dissertation on debt securities market in india

7/26/2019 Dissertation on Debt securities market in india

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A comprehensive analysis of debt securities market in India

A Study Report in partial fulfilment of the requirements for the award of

Masters Degree in Business Administration (MBA)

Of

Amity University

By

Name: Abhishek Soni

(Registration No: A30301913020)

Under the Gidan!e of

Prof. Tanushree Sodhani

Assistant "rofessor

(#nterna$ Gide)

Amity Global Business School

%3&2' oramanga$a 3rd

B$o!'

*osr +ain Road'

Banga$ore , -.003/

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A comprehensive analysis of debt securities market in India

A Study Report in partial fulfilment of the requirements for the award of

Masters Degree in Business Administration (MBA)

Of

Amity University

By

Name: Abhishek Soni

(Registration No: A30301913020)

Under the Gidan!e of

Prof. Tanushree Sodhani

Assistant "rofessor

(#nterna$ Gide)

Amity Global Business School

%3&2' oramanga$a 3rd

B$o!'

*osr +ain Road'

Banga$ore , -.003/

2


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Certifcate

This is to certiy that

dissertation report entitled

A study o A comprehensive

analysis o debt securities market

in India submitted by Mr Abhishek

Soni (nrol no A!"!"#$#!"%" In

partial ulflment o &raduation

re'uirements at Amity lobal

)usiness School* under my

&uidance+

,ro+ Tanushree Sodhani

,ro+ -a&maniA)S )an&alore

.ean* A)S )an&alore

.ate/

3


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,lace/ )an&alore

!"#A$ATI%N

# herey de!$are that the Organiationa$ tdy entit$ed &A comprehensive analysis of debtsecurities market in India'mitted y me in artia$ f$fi$ment for the a4ard of+aster5s 6egree in Bsiness Administration of Amity University is genine and origina$4or 7 resear!h !arried ot y me8

Amity G$oa$ Bsiness !hoo$

Banga$ore8

6ate: Name Ahishe oni

A30301913020

4


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A"(N%)#!G!*!NT

Behind every s!!ess' there is a driving for!e that motivates and insires8 # fee$ $essed 4hen

# say that # had not one t many sor!es of insiration8 # 4ant to tae this oortnity to

than ea!h one of them in this se!tion of the roe!t8

irst and foremost # 4o$d $ie to ay my hm$e gratitde to Prof. N. Na+amani' 4ho has

een a tea!her' mentor and gide to me throghot my se!ond year in !o$$ege8 # 4as fortnate

to stdy nder her and got to $earn immense$y8 he e$ieved in me and e;e!ted nothing t

the est from me8 he is resonsi$e for the $eve$ of


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Name: Abhishek Soni

A,-,-/,-0-

ABST$A"T

>he det maret is one of the most !riti!a$ !omonents of the finan!ia$ system of any

e!onomy and a!ts as a $everage too$ in a finan!ia$ system8 >he det maret !omrises of

t4o segments: government se!rities maret and !ororate det maret8 #ndian det

maret is dominated y government se!rities as !omared to !ororate det se!rities8

#ndian !ororate onds maret is very nderdeve$oed and i$$ihis aer resents an overvie4 of the !ororate det maret in

#ndia8 #t is !on!$ded that #ndian !ororate det maret has sho4n gro4th trend in rimary

maret and se!ondary maret as 4e$$8 >here are a $ot of !ha$$enges avai$a$e in the maret

4hi!h are maor osta!$es in the deve$oment of the maret $ie $a! of informationamong the investors' high stam dty !harges' $a! of innovative det instrments et!8

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Table o Content

S.No Title Page No.1 Executive Summary 8

2 Introduction 1!16

3 "iterature #evie$ 1%!1&

4#e'earc( )et(odology and *+,ective o-

'tudy 2!21

5 i'tory 22!26

6 Ty/e' o- +ond' in India 31!31

% Trading Procedure 32!36

8 *+,ective' o- Inve'tor and i''uer 3%!38

& Sen'itivity o- +ond' 3&!41 Pricing Strategy o- +ond' 41!45

11 #i'0 46!53

12Indian +ond mar0et 'tri0ing a c(ord $it(

'ian /eer'54!61

13om/ari'on o- +ond o- India and re't o- t(e

$orld62!68

14I''ue' and c(allenge' $it( t(e develo/ment

o- +ond mar0et in India 6&!%

15 Im/act o- +ond mar0et in an economy %1!%3

16 ond mar0et v' Euity mar0et %4!%6

1% ond' v' lternative inve'tment' %%!8

18Selection o- 7xed income +earing 'ecuritie'

mutual -und' 81!82

1& ene7t' and ri'0' a''ociated $it( +ond' 83!85

2//lication o- erivative in'trument' on

+ond' 86!8%

21

)acro!economic varia+le' a9ecting in t(e

value o- +ond in India88!&3

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22 #ecommendation and onclu'ion &4!&6

23 i+liogra/(y &%!&8

!1ecutive summary

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A 4e$$?deve$oed !aita$ maret !onsists of e


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Introduction

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Introduction:

6et maret refers to the finan!ia$ maret 4here investors y and se$$ det se!rities'

most$y in the form of onds8 >hese marets are imortant sor!e of fnds' ese!ia$$y in adeve$oing e!onomy $ie #ndia8 #ndia det maret is one of the $argest in Asia8 Die a$$ other!ontries' det maret in #ndia is a$so !onsidered a sef$ sstitte to aning !hanne$s forfinan!e8

A 4e$$?deve$oed !aita$ maret !onsists of oth the ehe det maret is m!h more o$ar than the ehis has een de to the

dominan!e of the government se!rities in the det maret and !ororates5 deenden!y on

ans and finan!ia$ instittions5 $oan for their det fnding ne!essities8 >his has not on$y

!entra$ied the !redit riss 4ithin the aning system t has a$so do4n!ast the most

!omanies from a!!essing det marets8 >he re!ent g$oa$ !redit !risis and the retrning

investor interest in ehe government isses the fi;ed in!ome instrments'

no4n as government se!rities (G?e!)' to finan!e its fis!a$ defi!it 4ith the he$ of the

Reserve Ban of #ndia8 >he !ororate det maret (a$so no4n as non?G?se! maret)

!onsists of finan!ia$ instittions (#s) onds' $i! se!tor nits ("U) onds and

!ororate onds7 deentres8 +aret for government onds has gro4n over the years

de to rising government orro4ings and !ontinos reg$atory reforms8 >he !ororate

det maret has a$so e;anded in sie t its deve$oment has not een as remara$e as

government onds8

>he most distingishing featre of the det instrments of #ndian det maret is that theretrn is fi;ed8 >his means' retrns are a$most ris?free8 >his fi;ed retrn on the ond is often

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termed as the E!oon rateE or the Einterest rateE8 >herefore' the yer (of ond) is giving these$$er a $oan at a fi;ed interest rate' 4hi!h ehe ond is negotia$e' i8e8 the o4nershi of the instrment !an e transferred in these!ondary maret8 >his means that on!e the transfer agents at the an meda$$ion stam the

ond' it is high$y $ihs a ond is a form of $oan or #OU: the ho$der of the ond is the $ender (!reditor)' theisser of the ond is the orro4er (detor)' and the !oon is the interest8 Bonds rovide the

orro4er 4ith e;terna$ fnds to finan!e $ong?term investments' or' in the !ase of governmentonds' to finan!e !rrent e;enditre8 ertifi!ates of deosit (6s) or short term !ommer!ia$aer are !onsidered to e money maret instrments and not onds: the main differen!e is inthe $ength of the term of the instrment8

