What is debt market

Debt instruments are contracts in which one party lends money to another on
pre-determined terms with regard to rate of interest to be paid by the
borrower to the lender, the periodicity of such interest payment, and the
repayment of the principal amount borrowed (either in installments or in
bullet).

Indian debt markets

Indian debt markets, in the early nineties, were characterised by controls on

pricing of assets, segmentation of markets and barriers to entry, low levels of
liquidity, limited number of players, near lack of transparency, and high
transactions cost. Financial reforms have significantly changed the Indian
debt markets for the better. Most debt instruments are now priced freely on
the markets; trading mechanisms have been altered to provide for higher
levels of transparency, higher liquidity, and lower transactions costs; new
participants have entered the markets, broad basing the types of players in
the markets; methods of security issuance, and innovation in the structure of
instruments have taken place; and there has been a significant improvement
in the dissemination of market information

Wholesale Debt Market

The Wholesale Debt Market segment deals in fixed income securities and is fast gaining ground in
an environment that has largely focussed on equities.

The Wholesale Debt Market (WDM) segment of the Exchange commenced operations on June 30,
1994. This provided the first formal screen-based trading facility for the debt market in the
country.

This segment provides trading facilities for a variety of debt instruments including Government
Securities, Treasury Bills and Bonds issued by Public Sector Undertakings/ Corporates/ Banks like
Floating Rate Bonds, Zero Coupon Bonds, Commercial Papers, Certificate of Deposits, Corporate
Debentures, State Government loans, SLR and Non-SLR Bonds issued by Financial Institutions,
Units of Mutual Funds and Securitized debt by banks, financial institutions, corporate bodies, trusts
and others.

Large investors and a high average trade value characterize this segment. Till recently, the market
was purely an informal market with most of the trades directly negotiated and struck between
various participants. The commencement of this segment by NSE has brought about transparency
and efficiency to the debt market

Retail Debt Market

With a view to encouraging wider participation of all classes of investors across the country
(including retail investors) in government securities, the Government, RBI and SEBI have
introduced trading in government securities for retail investors.

Trading in this retail debt market segment (RDM) on NSE has been introduced w.e.f. January 16,
2003. Trading shall take place in the existing Capital Market segment of the Exchange.

In the first phase, all outstanding and newly issued central government securities would be traded
in the retail segment. Other securities like state government securities, T-Bills etc. would be added
in subsequent phases
Features of debt market
1 Participant
 Central and state government

Central Governments, raising money through bond issuances, to fund

budgetary deficits and other short and long term funding requirements

 Banking sector RBI SBI other commercial banks cooperative banks

Reserve Bank of India, as investment banker to the government, raises

funds for the government through bond and t-bill issues, and also
participates in the market through open- market operations, in the course
of conduct of monetary policy. The RBI regulates the bank rates and repo
rates and uses these rates as tools of its monetary policy. Changes in
these benchmark rates directly impact debt markets and all participants in
the market

 Foreign Institutional Investors

Foreign Institutional Investors are permitted to invest in Dated

Government Securities and Treasury Bills within certain specified limits

 PF organisations

Provident funds are large investors in the bond markets, as the prudential
regulations governing the deployment of the funds they mobilise, mandate
investments pre-dominantly in treasury and PSU bonds. They are,
however, not very active traders in their portfolio, as they are not
permitted to sell their holdings, unless they have a funding requirement
that cannot be met through regular accruals and contributions

 Primary dealers

Primary dealers, who are market intermediaries appointed by the Reserve

Bank of India who underwrite and make market in government securities,
and have access to the call markets and repo markets for funds

 Others financial institutions ,local authorities , trusts, joint stocks companies, NRI

State Governments, municipalities and local bodies, which issue securities

in the debt markets to fund their developmental projects, as well as to
finance their budgetary deficits

 Mutual funds

Mutual funds have emerged as another important player in the debt

markets, owing primarily to the growing number of bond funds that have
mobilised significant amounts from the investors. Most mutual funds also
have specialised bond funds such as gilt funds and liquid funds. Mutual
funds are not permitted to borrow funds, except for very short-term
liquidity requirements. Therefore, they participate in the debt markets
pre-dominantly as investors, and trade on their portfolios quite regularly
2 Forms of government securities
Corporate bonds

Corporate bonds are debt securities issued by private and public corporations. Companies issue
corporate bonds to raise money for a variety of purposes, such as building a new plant, purchasing
equipment, or growing the business. When one buys a corporate bond, one lends money to the
"issuer," the company that issued the bond. In exchange, the company promises to return the
money, also known as "principal," on a specified maturity date. Until that date, the company usually
pays you a stated rate of interest, generally semiannually. While a corporate bond gives an IOU from
the company, it does not have an ownership interest in the issuing company, unlike when one
purchases the company's equity stock.

