Debt Market and Instruments
* D.Chandra priya.
* D.Chandra priya, Assistant professor, Department of commerce, PSG College of arts and
science, Coimbatore. E-mail: cppsgcas@gmail.com.
MOBILE: 94875 30177
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Debt Market and Instruments
* D.Chandra priya.
ABSTRACT
A debt market is an element of the capital market. As the name suggests, a capital market
is where trading in financial instruments is conducted to lift capital. Contrary to an equity
market, debt instruments similar to debentures and bonds are traded in debt markets. A debt
market is also known as a ‘fixed income market’ as debt instruments shell out fixed returns. Also,
the risk factor is considerably lower, particularly for government securities. The benefit
of holding debt instruments is that the investor enjoys high liquidity.
These are the various information about the debt market and its instruments .The most
active part of the money market is the call money market (i.e. market for overnight and term money
between banks and institutions) and the market for repo transactions. The former is in the form of loans
and the latter are sale and buyback agreements - both are obviously not traded. The main traded
instruments are Commercial Papers (CPs), Certificates of Deposit (CDs) and Treasury Bills (T-Bills).
* D.Chandra priya, Assistant professor, Department of commerce, PSG College of arts and
science, Coimbatore. E-mail: cppsgcas@gmail.com
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Debt Market and Instruments
Introduction
A debt market is an element of the capital market. As the name suggests, a capital market
is where trading in financial instruments is conducted to lift capital. Contrary to an equity
market, debt instruments similar to debentures and bonds are traded in debt markets. A debt
market is also known as a ‘fixed income market’ as debt instruments shell out fixed returns.
Also, the risk factor is considerably lower, particularly for government securities. The benefit
of holding debt instruments is that the investor enjoys high liquidity.
The Asian financial crisis in the 1990s frazzled the importance of a fully active debt
market; the lack of which aggravated the crisis. As in the 1980s, the bond market of the United
States of America countered the shortcoming of banking system in relation to the real estate
cycle. In most of the Asian countries, though both equity and debt market exist, the equity
markets have stretched at a much faster speed than the debt market. Debt markets are now
considered a different route for financing to banking channels.
The Debt Market is the marketplace where rigid income securities of various types and
features are issued and traded. Debt Markets are therefore, markets for fixed revenue 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.
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Benefits of an efficient Debt Market to the financial system and the economy
• Reduction in the borrowing cost of the Government and facilitate mobilization of resources
at a reasonable cost.
• Provide greater funding avenues to public-sector and private sector projects and reduce the
pressure on institutional financing.
• Enhanced mobilization of resources by unlocking illiquid retail investments like gold
• Development of heterogeneity of market participants
• Assist in the development of a reliable yield curve.
Importance of the Debt Market to the economy
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.
Advantages
The biggest advantage of investing in Indian debt market is its assured returns. The
returns that the market offer is almost risk-free (though there is always certain amount of risks,
however the trend says that return is almost assured). Safer are the government securities. On the
other hand, there are certain amounts of risks in the corporate, FI and PSU debt instruments.
However, investors can take help from the credit rating agencies which rate those debt
instruments. The interest in the instruments may vary depending upon the ratings.
Another advantage of investing in India debt market is its high liquidity. Banks offer easy loans
to the investors against government securities.
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Disadvantages
Even though there are several advantages of investing in India debt market, there are
certain disadvantages as well. As the returns here are risk free, those are not as high as the
equities market at the same time. So, at one hand you are getting assured returns, but on the other
hand, investor will get less return at the same time. Retail participation is also very less here,
though increased recently. There are also some issues of liquidity and price discovery as the
retail debt market is not yet quite well developed.
Debt Market Instruments
There are various types of debt instruments available that one can find in Indian debt market
The Money Market trades in the following Debt Market Instruments:
Government of India Securities
Treasury Bills
Commercial Papers
Corporate bonds
Certificate of deposits
Government of India Securities:
It consists of central and state government securities. It means that, loans are being
taken by the central and state government. It is also the most dominant category in the India debt
market. It is the Reserve Bank of India that issues Government Securities or G-Secs on behalf of
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the Government of India. These securities have a maturity period of 1 to 30 years. G-Secs offer
fixed interest rate, where interests are payable semi-annually. For shorter term, there are
Treasury Bills or T-Bills, which are issued by the RBI for 91 days, 182 days and 364 days.