Indian ebt *arket 2 Pillars of the Indian !conomy

>he 6et +aret $ays a very !riti!a$ ro$e for any gro4ing e!onomy 4hi!h needs to em$oy a $arge

amont of !aita$ and resor!es for a!hieving the desired indstria$ and finan!ia$ gro4th8 >he #ndian

e!onomy 4hi!h has gro4n at more than &F 8a8 in the $ast de!ade and is on the tae off stage for

do$e digit gro4th 4o$d have to meet its resor!es rehe #ndian det marets 4ith an otstanding isse sie of Government se!rities (entra$ and state)

!$ose to Rs8 19'&/'/.& !rores (U6 /2183- i$$ion) and a se!ondary maret trnover of arond Rs8 30

$ah !rores (U6 ./0820 i$$ion) for the year 2009 is the $argest segment of the #ndian finan!ia$

marets8 or!e Reserve Ban of #ndia (RB#) H $earing ororation of #ndia Dimited (#D)I8

>he Government e!rities maret !a$$ed EG?e!E maret is the o$dest and the $argest !omonent of

the #ndian det maret in terms of maret !aita$iation' otstanding se!rities and trading vo$mes8

>he G?e!s maret $ays a vita$ ro$e in the #ndian e!onomy as it rovides the en!hmar for

determining the $eve$ of interest rates in the !ontry throgh the yie$ds on the government se!rities

4hi!h are referred to as the ris?free rate of retrn in any e!onomy8

Besides G?e! maret' there is an a!tive maret for !ororate det aers in #ndia 4hi!h trade in short

term instrments s!h as !ommer!ia$ aers and !ertifi!ate of deosits issed y Bans and $ong term

instrments s!h as deentres' onds' ero !oon onds' ste onds et!8 >he otstanding isse

sie of $isted !ororate det aer 4as Rs8 282 $ah !rores in 2009 (U6 /.89- i$$ion)8

*arket structure of Indian "orporate ebt *arket

igre gives a ird5s eye vie4 of the #ndian det maret str!tre8 >he !ororate det maret is

divided into t4o arts: rimary !ororate det maret and se!ondary !ororate det maret8

3 Primary "orporate ebt *arket

>his maret refers to the $a!e 4here the fnds are raised throgh different se!rities for

the first time8 #n ta$e 1' it !an e seen the he ta$e sho4s that rimary det maret of #ndia is strong$ydominated y the government det se!rities8 Aro;imate$y &-F area of the maret is

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!overed y this maret8 A$thogh the amont raised y the !ororates in!reased from Rs

-'1.- !rores to Rs8 201'.&. !rores dring the mentioned eriod t its maret !overage

remained aro;imate$y the same8

>he !onstitents of rimary maret are issers' instrments' ro!esses' investors' rating

agen!ies and reg$ators8 6es!rition of ea!h of them is fo$$o4ing:

i3 Issuers: Thereare a variety of issers avai$a$e in the rimary maret8 igre 1 dei!ts

the detai$ on varios !$asses of issers8 >he issers are road$y !$assified in t4o segments:

the $i! se!tor issers and the rivate se!tor issers8 >hey in!$des government agen!ies

and state odies' $i! se!tor ndertaings 4hether they are nions or government

odies' rivate se!tor !ororates' finan!ia$ instittions' ans et!8

ii) #nstrments:igre 1 rovides names of some of the more o$ar instrments that

have een issed8 >i$$ re!ent$y #ndian det maret 4as redominant$y dominated y

government onds8 Over a eriod of time' many other instrments have een issed8>hey in!$de art$y !onverti$e deentres ("6s)' f$$y !onverti$e deentres(6s)'

dee dis!ont onds (66Bs)' ero !oon onds (JBs)' onds 4ith 4arrants' f$oating

rate notes (RNs) 7 onds and se!red remim notes ("Ns)8 >he !oon rates most$y

deend on tenre and !redit rating of se!rities8 *o4ever' thesemay not e rigoros$y

interre$ated in a$$ !ases8 >he matrities of onds genera$$y vary from one year to ten years8

>he matrity eriod of se!rities' y and $arge' deends on ot$oo on interest rates8 #n

e;e!tation of fa$$ing interest rates environment' it isoserved that !ororates most$y go

to shorter term instrments 4hi$e the oosite is tre in !ase of ossi$e hie in interest

rates of se!rities8

igre: 1 tr!tre of det maret in #ndia

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iii0 ,rocess/>he ne4 det se!rities are issed either throgh $i! rose!ts' right isses or rivate $a!ement8

#n #ndia' $i! isse and rivate $a!ement rotes are more o$ar8 "rivate $a!ement is the oosite

of a $i! isse8 #t does not go for $i! offering for the se!rities t throgh a rivate offering8 #t

does not rehey invo$ve roers' s roers' !stodians' share transfer

agents' mer!hant aners et!8 Broers and mer!hant aners are t4o maor intermediaries 4ho are

rehere are varios !redit rating agen!ies avai$a$e

and registered 4ith CB# $ie R##D (19)' #RA (1991)' ARC (1993)' it!h #ndia (199.) and

Bri!4ors (200)8 #t is mandatory for every $isted !omany to have its se!rity5s !redit rating

from a re!ognied !redit rating agen!y registered 4ith CB# efore going for ne4 isse of the

se!rity8

03 Secondary "orporate ebt *arket:

e!ondary maret is the maret 4here the e;isting se!rities are reso$d or traded8 An a!tive

se!ondary maret is vita$ for trading' !$earing and sett$ement of the se!rities8

:ra/( 1 *ut'tanding or/orate ond' a' /ercentage o- :P

A !omarative ana$ysis of a$$ emerging e!onomies (>a$e 1) !onfirms that most of the

emerging e!onomies have a !ororate ond maret8 rther' aart from an $oans' themost o$ar ones in!$de art$y !onverti$e deentres ("6s)' f$$y !onverti$e

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deentres (6s)' dee dis!ont onds (66Bs)' ero !oon onds (JBs)' onds 4ith

4arrants' f$oating rate notes (RNs) 7 onds and se!red remim notes ("Ns)8 Of these

instrments' fi;ed rate onds emerge as the dominant otion 4ith ma;imm vo$me

transa!ted8 *o4ever' other se!rities are a$so avai$a$e a$eit the vo$mes are m!h $o4er