Corporate bonds tend to rise in value when interest rates fall, and they fall in value when interest
rates rise. Usually, the longer the maturity, the greater is the degree of price volatility. By holding
a bond until maturity, one may be less concerned about these price fluctuations (which are known
as interest-rate risk, or market risk), because one will receive the par, or face, value of the bond
at maturity. The inverse relationship between bonds and interest rates—that is, the fact that bonds
are worth less when interest rates rise and vice versa can be explained as follows :-

 When interest rates rise, new issues come to market with higher yields than older
securities, making those older ones worth less. Hence, their prices go down.

 When interest rates decline, new bond issues come to market with lower yields than older
securities, making those older, higher-yielding ones worth more. Hence, their prices go up.

 As a result, if one sells a bond before maturity, it may be worth more or less than it was
paid for.

Treasury bills

Treasury bills are short-term debt instruments issued by the Central

 government. There are 3 types of T-bills which are issued: 91-day, 182-day
 and 364-day, representing the 4 types of tenors for which these instruments
 are issued.
 Until 1988, the only kind of Treasury bill that was available was the 91-day
 bill, issued on tap; at a fixed rate of 4.5% (the rates on these bills remained
 unchanged at 4.5% since 1974!). 182-day T-bills were introduced in 1987,
 and the auction process for T-bills was started. 364 day T-bill was introduced
 in April 1992, and in July 1997, the 14-day T-bill was also introduced. RBI
 had suspended the issue of 182-day T- bills from April 1992, and revived their
 issuance since May 1999. RBI did away with 14-day and 182-day Treasury
 Bills from May 2001. It was decided in consultation with the Central
 Government to re-introduce, 182 day TBs from April 2005. All T-bills are now
 sold through an auction process according to a fixed auction calendar,
 announced by the RBI. Ad hoc treasury bills, which enabled the automatic
  monetisation of central government budget deficits, have been eliminated in
 1997. All T-bill issuances now represent market borrowings of the central
 Treasury bills (T-bills) are short-term debt instruments issued by the Central
 government. Three types of T-bills are issued: 91-day, 182-day and 364-day,
 T-bills are sold through an auction process announced by the RBI at a
 discount to its face value. RBI issues a calendar of T-bill auctions (Table 4.1) .
 It also announces the exact dates of auction, the amount to be auctioned and
 payment dates. T-bills are available for a minimum amount of Rs. 25,000 and
 in multiples of Rs. 25,000. Banks and PDs are major bidders in the T-bill
 market. Both discriminatory and uniform price auction methods are used in
 issuance of T-bills. Currently, the auctions of all T-bills are
 multiple/discriminatory price auctions, where the successful bidders have to
 pay the prices they have actually bid for. Non-competitive bids, where bidders
 need not quote the rate of yield at which they desire to buy these T-bills, are
 also allowed from provident funds and other investors. RBI allots bids to the
 non-competitive bidders at the weighted average yield arrived at on the basis

Stock certificates

In corporate law, a stock certificate (also known as certificate of stock or share certificate)
is a legal document that certifies ownership of a specific number of stock shares (or fractions
thereof) in a corporation In corporate law, a stock certificate (also known as certificate of
stock or share certificate) is a legal document that certifies ownership of a specific number
of stock shares (or fractions thereof) in a corporation. In large corporations, buying shares
does not always lead to a stock certificate (in a case of a small number of shares purchased by
a private individual, for instance).

In the United States, electronic registration is supplanting the stock certificate. Companies are
no longer required to issue paper certificates, and over 420 companies do not.[1] Brokers may
charge up to $500 for issuing a paper certificate, though this fee can be avoided by registering
shares directly with the stock transfer agent (as opposed to "street name") and having them
issue the certificate.[2]

In Sweden, share certificates have been largely abolished, people using electronic shares
instead (which are either registered in the share owner's name or in the share owner's broker's
name). Share certificates may exist in Sweden, but only if the shares are not listed on any
stock exchange in Sweden, and the availability of share certificates has nothing to do with
voting in shareholders' general meetings. Sometimes a shareholder with a stock certificate
can give a proxy to another person to allow them to vote the shares in question. Similarly, a
shareholder without a share certificate may often give a proxy to another person to allow
them to vote the shares in question. Voting rights are defined by the corporation's charter and
corporate law.
Stock certificates are generally divided into two forms: registered stock certificates and
bearer stock certificates. A registered stock certificate is normally only evidence of title, and
a record of the true holders of the shares will appear in the stockholder's register of the
corporation. A bearer stock certificate, as its name implies is a bearer instrument, and
physical possession of the certificate entitles the holder to exercise all legal rights associated
with the stock. Bearer stock certificates are becoming uncommon: they were popular in
offshore jurisdictions for their perceived confidentiality, and as a useful way to transfer
beneficial title to assets (held by the corporation) without payment of stamp duty.
International initiatives have curbed the use of bearer stock certificates in offshore
jurisdictions, and tend to be available only in onshore financial centres, although they are
rarely seen in practice.

