DEBT MARKETS
DEBT MARKETS
1
INTRODUCTION
What is a debt market?
• A part of the capital market
• A place where trading in Debt Instruments takes place
• Is also known as a ‘fixed income market as debt instruments pay fixed
returns
Impact of the debt market on the economy?
• Opportunity for investors to diversify their investment portfolio
• Improved transparency because of stringent disclosure norms and
auditing requirements
• Less risk compared to the equity markets. This leads to inflow of funds in
the economy
• Increased funds for implementation of government development plans.
The government can raise funds at lower costs by issuing government
securities
DEBT MARKETS
2
THE STRUCTURE OF INDIAN DEBT MARKET
DEBT MARKETS
3
Platform’s For Debt Market
Primary Debt
Market
Secondary Debt
Market
• Trading Platform
• Issuer’s
• Clearing and Settlement
Mechanism
• Instruments
• Investors
• Instrument’s
• Rating agencies
DEBT MARKETS
• Investor’s
4
REGULATION’S FOR DEBT MARKET
 SARFAESI Act,2002
 Securities and Exchange Board of India,1992.
 Companies Act, 1956
 Securities Contracts (Regulation) Act, 1956
 Depositories Act, 1996
 Fixed-Income and Money Market Dealers’ Association
DEBT MARKETS
5
MARKET PARTICIPANTS IN THE DEBT MARKET