(>a$e 3)8

Table : Government and "orporate Bonds as percenta+e of GP *arch 0-,

ebt as 4 of GP Government "orporate Total

"eo$e5s Re$i! of hina 3381 1380 /.8

2

*ong ong 3&8 318/ .98

2

#ndonesia 118/ 283 138

&

Re$i! of orea /8& &&8- 12.82

+a$aysia .28/ /381 10-8-

"hi$iines 3282 /89 3&81

ingaore -381 3&80 908

1

>hai$and -8. 1-89 &/8

/

=ietnam 198 08& 208

-

#ndia /981 -8/ -/8

-

Source:Asian 6eve$oment Ban (Asian Bonds On$ine) and RB#

@e no4 fo!s on ana$ying the investors and issers in the !ororate det maret8 >o

rovide a erse!tive to the ana$ysis that fo$$o4s 4e ta$ate moi$iation and trnover in

the re!ent ast8 #n 2011?12' the !ororate se!tor raised Rs8 2'&1 i$$ion from the rimary

maret' throgh issan!e of onds8 >he government raised Rs8 &'-91 i$$ion' or &28. er

!ent of tota$ det fnds raised from rimary marets8

Table 0: %vervie5 of primary and secondary bond market

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Issuer Amount raised rom

,rimary Market (in 1s+

bn0

Turnover in

Secondary Market (in

1s+ bn0

%"##2#% %"#%2#! %"##2#% %"#%2#!

or/orateNon!government 2;1% 2;8%1 1;5&2 1;%61

:overnment 5;834 %;5&1 %;683 %3;431

Total %;851 1;462 %2;2%4 %5;1&1

Source/Indian Securitie' )ar0et #evie$ 211!12; NSE

.ebt instruments/

>here are varios tyes of det instrments avai$a$e that one !an find in #ndian det maret8

Government Securities

#t is the Reserve Ban of #ndia that isses Government e!rities or G?e!s on eha$f of the

Government of #ndia8 >hese se!rities have a matrity eriod of 1 to 30 years8 G?e!s offer

fi;ed interest rate' 4here interests are aya$e semi?anna$$y8 or shorter term' there are

>reasry Bi$$s or >?Bi$$s' 4hi!h are issed y the RB# for 91 days' 12 days and 3./ days8

"orporate Bonds

>hese onds !ome from "Us and rivate !ororations and are offered for an e;tensive range

of tenres to 1- years8 >here are a$so some ereta$ onds8 omaring to G?e!s'

!ororate onds !arry higher riss' 4hi!h deend on the !ororation' the indstry 4here

the !ororation is !rrent$y oerating' the !rrent maret !onditions' and the rating of the

!ororation8 *o4ever' these onds a$so give higher retrns than the G?e!s8

"ertificate of eposit

>hese are negotia$e money maret instrments8 ertifi!ate of 6eosits (6s)' 4hi!h sa$$y

offer higher retrns than Ban term deosits' are issed in demat form and a$so as a Usan!e

"romissory Notes8 >here are severa$ instittions that !an isse 6s8 Bans !an offer 6s

4hi!h have matrity et4een & days and 1 year8 6s from finan!ia$ instittions have

matrity et4een 1 and 3 years8 >here are some agen!ies $ie #RA' #>*' ARC' R##D

et!8 that offer ratings of 6s8 6s are avai$a$e in the denominations of K 1 Da! and in

m$ti$e of that8

"ommercial Papers

>here are short term se!rities 4ith matrity of & to 3.- days8 "s are issed y !ororate

entities at a dis!ont to fa!e va$e

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Diteratre Revie4

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#n any e!onomy' a smooth$y fn!tioning det maret is !onsidered !r!ia$ for deve$oment

and stai$ity8 Armor and De$e (2009) ost$ate that e!onomi! str!tre is a determinant of

finan!ia$ str!tre8 in!e #ndia is a redominant$y servi!es ased e!onomy' the finan!ia$

str!tre atomati!a$$y refers ehe #nternationa$ aita$ +arets Asso!iation (2013) arges that virant !ororate det

marets ring sstantia$ e!onomi! enefits and are imortant for a$$ staeho$ders

!on!erned vi8 !omanies' investors' e!onomies and governments8

Good friend (200-) advo!ates the se of !ororate ond marets y more transarent

firms' to $o4er their effe!tive interest !osts8 On the !ontrary' Dengnaremit!hai and Ong

(200-) !on!ede that there is no !on!$sive eviden!e esta$ishing the seriority of either a

an dominated or a maret dominated finan!ia$ system t state that a 4e$$?diversified

e!onomy 4ith a$an!ed distrition a!ross an $ending and !ororate onds is $ess

v$nera$e to a finan!ia$ !risis8

rom the erse!tive of a deve$oing e!onomy' the @or$d Ban (2000) oserves that Lthe

!ororate ond maret in a !ontry !an sstitte art of the an $oan maret' and is

otentia$$y a$e to re$ieve the stressed aning system in a deve$oing !ontry ofneara$e rden8M 6eve$oment of !ororate det marets needs strong instittiona$ and

reg$atory sort8 >he @or$d Ban (2000) se!ifi!a$$y identifies seven ne!essary

deve$omenta$ !omonents for the effe!tive fn!tioning of virant ond marets8 Any

Lasen!e' defi!ien!y or ineffi!ien!yM of any of these !omonents !an otentia$$y sta$$ the

deve$oment ro!ess8 >hese !omonents are (i) a dis!$osre and information system' (ii) a

!redit rating system' (iii) effe!tive anrt!y $a4s' (iv) maret intermediaries' (v)

instittiona$ investors' (vi) a trading system and !$earing $atform and (vii) a deository

system8

engta (199) esta$ishes a dire!t !orre$ation et4een any firm5s dis!$osre ra!ti!es

and its effe!tive interest !ost8 Cd4ards et a$ (200&)' 4hi$e a!no4$edging merit inoosing argments rovides ersasive eviden!e of red!ed transa!tion !osts on a$$o4ing

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ond ri!e transaren!y8 On the other hand' Besseminder and +a;4e$$ (200) are more

seti!a$ and see to a!hieve some midd$e grond8 #t is tre that investors stand to enefit

from in!reased transaren!y' de to red!tion in id as sreads58 *o4ever' ond dea$ers

e;erien!e red!tions in !omensations therey shifting trading a!tivities to other

se!rities8 rther' dea$ers are averse to !arrying inventory and sharing resear!h 4ith

investors8

Dengnaremit!hai and Ong (200-) oine that !ro4ding ot y government onds is one

of the otentia$ osta!$es to hea$thy !ororate ond marets8 A high $eve$ of $i! det

!ro4ds ot !ororate orro4ing y red!ing the aetite of finan!ia$ instittions8 >his

in!reases the !ost of orro4ing for !ororates maing ond marets an nvia$e sor!e of

fnding (A!a and e$asn' 2009)8 On the !ontrary' Raghavan and ar4ano (2012)

!on!$de that in !ase of #ndia' n$ie e!onomies $ie orea' the deve$oment of the

government ond maret has in fa!t had a ositive effe!t on the !ororate ond maret8

*aansson (1999) !ontends that the asen!e of an adehs' investment ans sho$d

!ontine engineering a 4ide ortfo$io of det instrments' in addition to Lfine?tning thearameters of individa$ instrments for se!ifi! !$ientsM8

