Introduction To Debt

Market

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

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
o
o
o
o

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

Debt Instruments &

Features

Contract between lender and the

borrower
Bonds
Debentures
Features
Maturity
Coupon
Principal
6

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

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)
9

Indian Debt Market

Issuer

Instrume Maturit Investors

nt
y

Central
Government

Dated
Securities

2-20 Years

RBI,Banks,Insurance Co.,
PFs, MFs, PDs,

Central
Government

T-Bills

91/364
days

RBI,Banks,Insurance Co.,
PFs, MFs, PDs,Individuals

State
Government

Dated
Securities

5-10 Years

Banks,Insurance Co.,PFs.

PSUs

Bonds

5-10 Years

Banks,Insurance Co., PFs,

MFs, PDs,Individuals,
Corporates

Corporates

Debentures

1-12 Years

Banks, Mutual Funds,

Corporates,Individuals

Corporates,
PDs

Commercial
paper

3 months
to 1 Year

Banks, Mutual Funds, FI s,

Corporates,Individuals

Banks
10

Certificates of
Deposit

3 months
to 1 Year

Banks, Corporates

Central Government
Securities: Bonds
Primary Issuance Process Auction

based
Enable Higher Auction Volumes
Broadening participation
Ensuring efficiency
Types of Auctions
Discriminatory / Uniform Price Auction
Yield / Price Based Auction
Participants
Banks, PFs, Insurance Co., PDs, MFs.
11

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 Operations
Eligibility

12

Cont.
Satellite Dealers
Second Tier in Trading and

Distribution
Provide a retail outlet

13

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

Usually held till maturity

5.5% of total secondary market

14

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:

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:
((100-95.510)*365)/(95.510*182)
15

State Government Bonds

Represent market borrowimg to finance 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%
State Government Guaranteed Bonds

16

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
Deposit mobilization of Banks, capital

flows,CRR on supply side

Tax outflows, Government borrowing,Credit
Off Take

17

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
Listing Criteria on NSE WDM
Form of Holding

18

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
Oversubscribed

19

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
Security

20

Current Yield =

Annual coupon pyt.

Current price

in price
Capital Gains yield Change
=
Beginning price
Exp. Total = YTM = Exp.
Exp.
+ Cap.
Return
Curr. Yld. gains yld.
21

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%.

22

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.
23

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
24

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

25

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