The Indian debt market, primarily of the fixed-income variety, can be broadly classified into:
Indian Debt Market
Money Market: Where the borrowing is for tenor of less than a year. Inter Bank Term Money, repo transactions, Certificate of Deposits, Commercial Papers, T-Bills, etc. are some of the money market instruments through which short term requirement of funds are met by banks, institutions and the state and central governments. Debt Market : The Debt Market is the market where fixed income securities of various types and features are issued and traded. Debt Markets are therefore, markets for fixed income securities issued by Central and State Governments, Municipal Corporations, Govt. bodies and commercial entities like Financial Institutions, Banks, Public Sector Units, Public Ltd. companies and also structured finance instruments.
Fixed-income securities are investments where the cash flows are according to a predetermined amount of interest, paid on a fixed schedule.
Fixed Income securities offer a predictable stream of payments by way of interest and repayment of principal at the maturity of the instrument. The debt securities are issued by the eligible entities against the moneys borrowed by them from the investors in these instruments. Therefore, most debt securities carry a fixed charge on the assets of the entity and generally enjoy a reasonable degree of safety by way of the security of the fixed and/or movable assets of the company. The investors benefit by investing in fixed income securities as they preserve and increase their invested capital or also ensure the receipt of dependable interest income. The investors can even neutralize the default risk on their investments by investing in Govt. securities, which are normally referred to as risk-free investments due to the sovereign guarantee on these instruments. Debt Markets in India and all around the world are dominated by Government securities, which account for between 50 – 75% of the trading volumes and the market capitalization in all markets.
The key role of the debt markets in the Indian Economy stems from the following reasons:
∙ Efficient mobilization and allocation of resources in the economy
∙ Financing the development activities of the Government
∙ Transmitting signals for implementation of the monetary policy
∙ Facilitating liquidity management in tune with overall short term and long term objectives.
Since the Government Securities are issued to meet the short term and long term financial needs of the government, they are not only used as instruments for raising debt, but have emerged as key instruments for internal debt management, monetary management and short term liquidity management.
Below are the general instruments traded here in the Debt market; debt market consist of three segment viz, Government Debt Market, PSU debt Segment and Private Sector Debt What is a Debt Security?
A debt security is any debt that can be bought or sold between parties in the market prior to maturity. Its structure represents a debt owed by an issuer (the government, an organization, or a company) to an investor who acts as a lender.
Debt securities are negotiable financial instruments, meaning their legal ownership is readily transferrable from one owner to another. Bonds are the most common form of such securities. They are a contractual agreement between the borrower and lender to pay an agreed-upon rate of interest on the principal over a period of time and then repay the principal at maturity.
Bonds can be issued by the government and non-government entities. They are available in various forms. Typical structures include fixed-rate bonds and zero-coupon bonds. Floating-rate notes, preferred stock, and mortgage-backed securities are also examples of debt securities. Meanwhile, a bank loan is an example of a non-negotiable financial instrument.
● Debt securities are negotiable financial instruments, meaning they can be bought or sold between parties in the market. ● They come with a defined issue date, maturity date, coupon rate, and face value. ● Debt securities provide regular payments of interest and guaranteed repayment of principal. They can be sold prior to maturity to allow investors to realize a capital gain or loss on their initial investment.
⮚ Main Features of Debt Securities
1. Issue date and issue price
Debt securities will always come with an issue date and an issue price at which investors buy the securities when first issued. 2. Coupon rate
Issuers are also required to pay an interest rate, also referred to as the coupon rate. The coupon rate may be fixed throughout the life of the security or vary with inflation and economic situations.
3. Maturity date
Maturity date refers to the date on which the issuer must repay the principal at face value and remaining interest. The maturity date determines the term that categorizes debt securities.
Short-term securities mature in less than a year, medium-term securities mature in 1-3 years, and long-term securities mature in three years or more. The term’s length will impact the price and interest rate given to the investor, as investors demand higher returns for lengthier investments.