#n the #ndian !onte;t' +itra (2009) fo!ses on the s$y side isses hamering the

deve$oment of !ororate det marets in #ndia and $ists the $a! of diversity in

instrments as a maor fa!tor8 #nternationa$$y' there are varios tyes of instrments

reva$ent' s!h as ste onds' ste do4n onds' dee dis!ont onds' reverse f$oater

onds' inde;ed onds' !rren!y onds' et!8 *o4ever' the #ndian ond maret is rimari$y

dominated y fi;ed rate !oon onds8 e!ond$y' the average age of the onds issed y

#ndian !ororations is on$y - to & years8

hanna and =arotti$ (2012) e$!idate the L"o$iti!a$ e!onomy of BondsM8 A!!ording to themanother !riti!a$ isse a!!onting for the differen!es in e


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#t !an e arged that det marets tyi!a$$y are 4e$$ deve$oed in matre e!onomies $ie

the UA' Paan or Germany and the deve$oment of !ororate ond marets 4as re!eded

y that of sto! and government ond marets' 4hi!h in trn 4as re!eded y years of

!aita$ a!!m$ation throgh indstria$ deve$oment (@or$d Ban' 2000)8 Natra$$y'

emerging e!onomies $ag ehind in !ororate ond maret deve$oment de to their nas!ent

stages of !aita$ a!!m$ation8

Resear!h methodo$ogy

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>his !hater aims at nderstanding the resear!h methodo$ogy 4hi!h 4i$$ e sed in this

resear!h roe!t' esta$ishing a frame4or for !o$$e!tion' ana$ysis and interretation of

rimary and se!ondary data8

tdy on . months maret trends on det se!rities to im$ement te!hni!a$

ana$ysis8

ndamenta$ ana$ysis of the ond maret 4as !ond!ted eeing e!onomy as aase8

e!ondary data stdy of the ond marets8

omarative stdy 4as !ond!ted et4een #ndian and g$oa$ maret8

inan!ia$ too$s are sed to assess the va$ation of the onds8

%b6ectives of the study:

18 >o stdy aot det se!rities in #ndia as 4e$$ as g$oa$ maret828 >o redi!t the n!ertain movement in ri!e in det se!rities838 >o identify' o stdy ho4 ond maret may affe!t the e!onomi! erforman!e8

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*istory

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>o4ards the eighteenth !entry' the orro4ing needs of #ndian "rin!e$y tates 4ere $arge$y

met y #ndigenos aners and finan!iers8 >he !on!et of orro4ing from the $i! in #ndia

4as ioneered y the Cast #ndia omany to finan!e its !amaigns in oth #ndia (the Ang$o

ren!h 4ars) in the eighteenth !entry8 >he det o4ed y the Government to the $i!' over

time' !ame to e no4n as $i! det8 >he endeavors of the omany to esta$ish

government ans to4ards the end of the 1th entry o4ed in no sma$$ measre to the needto raise term and short term finan!ia$ a!!ommodation from ans on more satisfa!tory terms

than they 4ere a$e to garner on their o4n8 >he in!entive to set Government ans (read

!entra$ ans)' had a $ot to do 4ith det management8

"$i! 6et' today' is raised to meet the Governments revene defi!its (the differen!e

et4een the in!ome of the government and money sent to rn the government) or to finan!e

$i! 4ors (!aita$ formation)8 Borro4ing for finan!ing rai$4ay !onstr!tion and $i!

4ors s!h irrigation !ana$s 4as first ndertaen in 1.&8 >he irst @or$d @ar sa4 a rise in

#ndiaEs "$i! 6et as a res$t of #ndiaEs !ontrition to the British e;!hehe rovin!es of British #ndia 4ere a$$o4ed to f$oat $oans for the first time in6e!emer' 1920 4hen $o!a$ government orro4ing r$es 4ere issed nder se!tion 30(a) of

the Government of #ndia A!t' 19198 On$y three rovin!es vi8' Bomay' United "rovin!es and

"na ti$ised this san!tion efore the introd!tion of rovin!ia$ atonomy8 "$i! 6et 4as

managed y the "residen!y Bans' the omtro$$er and Aditor?Genera$ of #ndia ti$$ 1913

and thereafter y the ontro$$er of the rren!y ti$$ 193- 4hen the Reserve Ban !ommen!ed

oerations8

#nterest rates varied over time and after the rising of 1-& grada$$y !ame do4n to aot

-F and $ater to /F in 1&18 #n 19/' the famos 3 172 F aer 4as !reated 4hi!h !ontined

to e in e;isten!e for a$most -0 years8 @hen the Reserve Ban of #ndia too over themanagement of $i! det from the ontro$$er of the rren!y in 193-' the tota$ fnded det

23


24/103

of the entra$ Government amonted to Rs 9-0 !rores of 4hi!h -/F amonted to ster$ing

det and /.F ree det and the det of the "rovin!es amonted to Rs 1 !rores8

Broad$y' the hases of $i! det in #ndia !o$d e divided into the fo$$o4ing hases8

7p to 89: 4hen $i! det 4as driven $arge$y y needs of finan!ing !amaigns8

892 /9: 4hen $i! det 4as raised for finan!ing rai$4ays and !ana$s and other s!h

roses8

/2/;-: 4hen $i! det in!reased sstantia$$y essentia$$y ot of the !onsiderations of

/;-2/;9: 4hen e!ase of 4ar time inf$ation' the effort 4as to mo as m!h as ossi$e

of the !rrent 4ar time in!omes

/;2/


25/103

>heoreti!a$$y' others !an orro4 at a rate aove 4hat the Government ays deending on

ho4 their ris is er!eived y the marets8 *en!e' a 4e$$ deve$oed Government e!rities

maret he$s in the effi!ient a$$o!ation of resor!es8 A !ontry5s det maret to a $arge e;tent

deends on the deth of the Government5s Bond +aret8 #t in in this !onte;t that the re!ent

initiatives to 4iden and deeen the Government e!rities +aret and to mae it more

effi!ient have een taen8

>he det is one of the most !riti!a$ !omonents in the finan!ia$ system of any e!onomy anda!ts as the f$!rm of a modern finan!ia$ system8

>he det maret in most deve$oed !ontries is many times igger than the other finan!ia$marets in!$ding the ehe U ond maret is more than 138- tri$$ion in sie4ith a trnover e;!eeding -00 i$$ion dai$y reresenting the $argest se!rities maret in the4or$d8 >he sie of the 4or$d ond marets is !$ose to U 318/ tri$$ion 4hi!h is near$yehe #ndian ond maret measred y the estimated va$e of onds otstanding is ne;ton$y to the Paanese and orean ond marets in Asia8 >he #ndian det maret' in terms ofvo$me' is $arger than the e


26/103

>he government se!rities maret a!!onts for more than 90 er!ent of the trnover in thedet maret8 #t !onstittes the rin!ia$ segment of the det maret8

>he #ndian det maret has traditiona$$y een a 4ho$esa$e maret 4ith arti!iation restri!tedto fe4 instittiona$ $ayers , main$y ans8 >he ans 4ere the maor arti!iants in the

government se!rities maret de to stattory rehe trnover in the det marettoo 4as he det maret 4as fair$ynderdeve$oed de to the administrated interest rate regime and the avai$ai$ity ofinvestment avenes 4hi!h gave a higher rate of retrn to investors8