These are sovereign (credit risk-free) coupon bearing instruments which are issued by the
Government of India.
The main features of these bonds are:
These securities have a fixed coupon that is paid on specific dates on half-yearly basis.
Securities are available in wide range of maturity dates, from short dated (less than one year)
to long date (up to twenty years).
Securities are available in primary and secondary market.
High liquidity-securities can be sold in the secondary market at prevailing rates.
Available in physical form or in demat -maintained in Constituents Subsidiary General
Ledger (CSGL) a/c with any bank.
Securities held in CSGL a/c will have the convenience of automatic credit of half yearly
interest and the redemption proceeds on due date.
Reasonably good returns.
Treasury bill
It is a discounted instrument issued by the Central Government
The main features of Treasury Bills are:
Sovereign zero risk instruments.
Treasury Bills: Short term, discounted Instruments with a maximum tenor of 364 days.
Available in primary and secondary market.
Issued at a discount to face value i.e., investors will buy the T-bill at discount to face value of
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Rs.100 and on maturity the face value of Rs.100 is received by the investor.
No Tax Deduction at Source (TDS)
Convenience of CSGL a/c as in case of Central Govt. securities such as automatic credit of
redemption money.
Highly liquid.
Attractive returns.
Commercial Papers
It represents short term unsecured promissory notes issued by top rated corporate,
primary dealers (PDs), satellite dealers (SDs) and the all-India financial institutions (FIs).
There are short term securities with maturity of 7 to 365 days. CPs is issued by corporate entities
at a discount to face value.
The main features of these papers are:
Corporate having tangible net worth of not less than Rs.4 crore and whose borrowal account
is classified as Standard Asset by the financing bank/s, are eligible to issue CPs
All CPs require credit rating from a credit rating agency. Highest rating is P1+ and lowest is
P-2 by CRISIL.
CP can be issued for a minimum period of 15 days and a maximum up to one year.
Minimum amount invested by single investor is Rs.five lacs or multiple thereof.
CPs is issued at a discount to face value.
Issued in demat form. (Compulsory demat from July '01).
Attractive returns.
Corporate Bonds
It consists of Financial Institutions bonds, corporate bonds and debentures and Public
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Sector Units bonds. These bonds are issued to meet financial requirements at a fixed cost and
hence remove uncertainty in financial costs. These bonds come from PSUs and private
corporations and are offered for an extensive range of tenures up to 15 years. There are also
some perpetual bonds. Comparing to G-Secs, corporate bonds carry higher risks, which depend
upon the corporation, the industry where the corporation is currently operating, the current
market conditions, and the rating of the corporation. However, these bonds also give higher retur
ns than the G-Secs.
Certificate of Deposit
These are negotiable money market instruments. There are several institutions that
can issue CDs. Banks can offer CDs which have maturity between 7 days and 1 year. CDs from
financial institutions have maturity between 1 and 3 years. There are some agencies like ICRA,
FITCH, CARE, CRISIL etc. that offer ratings of CDs. CDs are available in the denominations of
`1 Lac and in multiple of that.
Conclusion
These are the various information about the debt market and its instruments .The most
active part of the money market is the call money market (i.e. market for overnight and term money
between banks and institutions) and the market for repo transactions. The former is in the form of loans
and the latter are sale and buyback agreements - both are obviously not traded. The main traded
instruments are Commercial Papers (CPs), Certificates of Deposit (CDs) and Treasury Bills (T-Bills).
BIBILIOGRAPHY
http://www.nyse.com/pdfs/Fact_sheet_debt_markets.pdf
http://sawaal.ibibo.com/personal-finance-and-tax/what-debt-markets-debt-market-instruments-427115.html
http://business.mapsofindia.com/india-market/debt.html
Debt Market Transactions:
Legal and Regulatory Issues
By Rajendra P. Chitale.
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