Central Governments

Reserve Bank of India

Primary Dealers

State Governments

Public Sector Units

Corporate treasuries

Public Sector Financial Institutions

Banks

Foreign Institutional Investors

Charitable Institutions, Trusts and Societies
DEBT MARKETS
6
DEBT INSTRUMENTS
DEBT MARKETS
7
DEBT INSTRUMENTS
LONG TERM INSTRUMENTS
•
•
•
•
•
•
•
Government of India dated
securities (GOISECs)
Inflation linked bonds
Zero coupon bonds
State government securities
(state loans)
Public Sector Undertaking Bonds
(PSU Bonds)
Corporate debentures
Bonds of Public Financial
Institutions (PFIs)
DEBT MARKETS
SHORT TERM INSTRUMENTS
•
•
•
•
•
Treasury Bills
Fixed deposit
Certificates of Deposits
Commercial Paper
Bills Rediscounting schemes
8
TREASURY BILLS
• Promissory notes of the central government and therefore qualify as being
free of credit risks
• Issued to meet short term funding requirements of the government account
with Reserve Bank
• Sale is by auction. Any individual, corporate, bank, primary dealer or other
entity is free to buy T-Bill
• Denominations of 91, 182 and 364 days
CERTIFICATE OF DEPOSIT (CD)
• Similar to CPs except that the issuer is a bank
• Minimum amount of a CD can be Rs. 1 lakh and maturity between 7 days
and 1 year
• Financial Institutions can issue CDs only for maturities between 1 and 3
years
• No premature cancellation of CD is allowed
DEBT MARKETS
9
COMMERCIAL PAPER (CP)
•
•
•
•
•
Promissory notes issued by the corporate sector for raising short term funds
Sold at a discount to face value
Maturity can range between a minimum of 7 days and a maximum of 1 year
CPs are required to be rated and the minimum rating eligibility is P2
Every CP issue has an Issuing and Paying Agent (IPA), which has to be a
scheduled bank
• Stamp duty is currently payable on CP issues, depending on the maturity
and who the initial buyer is
BILLS REDISCOUNTING SCHEME
• The RBI introduced the Bills Market Scheme (BMS) in 1952 which was later
modified into the New Bills Market Scheme (NBMS)
• Under this scheme commercial banks can rediscount the bills which were
originally discounted by them with approved institutions (viz., Commercial
Banks, Development Financial Institutions, Mutual Funds, Primary Dealers
etc.)
DEBT MARKETS
10
GOVERNMENT OF INDIA DATED SECURITIES
(GOISECS)
 GOISECs are issued by the Reserve Bank of India on behalf of the
Government of India. These form a part of the borrowing program approved
by Parliament in the Finance Bill each year (Union Budget)
 They have maturity ranging from 1 year to 30 years
 GOISECs are issued through the auction route. The RBI pre specifies an
approximate amount of dated securities that it intends to issue through the
year
INFLATION LINKED BONDS
 These are bonds for which the coupon payment in a particular period is
linked to the inflation rate at that time - the base coupon rate is fixed with the
inflation rate. Investors are often loath to invest in longer dated securities
due to uncertainty of future interest rates. The idea behind these bonds is to
make them attractive to investors by removing the uncertainty of future
inflation rates, thereby maintaining the real value of their invested capital.
DEBT MARKETS
11
ZERO COUPON BONDS
 These are bonds for which there is no coupon payment. They are issued at a
discount to face value with the discount providing the implicit interest payment.
STATE GOVERNMENT SECURITIES (STATE LOANS)
 These are issued by the respective state governments but the RBI coordinates
the actual process of selling these securities. Each state is allowed to issue
securities up to a certain limit each year. State Government issue such
securities to fund their developmental projects and finance their budgetary
defictis
BONDS OF PUBLIC FINANCIAL INSTITUTIONS (PFIS)
 Apart from public sector undertakings, Financial Institutions are also
allowed to issue bonds, that too in much higher quantum.
DEBT MARKETS
12
PUBLIC SECTOR UNDERTAKING BONDS (PSU
BONDS)
 These are long term debt instruments issued by Public Sector Undertakings
(PSUs). Typically, they have maturities ranging between 5-10 years and they
are issued in denominations (face value) of Rs.1,000 each
 Most of these issues are made on a private placement basis to a targeted
investor base at market determined interest rates.
CORPORATE DEBENTURES
 These are long term debt instruments issued by private sector companies.
 These are issued in denominations as low as Rs.1,000 and have maturities
ranging between one and ten years.
 A key feature that distinguishes debentures from bonds is the stamp duty
payment. Debenture stamp duty is a state subject and the quantum of
incidence varies from state to state. Transfer stamp duty remains high in many
states and is probably the biggest deterrent for trading in debentures resulting in
lack of liquidity.
DEBT MARKETS
13
BOND BASICS & VALUATION OF BONDS
Bonds represent loans by investors to a company.
BOND TERMINOLOGY
 Coupon
 Coupon rate
 Face (par) value
 Maturity date
 Yield
 YTM
DEBT MARKETS
14
PROCESS FOR ISSUING
BONDS
 Company sets the maturity date and face value of the
bonds
 Investment bankers set the coupon rate for the bonds
 Investment bankers find investors for the bonds and
issue them in the primary market.
 Government Securities : Uniform price Based or Dutch Auction
 Multiple/variable Price Based or French Auction
 The bonds become available in the secondary market.
 NDS – OM and WDM
DEBT MARKETS
15
Example
 What is the present value of a bond with a two-year
maturity date, a face value of Rs.1,000, and a coupon
rate of 6%? The current prevailing rate for similar
issues is 5%.
Inverse relationship :As interest rates fall, bond prices rise
As interest rates rise, bond prices fall
DEBT MARKETS
16
Relationship between
prices & yield
Bond
Prices
Yields
Example
Bond
Prices
Yields
YTM
= 10%
YTM
= 12%
Coupon
= 10%
Coupon
= 10%
Bond price
= Rs100
Bond price
= Rs 83
Flat yield
= 10%
Flat yield
= 12%
-----------------------------------------------------------------YTM 
= 12%
YTM 
= 10%
Bond price
= Rs83
Bond price
= Rs100
Flat yield
= 12 %
Flat yield
= 10 %
Price Interest rate relationship
Par
• Coupon rate = Yield to maturity
Discount
• Coupon rate < Yield to maturity
Premium
• Coupon rate > Yield to maturity
Credit Spread
DEBT MARKETS
19
RISK ASSOCIATED WITH BONDS
• Interest rate risk
• Credit risk
• Reinvestment risk
• Sovereign risk
• Inflation risk
DEBT MARKETS
20
ADVANTAGES OF DEBT MARKET
 Assured returns
 High liquidity
 Credit rating agencies
 Flexibility of capital structure
 Tax deductible
DISADVANTAGES OF DEBT MARKET
 Less returns when compared
to Equity market
 Not well developed in India.
 Exposed to interest rate risk.
 Less liquidity in many issues.
IMPACT ON THE ECONOMY
 Opportunity for investors to
diversify their investment portfolio.
 Higher liquidity and control over
credit.
 Less risk compared to the equity
markets
 Government can raise funds at lower
costs by issuing government
securities.
DEBT VS EQUITY
 Equity :
 Time and amount of repayment is uncertain and not fixed.
 Repayment is also dependent on the performance of the
company.
 Returns are higher but also the risk for the investor is
higher.
 DEBT :
 Time and amount of repayment is fixed beforehand.
 Repayment is not dependent on performance.
 Risk is low and so is the returns.
GLOBAL SCENARIO.....
 At present, the size of the international bond market is
about $45 trillion
 Chinese Bond Market at a growing stage with a
turnover of about $40 billion
 USA, Britain and Euro zone are the leaders
FUTURE ESTIMATION OF INDIAN
DEBT MARKET
 Four-fold increase in the size of India’s overall bond
market, from about $400bn today, or around 45% of
GDP, to about $1.5 trillion by 2016 in current Dollars,
i.e. 55% of GDP at that time.
 If India were to proceed more aggressively on financial
liberalisation, the size of the debt market would grow
even faster
ISSUES AND RECOMMENDATIONS
 Issues :
 Lack of sufficient investor base in
terms of quantity as well as diversity.
 Lack of awareness among investors.
 Recommendations:
 Developing bond managers.
 By enlarging number of investors.
 Increasing awareness among the investors.
THANK YOU
DEBT MARKETS
28