#n the ear$y 1990s' the government needed a $arge amont of money for investment indeve$oment and infrastr!tre roe!ts8 >he government rea$ied the need of a virant'effi!ient and hea$thy det maret and ndertoo reform measres8 >he Reserve Ban t insstantia$ efforts to deve$o the government se!rities maret t its t4o segments' the

rivate !ororate det maret and $i! se!tor ndertaing ond maret' have not yet f$$ydeve$oed in terms of vo$me and $ihe det maret is!riti!a$ to the deve$oment of a deve$oing !ontry $ie #ndia 4hi!h rehe Reserve Ban of #ndia reg$ates the government se!ritiesmaret and money maret 4hi$e the !ororate det maret !omes nder the rvie4 of thee!rities C;!hange and Board of #ndia (CB#)8

#n order to romote an order$y deve$oment of the maret' the government issed anotifi!ation on +ar!h 2' 2000 de$ineating the areas of resonsii$ity et4een the ReserveBan and CB#8 >he !ontra!ts for sa$e and r!hase of government se!rities' go$d re$atedse!rities' +oney maret se!rities and se!rities derived from these se!rities and readyfor4ard !ontra!ts in det se!rities sha$$ e reg$ated y the Reserve Ban8 !h !ontra!ts' ife;e!ted on the sto! e;!hanges sha$$' ho4ever' e reg$ated y CB# in manner that is!onsistent 4ith the gide$ines issed y the Reserve Ban8

26


27/103

2%


28/103

A Brief *istory of Bond

+aret 6isasters

The 3istory o )ondsBond?$ie finan!ia$ instrments have a $ong history8 6eniens of =eni!e in the 1/th !entry !o$d

r!hase and trade government se!rities 4hi!h aid the o4ner an end$ess annity at a set rate8 #n

1&9/ Britain !onso$idated a$$ of its $ong?term o$igations into a se!rity no4n as L!onso$sM 4hi!h

ay a dividend to the o4ner' a$so 4ithot any e;iration date8 >hese !onso$s are sti$$ traded8

Une;e!ted $osses in these se!rities a$so have a $ong history8 or instan!e' the !onso$s 4ere issed ata time 4hen !rren!y 4as a!ed y go$d' and inf$ation 4as not a !onsideration8 @hen !rren!ies

4ere nsha!$ed from go$d' interest rates egan to rise8 >he ho$ders of these o$d !onso$s' $o!ed into

a $o4 rate of retrn' sa4 dramati! erosion in the va$e of their se!rities8 6ring a eriod in the 1920s

4hen Germany sffered hyerinf$ation' the va$e of German?ased onds $ost virta$$y 100F of their

va$e 4ithin a eriod of months8

T(e )oral e a$are t(at inve'tment climate' c(ange and $(at $ere once greatinve'tment' can turn into lia+ilitie'.

,eriods o 1isin& 1ates Can be Multi24ear A5airs*,roducin& Challen&in& ,eriods or 3olders o 6on& )onds

28


29/103

#"2 4ear Treasury Constant Maturity 1ate (.S#"0212re'earc(.'tloui'-ed.org?

The Great epression = Bond >olders Triumph >he first U88 >reasry onds' no4n then as

LDierty Bonds'M 4ere issed to he$ fnd @or$d @ar #8 Dong?term government onds roved to e a

safe haven from the sto! maret !o$$ase in 1929' a year in 4hi!h they retrned 38/F8 1>his 4as a$so

tre for the ssehe years 19--?19-9 4ere not ind to

ond ho$ders8 *o$ders of $ong?term government onds $ost money in for of the five years' 4ith

anna$ retrns of ?183F' ?-8.F' &8-F' ?.81F and ?283F81

#ntermediate >reasries fared etter' t a$sohad $osses for for of the five years8 Over the same eriod' ho$ders of $ong term !ororate onds

e;erien!ed $osses of ?.8F in 19-.' ?282F in 19- and ?180F in 19-98 2

Startin& rom #"24ear Treasury rates belo7 !8* a steady rise in interest rates tried the

patience o bond holders rom #$992#$9$

Total

1eturns

6on&2Term

ovt )onds

6on&2Term

Corporate

)onds

Intermed

iate

Treasuri

es

1&55 !1.3< .5< !.%i+h yield bonds: are onds that are rated e$o4 investment grade y the !redit rating

agen!ies8 As these onds are more risy than investment grade onds' investors e;e!t to earn

sa higher yie$d8-8 "onvertible bonds:$et a ondho$der e;!hange a ond to a nmer of shares of the isserEs

!ommon sto!8 >hese are no4n as hyrid se!rities' e!ase they !omine e


32/103

108 Bearer bonds: i' an oAcial certi7cate i''ued $it(out a named (older. In

ot(er $ord'; t(e /er'on $(o (a' t(e /a/er certi7cate can claim t(e valueo- t(e +ond.

118 $e+istered bonds:is a ond 4hose o4nershi (and any sse


33/103

Tradin+ Procedure

>o5 are bonds different from stocks

Bonds are !onsidered det investments8 On the other hand' a sto! r!hase is

!onsidered an ehe issers of sto! or e


34/103

oon rates are most often fi1ed, the rate of interest stays !onstant throghot the $ife of

the ond8 *o4ever' some onds have variable or floating!oon rates (interest ayments

!hange from eriod to eriod ased on a redetermined s!hed$e or form$a)8 ome onds

ay no interest at a$$ nti$ matrity8

Be!ase ondho$ders are !reditors rather than art o4ners' if a !ororation goes anrt'ondho$ders have a higher !$aim on assets than sto!ho$ders8 >his rovides added se!rity to

the ond investor , t does not !om$ete$y e$iminate ris8

ina$$y' onds a$so trade different$y from sto!s8 Bonds tyi!a$$y trade in the over the?!onter

(O>) maret , for e;am$e' from a roer to a roer at another firm dire!t$y , instead of

on a sto! e;!hange8

>%) % I INC!ST IN B%NS>here are three !ommon 4ays to invest in onds:

%ver2the2counter D%T"3 market: #ndivida$ onds are not oght on a !entra$ e;!hanges!h as the >oronto to! C;!hange (>T) (e;!et in the !ase of !onverti$e deentres)8

#nstead' they are oght or so$d throgh an investment advisor from inventory in the

advisor5s roerage firm or in the O> maret8 >he ri!e in!$des any fees for the advisor5s

servi!es8 @hen r!hasing a ne4$y issed ond (a ond not revios$y he$d y another

investor)' the investment advisor rovides yo 4ith a rose!ts or other dis!$osre

do!ments that e;$ain the ond5s terms' featres and asso!iated riss and then ys the ond

on yor eha$f in theprimary market8 "revios$y issed onds are traded in the secondary

market.