Promissory notes

A promissory note, referred to as a note payable in accounting, or commonly as just a "note", is a

negotiable instrument, wherein one party (the maker or issuer) makes an unconditional promise in
writing to pay a sum of money to the other (the payee), either at a fixed or determinable future time
or on demand of the payee, under specific terms. They differ from IOUs in that they contain a
specific promise to pay, rather than simply acknowledging that a debt exists. In common speech,
other terms, such as "loan," "loan agreement," and "loan contract" may be used interchangeably
with "promissory note" but these terms do not have the same legal meaning. Whereas a promissory
note is evidence of a loan, it is not the loan contract, which would contain all the terms and
conditions of the loan agreement.
[
Bearer bonds

A bearer bond is a debt security issued by a business entity, such as a corporation, or by a

government. It differs from the more common types of investment securities in that it is
unregistered – no records are kept of the owner, or the transactions involving ownership. Whoever
physically holds the paper on which the bond is issued owns the instrument. This is useful for
investors who wish to retain anonymity. Recovery of the value of a bearer bond in the event of its
loss, theft, or destruction is usually impossible. Some relief is possible in the case of United States
public debt

Zero Coupon Bond

In such a bond, no coupons are paid. The bond is instead issued at a

discount to its face value, at which it will be redeemed. There are no
intermittent payments of interest. When such a bond is issued for a very long
tenor, the issue price is at a steep discount to the redemption value. Such a
zero coupon bond is also called a deep discount bond. The effective interest
earned by the buyer is the difference between the face value and the
discounted price at which the bond is bought. There are also instances of zero
coupon bonds being issued at par, and redeemed with interest at a premium.
The essential feature of this type of bonds is the absence of intermittent cash
flows
Floating Rate Bonds

Instead of a pre-determined rate at which coupons are paid, it is possible to

structure bonds, where the rate of interest is re-set periodically, based on a
benchmark rate. Such bonds whose coupon rate is not fixed, but reset with
reference to a benchmark rate, are called floating rate bonds

callable bonds

Bonds that allow the issuer to alter the tenor of a bond, by redeeming it prior
to the original maturity date, are called callable bonds. The inclusion of this
feature in the bond’s structure provides the issuer the right to fully or partially
retire the bond, and is therefore in the nature of call option on the bond.
Since these options are not separated from the original bond issue, they are
also called embedded options. A call option can be an European option,
where the issuer specifies the date on which the option could be exercised.
Alternatively, the issuer can embed an American option in the bond, providing
him the right to call the bond on or anytime before a pre-specified date
Puttable Bonds

Bonds that provide the investor with the right to seek redemption from the
issuer, prior to the maturity date, are called puttable bonds. The put options
embedded in the bond provides the investor the rights to partially or fully sell
the bonds back to the issuer, either on or before pre-specified dates. The
actual terms of the put option are stipulated in the original bond indenture

Convertible Bonds

A convertible bond provides the investor the option to convert the value of
the outstanding bond into equity of the borrowing firm, on pre-specified
terms. Exercising this option leads to redemption of the bond prior to
maturity, and its replacement with equity

The principal features of a bond are:

a) Maturity
Maturity of a bond refers to the date on which the bond
matures, or the date on which the borrower has agreed to repay (redeem)
the principal amount to the lender
b) Coupon
Coupon rate is the rate at which interest is paid, and is
usually represented as a percentage of the par value of a bond
c) Principal
Principal is the amount that has been borrowed, and is also called the par
value or face value of the bond

3 Position of RBI
 RBI occupies key position in market
 Government securities are issued through PDO(public debt office)
 RBI engages in selling and buying of government securities

4 Securities are issued by

 Central government
 State government
 Semi government organisation
 Autonomous institution
  Other government agency like IDBI,IFCI,SFCs, NAB

6 Purpose of issue
 Refunding : conversion of maturing securities
 Advance refunding :this is of securities that have not yet mature
 Cash financing