSU Bonds Corporate Securities

Participants
Government, RBI, PDs, PSUs, FI s,

Corporates, Banks, Mutual funds, FII s, Provident Funds, Trusts. Secondary Market NSE- WDM only formal trading platform (NEAT)

Indian Debt Market

Issuer
Central Government Central Government State Government PSUs Corporates

Instrument Maturity Investors

Dated Securities T-Bills Dated Securities Bonds Debentures 2-20 Years 91/364 days 5-10 Years 5-10 Years 1-12 Years RBI,Banks,Insurance Co., PFs, MFs, PDs, RBI,Banks,Insurance Co., PFs, MFs, PDs,Individuals Banks,Insurance Co.,PFs. Banks,Insurance Co., PFs, MFs, PDs,Individuals, Corporates Banks, Mutual Funds, Corporates,Individuals

Corporates, PDs
Banks
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Commercial paper
Certificates of Deposit

3 months to 1 Year
3 months to 1 Year

Banks, Mutual Funds, FI s, Corporates,Individuals

Banks, Corporates

Central Government Securities: Bonds

Primary Issuance Process

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Auction based Enable Higher Auction Volumes Broadening participation Ensuring efficiency Types of Auctions Discriminatory / Uniform Price Auction Yield / Price Based Auction Participants

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Cont.. Primary Dealers Introduced in 1995 and at present 19 Act as underwriters and market makers To Strengthen Infrastructure To divest responsibilities of RBI To facilitate Open Market

Cont.
Satellite Dealers Second Tier in Trading and

Distribution Provide a retail outlet

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T - Bills
Short Term borrowing Issued at discount 91 / 364 Days T Bills Abolition of Ad Hoc T-Bills Issuance Process through Auction Banks and PDs Non Competitive Bids Calendar
91 days Weekly

250 Cr. Wednesday

Thursday 364 days Fortnightly 750 Cr. Wednesday Thursday

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Usually held till maturity

T-Bills
Cut off Yields Yield given Price= ((100-Price)*365/(Price*No. of days to maturity)
Price given Yield=

100/1+(yield%*(No.of days to maturity/365))

For Example:

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A 182 day T-Bill auctioned on January 18 at a price of 95.510 would have an implicit yield of 9.4280% computed as follows:

State Government Bonds

Represent market borrowimg to finance

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GFD Currenrly at 13% of GFD Averages about 12000 Cr. 84000 Cr. Outstanding Managed by RBI, States upto 35% Coupon fixed at 25 bps above Central Government securities PDs allowed to particiapte SBI owns the largest chunk Low risk weight of 20%

Call Money Markets

Short Term funds ranging from

overnight funds to 14 days Banks and PDs allowed to borrow/lend UTI, FI s, MF s, Corporates allowed to lend Is around 32% of reserve requirements Call Rates
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Deposit mobilization of Banks, capital

Corporate Debt: Bonds

Bonds issued by PSU, FI, and

Corporates PSU bonds can be taxable or taxfree Issue Process

Authority for the issue Appointment of Debenture Trustees Offer Document Creation of DRR Account Creation of charge Credit rating

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Corporate Debt: Bonds

Issue management & Book

building Managed by consortium of lead manager, co-managers, underwriters and brokers. Investors indicate the amount at different coupon rates or the amount at cut-off coupon rate
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Corporate Debt: Bonds

Terms of debenture Issue Face Value Price Credit rating Deemed date of allotment Applicable interest rate Interest on application money Interest payment Redemption Put/call option Letter of Allotment and Debenture Certificate

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Current Yield = Capital Gains yield =

Annual coupon pyt. Current price Change in price Beginning price

Exp. Exp. Cap. Exp. Total = YTM = Curr. Yld. + gains yld. Return
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Find current yield and capital gains yield for a 9%, 10-year bond (F.V. Rs. 1000) when the bond sells for Rs.887 and YTM = 10.91%.

Current yield = Rs.90 Rs.887 = 0.1015 = 10.15%.

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Yield to Maturity
The yield-to-maturity (YTM) is

the measure of a bonds rate of return that considers both the interest income and any capital gain or loss.

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What is the YTM on a 10-year, 9% annual coupon, Rs.1,000 par value bond, selling for Rs.887?
Must find the kd that solves this model:

Bn INT INT B0 ... 1 n n (1 k d ) (1 k d ) (1 k d ) 90 90 1,000 Rs.887 ... 1 10 10 (1 k d ) (1 k d ) (1 k d ) YTM K d 10.91

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YTM = Current yield + Capital Gains yield.

Cap Gains yield = YTM - Current yield = 10.91% - 10.15% = 0.76%.

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Coupon Rate, YTM, MP, and Par Value

If MP = Par(Red.) Value, then YTM =

Coupon Rate If MP > Par (Red.) Value, then YTM < Coupon Rate If MP < Par (Red.) Value, then YTM > Coupon Rate

Thank You

Neeraj Goyal Shreyance Jain Piyush Goel Priya Luthra Priyanka Chadha Pallavi Tripathi Sudhir Sharma Swati
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