Die sto!s' there are t4o main avenes throgh 4hi!h onds are so$d: the rimary and

se!ondary marets8 >he rimary maret is 4here the isser se$$s ne4 onds to the $i! for

the first time8 #n the se!ondary maret' investors y or se$$ onds from other investors 4ith

no invo$vement from the issing firm8

Primary mar0et

>he rimary maret for onds is simi$ar to the rimary maret for sto!s 4here initia$ $i!

offerings (#"Os) o!!r8 #nvestors y onds from an nder4riter' 4ith the nder4riter a!ting

as the midd$eman et4een the isser and the $i!8 >he nder4riter then !o$$e!ts the money

from ond sa$es and gives it to the isser' after taing a !ommission' or Lnder4riting feeM8

>he investor5s ri!e er ond is sa$$y e


35/103

#n the se!ondary ond maret' onds are oght and so$d day in and day ot y individa$

investors and instittions8 @hen yo y a ond in the se!ondary maret' yo5re ying it

from another investor ($ie$y a $arge instittion) instead of the origina$ isser8

Bying or se$$ing onds in the se!ondary maret in some 4ays is simi$ar to the trading of

e


36/103

Payin+ for your bonds>here are three things to rememer 4hen yo de!ide to y and !ome to ay for yor ond8

@ees: As ho4 fees are !harged on these rod!ts as fees and !ommissions 4i$$ have an

ima!t on yor overa$$ retrn8

0 Accrued interest: >he amont of interest that has a!!m$ated on a ond sin!e the $ast !oon

ayment is added to the tota$ !ost of a ond transa!tion' t 4i$$ e reaid to yo8

3. C(en you (ave to /ayT(e 'ettlement date; or t(e date $(en t(e 'eller

mu't deliver t(e +ond and t(e /urc(a'er mu't /ay -or it; can range -rom

t(e 'ame day t(e trade i' executed >or trade date? to 'tandard 'ettlement

time'; to; in certain ca'e'; ot(er date'. )oney mar0et in'trument' 'uc( a'

T!+ill' 'ettle on t(e 'ame day a' t(e tran'action. )o't ot(er government

and cor/orate +ond' 'ettle t(ree +u'ine'' day' a-ter t(e tran'action date.

@actors that affect bond pricin+ over time

#n the se!ondary maret ond ri!es are not set in stone8 >hey !an f$!tate over time for anmer of reasons8 ome fa!tors affe!ting ri!e in!$de' t aren5t $imited to:

rrent and estimated ftre interest rates !omared to the !oon

redit rating of the isser

C!onomi! !onditions , inf$ation and sto! maret erforman!e

The interest rate environment and the coupon are key

>he most imortant fa!tor that inf$en!es a ond5s ri!e is its !oon rate !omared to!rrent or e;e!ted ftre interest rates8 A ond5s !oon may e favora$e or nfavora$e!omared to the interest yo !o$d re!eive on other investments8 Bond ri!es have an inversere$ationshi to revai$ing interest rates in the e!onomy8 #n other 4ords' as revai$ing interestrates go do4n' a ond5s ri!e in the se!ondary maret 4i$$ sa$$y go 8 As revai$inginterest rates go ' tyi!a$$y a ond5s ri!e 4i$$ go do4n8 a$$ this the see?sa4' or inverse'

re$ationshi et4een ond ri!es and interest rates8

*ere5s an e;am$e: if a ond ays a .F !oon and the revai$ing interest rate dros e$o4.F' that ond ays !omarative$y etter than the a$ternatives8 >herefore it 4i$$ in!rease inva$e' and 4i$$ sa$$y trade higher than its fa!e va$e' or Lat a remimM8 #f the revai$inginterest rate rises aove .F' the ond 4i$$ ay !omarative$y 4orse than the a$ternatives' soits va$e 4i$$ de!rease and it 4i$$ sa$$y trade $o4er than its fa!e va$e' or Lat a dis!ontM8

"redit 5here credit is due: checkin+ a bondFs credit ratin+

Pst as individa$s re!eive !redit ratings ased on their ast orro4ing haits and ai$ity to

ay off dets' onds and their issers are rated y indeendent !omanies ased on the

36


37/103

$ie$ihood that issers 4i$$ e a$e to meet their o$igationsthat is' to ay the !oon overtime and retrn the rin!ia$ at matrity8

Of the main ond tyes' !ororate onds invo$ve the most ris' fo$$o4ed y mni!ia$ onds8>reasry onds' y !ontrast' are !onsidered a virta$$y ris?free investment8 #n fa!t' investors

!onsider them so $$et?roof that a$$ other onds are rated 4ith >reasries as a en!hmar8

Bond ratings are ased on the isser5s finan!ia$ stai$ity' and they5re the ey indi!ator of ho4m!h ris is assmed 4hen ying a arti!$ar ond8 Bonds issed y entities 4ith a high

roai$ity of meeting o$igations are no4n as Linvestment gradeM8 in!e they entai$re$ative$y $o4 ris' they genera$$y ay a $o4er !oon8 Risier onds are referred to as Lhigh?yie$dM or LnM onds' and sa$$y ay a higher !oon8

>here are three main !omanies that isse ond ratings: +oody5s' tandard H "oor5s' andit!h8

Economic condition'

#nf$ation $ays an imortant ro$e in ond va$es8 Die interest rates' inf$ation is inverse$y

roortiona$ to ond ri!es8 Be!ase higher inf$ation deteriorates the rea$ do$$ars a ond5s

!oon rovides' the ond5s !oon e!omes !omarative$y 4orth $ess8 o the higher

inf$ation goes' the ri!e of a ond de!reases8 #f inf$ation gets too high' the !on!ern is it 4i$$

ota!e the rate of interest re!eived from the ond investment8 >o !omat high inf$ation'

ond investors may e for!ed to trn to other investments 4ith more ris s!h as sto!s'

sin!e ehe ri!e of onds may a$so e affe!ted y other !onditions in the overa$$ maret$a!e8 ore;am$e' if the sto! maret is erforming oor$y' more eo$e may 4ant to invest in onds'

and ri!es in the ond maret 4i$$ tend to rise8 #f the sto! maret is erforming very 4e$$'

eo$e may e $ess in!$ined to invest in a re$ative$y $o4?yie$d investment vehi!$e $ie onds'

so ri!es 4i$$ tend to fa$$8

3%


38/103

%b6ectives

%b6ectives of investors:

38


39/103

>yi!a$$y' onds ay interest semi?anna$$y' 4hi!h means they !an rovide a redi!ta$ein!ome stream8 +any eo$e invest in onds for that e;e!ted interest in!ome and a$so to

reserve their !aita$ investment8 Understanding the ro$e onds $ay in a diversifiedinvestment ortfo$io is ese!ia$$y imortant for retirement $anning8 6ring the ast de!ade'the traditiona$ defined?enefit retirement $ans (ensions) have in!reasing$y een re$a!ed y

defined !ontrition rograms s!h as /01() $ans or #RAs8 Be!ase these $ans offergreater individa$ freedom in se$e!ting from a range of investment otions' investors mst ein!reasing$y se$f?re$iant in se!ring their retirement8

@hatever the rosesaving for yor !hi$dren5s !o$$ege ed!ation or a ne4 home'in!reasing retirement in!ome or any of a nmer of other finan!ia$ goa$sinvesting in

onds may he$ yo a!hieve yor oe!tives8

%b6ectives of issuer:

omanies isse onds to finan!e oerations8 +ost !omanies !an orro4 from ans' t

vie4 dire!t orro4ing from a an as more restri!tive and e;ensive than se$$ing det on theoen maret throgh a ond isse8