4. Yield-to-Maturity (YTM)
Lastly, the yield-to-maturity (YTM) measures the annual rate of return an investor is expected to earn if the debt is held to maturity. It is used to compare securities with similar maturity dates and considers the bond’s coupon payments, purchasing price, and face value.
Debt Securities vs. Equity Securities
Debt securities are fundamentally different from equities in their structure, return of capital, and legal considerations. Debt securities include a fixed term for principal repayment with an agreed schedule for interest payments. Hence, a fixed rate of return, the yield-to-maturity, can be calculated to predict an investor’s earnings.
Investors can choose to sell debt securities prior to maturity, where they may realize a capital gain or loss. Debt securities are generally regarded as holding less risk than equities.
Equity does not come with a fixed term, and there is no guarantee of dividend payments. Rather, dividends are paid at the company’s discretion and will vary depending on how the business is performing. Because there is no dividend payment schedule, equities do not offer a specified rate of return.
Investors will receive the market value of shares when sold to third parties, where they may realize a capital gain or loss on their initial investment. ⮚ Why Invest in Debt Securities?
Advantages of Investing in Debt Instruments
1. Fixed Return on capital
There are many benefits to investing in debt securities. First, investors purchase debt securities to earn a return on their capital. Debt securities, such as bonds, are designed to reward investors with interest and the repayment of capital at maturity.
The repayment of capital depends on the ability of the issuer to meet their promises – failure to do so will lead to consequences for the issuer.
2. Regular stream of income from interest payments
Interest payments associated with debt securities also provide investors with a regular stream of income throughout the year. They are guaranteed, promised payments, which can assist with the investor’s cash flow needs.
3. Means for diversification
Depending on the strategy of the investor, debt securities can also act to diversify their portfolio. In contrast to high-risk equity, investors can use such financial instruments to manage the risk of their portfolio.
They can also stagger the maturity dates of multiple debt securities ranging from short term to long term. It allows investors to tailor their portfolio to meet future needs. Various Debt Instruments Debt Instruments are of various types like Bonds, Debentures, Commercial Papers, Certificates of
Deposit, Government Securities (G secs) etc. A brief detail about some of these investment options
are given below.
Government Securities- G-Secs are issued by the Reserve Bank of India on behalf of the
Government of India. Normally the dated government securities have a period of 1 year to 30 years.
These are sovereign instruments generally bearing a fixed interest rate with interests payable
semi-annually and principle as per schedule. For shorter term, RBI issues Treasury Bills which are
discounted papers. At present T-Bills are issued for 91 days, 182 days & 364 days. G-Secs provide
risk free (credit risk) return to investors.
Corporate Bonds- Corporate Bonds are issued by public sector undertakings and private
corporations for a wide range of tenors normally upto 15 years although some corporates have also
issued perpetual bonds. Compared to government bonds, corporate bonds generally have a higher
risk of default. This risk depends, of course, upon the particular corporation issuing the bond, the
current market conditions, the industry in which it is operating and the rating of the company.
Corporate bond holders are compensated for this risk by receiving a higher yield than government
bonds.
Certificate of Deposit- CDs are negotiable money market instruments issued in demat form or as a
Usance Promissory Notes.CDs issued by banks should have a maturity of not less than seven days
and not more than one year. Financial Institutions are allowed to issue CDs for a period between 1
year and up to 3 years. CDs normally give a higher return than Bank term deposit. CDs are rated by
approved rating agencies(e.g. CARE, ICRA, CRISIL, FITCH) which considerably enhances their
tradability in secondary market. CDs are issued in denominations of Rs. 1 Lac and in the multiples of
Rs. 1 Lac thereafter.
Commercial Papers- A CP is a short term security (7 days to 365 days) issued by a corporate entity (other than a bank), at a discount to the face value. One can invest in CPs starting from a minimum
of 5 lacs (face value) and multiples thereof. CPs are rated by approved rating agencies (e.g. CARE,
ICRA, CRISIL, FITCH). CPs normally give a higher return than fixed deposits & CDs. CPs can be
traded in the secondary market, depending upon demand. An element of credit risk is attached to
