AGENDAAGENDAIntroduction of Debt MarketParticipants and products of debt market

Few terms in Debt MarketTypes of BondsRepo and Reverse RepoDuration in Bond MarketRelation between YTM and Bond Price

Introduction To Debt Market

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

togethero Total size of Indian debt market is in the

range of $92 billion to $100 billion i.e. approximately 30% of Indian GDP.

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o Debt market consists of three segments – Government security market – Public sector undertaking bond

market(PSU) – Corporate security marketo Govt. securities market accounts for

more than 90% of the total turnover

Few terms in Debt Few terms in Debt MarketMarketo Maturityo Coupon rateo Principleo Yield to Maturity (YTM)o Current yield

Debt Instruments & Debt Instruments & FeaturesFeatures

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Contract between lender and the borrower Bonds Debentures

Features Maturity Coupon Principal

ModifyingModifying

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Coupon Zero Coupon Bond Treasury Strips Floating Rate Bond Others

Cont.Cont.

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Term to Maturity Callable Bonds Puttable Bonds Convertible Bonds

Principal Repayment Amortizing Bonds Bonds with sinking fund Provisions

Indian Debt MarketIndian Debt Market

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Market SegmentsGovernment SecuritiesPSU BondsCorporate Securities

ParticipantsGovernment, RBI, PDs, PSUs, FI s,

Corporates, Banks, Mutual funds, FII s, Provident Funds, Trusts.

Secondary MarketNSE- WDM only formal trading platform

(NEAT)

Indian Debt MarketIndian Debt Market

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IssuerIssuer InstrumeInstrumentnt

MaturitMaturityy

InvestorsInvestors

Central Central GovernmentGovernment

Dated Dated SecuritiesSecurities

2-20 Years2-20 Years RBI,Banks,Insurance Co., RBI,Banks,Insurance Co., PFs, MFs, PDs,PFs, MFs, PDs,

Central Central GovernmentGovernment

T-BillsT-Bills 91/364 91/364 daysdays

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

State State GovernmentGovernment

Dated Dated SecuritiesSecurities

5-10 Years5-10 Years Banks,Insurance Co.,PFs.Banks,Insurance Co.,PFs.

PSUsPSUs BondsBonds 5-10 Years5-10 Years Banks,Insurance Co., PFs, Banks,Insurance Co., PFs, MFs, PDs,Individuals, MFs, PDs,Individuals, CorporatesCorporates

CorporatesCorporates DebenturesDebentures 1-12 Years1-12 Years Banks, Mutual Funds, Banks, Mutual Funds, Corporates,IndividualsCorporates,Individuals

Corporates,Corporates,

PDsPDsCommercial Commercial paperpaper

3 months 3 months to 1 Yearto 1 Year

Banks, Mutual Funds, FI s, Banks, Mutual Funds, FI s, Corporates,IndividualsCorporates,Individuals

BanksBanks Certificates of Certificates of DepositDeposit

3 months 3 months to 1 Yearto 1 Year

Banks, CorporatesBanks, Corporates

Central Government Central Government Securities: BondsSecurities: Bonds

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Primary Issuance Process – Auction basedEnable Higher Auction VolumesBroadening participationEnsuring efficiency

Types of AuctionsDiscriminatory / Uniform Price Auction

Yield / Price Based Auction Participants

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

Cont..Cont..

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Primary DealersIntroduced in 1995 and at present 19

Act as underwriters and market makers

To Strengthen InfrastructureTo divest responsibilities of RBITo facilitate Open Market Operations

Eligibility

Cont.Cont.

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Satellite DealersSecond Tier in Trading and Distribution

Provide a retail outlet

T - BillsT - Bills

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Short Term borrowingIssued at discount91 / 364 Days T – BillsAbolition of Ad Hoc T-BillsIssuance Process through Auction

Banks and PDsNon Competitive BidsCalendar

91 days Weekly 250 Cr. Wednesday Thursday364 days Fortnightly 750 Cr. Wednesday Thursday

Usually held till maturity5.5% of total secondary market

T-BillsT-Bills

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Cut off YieldsYield 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)

State Government BondsState Government Bonds

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Represent market borrowimg to finance GFDCurrenrly at 13% of GFDAverages about 12000 Cr.84000 Cr. OutstandingManaged by RBI, States upto 35%Coupon fixed at 25 bps above Central

Government securitiesPDs allowed to particiapteSBI owns the largest chunkLow risk weight of 20%State Government Guaranteed Bonds

Call Money MarketsCall Money Markets

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Short Term funds ranging from overnight funds to 14 days

Banks and PDs allowed to borrow/lendUTI, FI s, MF s, Corporates allowed to lendIs around 32% of reserve requirementsCall Rates

Deposit mobilization of Banks, capital flows,CRR on supply side

Tax outflows, Government borrowing,Credit Off Take

Corporate Debt: BondsCorporate Debt: Bonds

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Bonds issued by PSU, FI, and CorporatesPSU bonds can be taxable or taxfreeIssue Process

Authority for the issueAppointment of Debenture TrusteesOffer DocumentCreation of DRR AccountCreation of chargeCredit ratingListing Criteria on NSE WDMForm of Holding

Corporate Debt: BondsCorporate Debt: Bonds

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Issue management & Book buildingManaged 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

Corporate Debt: BondsCorporate Debt: Bonds

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Terms of debenture IssueFace ValuePriceCredit ratingDeemed date of allotmentApplicable interest rateInterest on application moneyInterest paymentRedemptionPut/call optionLetter of Allotment and Debenture CertificateSecurity

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Current Yield Current Yield =

Capital GainsCapital Gains yieldyield =

= YTMYTM = +

Annual coupon pyt.Current price

Change in priceBeginning price

Exp. TotalExp. TotalReturnReturn

Exp. Curr. Yld.

Exp. Cap.gains yld.

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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 =

= 0.1015 = 10.15%.

Rs.90 Rs.887

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Yield to Maturity

The yield-to-maturity (YTM) is the measure of a bond’s rate of return that considers both the interest income and any capital gain or loss.

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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:

10.91 K YTM d

10d

10d

1d

nd

nn

d1

d0

)k(1

1,000

)k(1

90 ...

)k(1

90 Rs.887

)k(1

B

)k(1

INT ...

)k(1

INT B

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YTM = Current yield + Capital Gains yield.

Cap Gains yield = YTM - Current yield

= 10.91% - 10.15% = 0.76%.

Coupon Rate, YTM, MP, and Par Value

If MP = Par(Red.) Value, then YTM = Coupon RateIf MP > Par (Red.) Value, then YTM < Coupon RateIf MP < Par (Red.) Value, then YTM > Coupon Rate

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