>o raise money' isse onds is one 4ay to do it8 A ond fn!tions $ie a $oan et4een aninvestor and a !ororation8 >he investor agrees to give the !ororation a se!ifi! amont ofmoney for a se!ifi! eriod of time in e;!hange for eriodi! interest ayments at designatedinterva$s8 @hen the $oan rea!hes its matrity date' the investor5s $oan is reaid8

"orporations issue bonds for several reasons:

18 "rovides !ororations 4ith a 4ay to raise !aita$ 4ithot di$ting the !rrentshareho$dersE ehe ond maret offers a very effi!ient 4ay to orro4 !aita$8 By issing onds' theorro4er is sared the tas of ndergoing nmeros searate negotiations andtransa!tions in order to raise the !aita$ it needs8

3&


40/103

Sensitivity

4


41/103

#f yo o4n onds or have money in a ond fnd' there is a nmer yo sho$d no48 #t is!a$$ed dration8 A$thogh stated in years' dration is not sim$y a measre of time8 #nstead'dration signa$s ho4 m!h the ri!e of yor ond investment is $ie$y to f$!tate 4hen thereis an or do4n movement in interest rates8 >he higher the dration nmer' the moresensitive yor ond investment 4i$$ e to !hanges in interest rates8

+any fa!tors ima!t ond ri!es' one of 4hi!h is interest rates8 A ma;im of ond investing is

that 4hen interest rates rise' ond ri!es fa$$' and vi!e versa8 >his is no4n as interest rate

ris8 Bt st as some eo$e5s sin is more sensitive to sn than others' some onds are more

sensitive to interest rate !hanges than others8 uration riskis the name e!onomists give to

the ris asso!iated 4ith the sensitivityof a ond5s ri!e to a one er!ent !hange in interest

rates8

>he higher a ond5s dration' the greater its sensitivity to interest rates !hanges8 >his means

f$!tations in ri!e' 4hether ositive or negative' 4i$$ e more ronon!ed8 #f yo ho$d a

ond to matrity' yo !an e;e!t to re!eive the ar (or fa!e) va$e of the ond 4hen yorrin!ia$ is reaid' n$ess the !omany goes anrt or other4ise fai$s to ay8 #f yo se$$

efore matrity' the ri!e yo re!eive 4i$$ e affe!ted y the revai$ing interest rates and

dration8

@or e1amplea ond fnd 4ith 10?year dration 4i$$ de!rease in va$e y 10 er!ent if

interest rates rise one er!ent8 On the other hand' the ond fnd 4i$$ in!rease in va$e y 10

er!ent if interest rates fa$$ one er!ent8 #f a fnd5s dration is t4o years' then a one er!ent

rise in interest rates 4i$$ res$t in a t4o er!ent de!$ine in the ond fnd5s va$e8 A t4o

er!ent in!rease in the ond5s fnd va$e 4o$d fo$$o4 if interest rates fa$$ y one er!ent8

41


42/103

Pricin+ strate+y of bonds

42


43/103

Bonds !an e ri!ed at a remim' dis!ont' or at ar8 #f the ondEs ri!e is higher than its arva$e' it 4i$$ se$$ at a remim e!ase its interest rate is higher than !rrent revai$ing rates8#f the ondEs ri!e is $o4er than its ar va$e' the ond 4i$$ se$$ at a dis!ont e!ase its

interest rate is $o4er than !rrent revai$ing interest rates8 @hen yo !a$!$ate the ri!e of aond' yo are !a$!$ating the ma;imm ri!e yo 4o$d 4ant to ay for the ond' given theondEs !oon rate in !omarison to the average rate most investors are !rrent$y re!eiving inthe ond maret8 Re


44/103

the greater oortnity for reinvesting the interest aid8

Present Calue

>he resent va$e is the ftre va$e ro!ess in reverse8 @e have:

( )

1

1 nP!

r

=

+ 8

or a given ftre va$e at a se!ified time in the ftre' the higher the interest rate (or

dis!ont rate)' the $o4er the resent va$e8 or a given interest rate (dis!ont rate)' the frther

into the ftre that the ftre va$e 4i$$ e re!eived' then the $o4er its resent va$e8

"resent =a$e of a eries of tre =a$es

>o determine the resent va$e of a series of ftre va$es' the resent va$e of ea!h ftre

va$e mst first e !omted8 >hen these resent va$es are added together to otain the

resent va$e of the entire series of ftre va$es8

"resent =a$e of an Ordinary Annity

@hen the same do$$ar amont of money is re!eived ea!h eriod or aid ea!h year' the series

is referred to as an annity8 @hen the first ayment is re!eived one eriod from no4' theannity is !a$$ed an ordinary annity8 @hen the first ayment is immediate' the annity is

!a$$ed an annity de8

>he resent va$e of an ordinary annity is:

( )

11

1n

r

P! " Ar

+

44


45/103

4hereA is the amont of the annity (in do$$ars)8

>he term in ra!ets is the resent va$e of an ordinary annity of 1 for neriods8

P$I"ING A B%N

6etermining the ri!e of any finan!ia$ instrment rehe !ash f$o4s for a ond that the isser !annot retire rior to its stated matrity date !onsist

of eriodi! !oon interest ayments to the matrity date' and the ar (or matrity) va$e at

matrity8

#n genera$' the ri!e of a ond !an e !omted sing the fo$$o4ing form$a:

( ) ( )1 1 1+

n

t

t n

t"

M#P " $

r $ r

8

4hereP X ri!e (in do$$ars)' n X nmer of eriods (nmer of years times 2)' # Xsemianna$ !oon ayment (in do$$ars)' r X eriodi! interest rate (re


46/103

( )

11

1n

rP " #

r

+

X

( )/0

11

180--R-0

080--

X

11

B8-1332R-0080--

X

1 0811&/.3R-0

080--

X

[ ]0/.13181.-0RX 028318

>he resent va$e of the ar or matrity va$e of 1'000 is:( )1

n

M

r+X

( )/0

R1'000

80--

%

X-13318B

000'1R

X 11&8/.8

>he ri!e of the ond (") X resent va$e !oon ayments Y resent va$e matrity va$e X

02831 Y 11&8/. X 9198&&8

Pricin+ ero2"oupon Bonds

or ero?!oon onds' the investor rea$ies interest as the differen!e et4een the matrity

va$e and the r!hase ri!e8 >he ehs' the ri!e of a ero?!oon ond is sim$y the resent

va$e of the matrity va$e8

ero2"oupon Bond !1ample

onsider the ri!e of a ero?!oon ond that matres 1- years from no4' if the matrity

va$e is 1'000 and the re


47/103

Price2?ield $elationship

A fndamenta$ roerty of a ond is that its ri!e !hanges in the oosite dire!tion from the

!hange in the rehe reason is that the ri!e of the ond is the resent va$e of

the !ash f$o4s8

$iskDIdentification Huantification >ed+in+ tool $isk mana+ement and

numerical e1ample based on research.3

4%


48/103

$isk identification: Ris identifi!ation is the ro!ess of determining riss that !o$dotentia$$y revent the rogram' enterrise' or investment from a!hieving its oe!tives8 #tin!$des do!menting and !ommni!ating the !on!ern8

o$$o4ing ris are asso!iated 4ith ond:

18 Interest rate risk: #nterest rates and ond ri!es !arry an inverse re$ationshiQ asinterest rates fa$$' the ri!e of onds trading in the maret$a!e genera$$y rises8

onverse$y' 4hen interest rates rise' the ri!e of onds tends to fa$$8 >his haense!ase 4hen interest rates are on the de!$ine' investors try to !atre or $o! in thehighest rates they !an for as $ong as they !an8

28 $einvestment risk:Another danger that ond investors fa!e is reinvestment ris'4hi!h is the ris of having to reinvest ro!eeds at a $o4er rate than the fnds 4ere

revios$y earning8 One of the main 4ays this ris resents itse$f is 4hen interestrates fa$$ over time and !a$$a$e onds are e;er!ised y the issers8

38 Inflation risk: @hen an investor ys a ond' he or she essentia$$y !ommits to

re!eiving a rate of retrn' either fi;ed or varia$e' for the dration of the ond or at$east as $ong as it is he$d8 Bt 4hat haens if the !ost of $iving and inf$ation in!rease

dramati!a$$y' and at a faster rate than in!ome investmentZ @hen that haens'

investors 4i$$ see their r!hasing o4er erode and may a!ta$$y a!hieve a negative

rate of retrn (again fa!toring in inf$ation)8"t another 4ay' sose that an investor

earns a rate of retrn of 3F on a ond8 #f inf$ation gro4s to /F after the ond

r!hase' the investorEs tre rate of retrn (e!ase of the de!rease in r!hasing

o4er) is ?1F8

/8 "reditE default risk:this is orro4ed money that mst e reaid y the !omany

over time 4ith interest8 +any investors donEt rea$ie that !ororate onds arenEtgaranteed y the f$$ faith and !redit of the U88 government' t instead deend on

the !ororationEs ai$ity to reay that det8 #nvestors mst !onsider the ossii$ity of

defa$t and fa!tor this ris into their investment de!ision8 As one means of ana$ying

the ossii$ity of defa$t' some ana$ysts and investors 4i$$ determine a !omanyEs

!overage ratio efore initiating an investment8 >hey 4i$$ ana$ye the !ororationEs

in!ome and !ash f$o4 statements' determine its oerating in!ome and !ash f$o4' and

then 4eigh that against its det servi!e e;ense8 >he theory is the greater the !overage

(or oerating in!ome and !ash f$o4) in roortion to the det servi!e e;enses' the

safer the investment8

48


49/103

-8 $atin+ do5n+rades: A !omanyEs ai$ity to oerate and reay its det (andindivida$ det) isses is fre


50/103

Standard deviation: tandard deviation (\) is the s


51/103

pr1 a

m

0

m1 m2

m

>RX PR=Rf+B (RmRf)

o' ]X pr

m

>ota$ ortfo$io retrn !onsisted 4ith t4o arts:

Atonomos retrn' 4hi!h is not deendent 7re$ated 4ith the maret movement' !an

e reresented 4ith ris free retrn (Rf) i8e8 the retrn of >?i$$s' 10 years G se!t8ond8

>he other art of the retrn !an e termed as maret remim i8e8 (maret retrn? ris

free rate of retrn) or (RmRf) 8

#n the aove grah' 4hen maret retrn is m1 !orresond in retrn of ortfo$io in pr1

and 4hen maret retrn is m2 the ortfo$io retrn is pr2 8 pr2 X

r 2pr1p

4hi!h is ositive and m X

2m1

m

4hi!h is a$so ositive8 No4' the ratio of the

!hange of retrn 4i$$ e pr

m X]X eta' i8e8 the sensitivity of the retrn of the ortfo$io

4ith rese!t to maret movement8

51


52/103

>ed+e funds:A hedge fnd is a fnd that !an tae oth $ong and short ositions' searitrage' y and se$$ nderva$ed se!rities' trade otions or onds' and invest in a$mostany oortnity in any maret 4here it foresees imressive gains at red!ed ris8 *edge fndstrategies vary enormos$y ?? many hedge against do4ntrns in the marets ?? ese!ia$$yimortant today 4ith vo$ati$ity and anti!iation of !orre!tions in overheated sto! marets8

>he rimary aim of most hedge fnds is to red!e vo$ati$ity and ris 4hi$e attemting toreserve !aita$ and de$iver ositive retrns nder a$$ maret !onditions8

*utual funds: A mta$ fnd is a tye of rofessiona$$y managed investment fnd that oo$smoney from many investors to r!hase se!rities8

Types of mutual fund:

Oen ended fnds

$ose ended fnds

C;!hange traded fnds Unit investment trsts

$isk mana+ement: >he ro!ess of identifi!ation' ana$ysis and either a!!etan!e ormitigation of n!ertainty in investment de!ision?maing8 Cssentia$$y' ris management o!!rsanytime an investor or fnd manager ana$yes and attemts to he ond isredeema$e after 3 years at a remim of 20F8 #f the !rrent maret ri!e of the ond isassred to e 1208 @hat 4i$$ e the:?

18 S>+8

28 Ris' if interest rate !hange y 200 8

38 #ntrinsi! va$e of the ond at !rrent interest rate8/8 6ration of the ond8-8 Re$ationshi 4ith time to ri!e of the ond8

52


53/103

.8 Sie$d !rve motion 4ith time eriod8

Intrinsic value o the bond

0=C PVIFA (r , n )+F PVIF(r , n)

p

p0=intrinsic price

c=couponinterest

PVIFA (r ,n )=[(1+r )n1

(1+r )n r] D /re'ent value intere't -actor annuity

PVIFAr ,n= 1

(1+r )n=present value interest factor at r , n years .

F=RedeemablePrice , so

p0=12

2

[ (1+ 0.092 )

32

(1+0.092 )

32

0.092

]+120

1

(1+0.092 )

6

p0=6 [ (1.045 )61

(1.045 )6 0.045]+120 1(1.045 )6

p0=123.094 ()

' t(e current mar0et /rice i' le'' t(an t(e intrin'ic value o- t(e +ond; t(e+ond i' under!valued 'o you can /urc(a'e.

4TM2 yield to maturity (at market price o rs #%"0 ? @r

53


54/103

pm=maret price=C PVIFA (r2 ,2n)+F PVIF(r

2,2n)

120=

12

2

PVIFA

(r

2

,32

)+120PVIF

(r

2

,6

) R!" , let r=20is 93.868

let r=10is 120

So T) i' 1a?

a'(@o$ >+?

i'counted ca'(@o$ >c? a

c

1 6 5.%142 5.%142

2 6 5.44211.884

2

3 6 5.183 15.54&

4 6 4.&3621&.%44

8

5 6 4.%1523.5%

5

6 126 &4.23564.13

8

Total 1263&.53

%%

#uration= (ac ) (c )

54


55/103

639.5357

120

5.3294

2.6647years.

1elationship 7ith time to price o the bond

Intrin'ic /rice o- t(e +ond at (ig(er maturity /eriod

p0=

12

2

[(1+ 0.092 )

10

1

(1.045)

10

0.045

]+120

1

(1.045 )

2n

D 124.%4%6

Falue o- t(e +ond and maturity /eriod i' /o'itively co!related

pm=120

120=12

2

[(1+

r

2

)

2n

1

(1+ r2 )2n

r

2]+120 1

(1+ r2 )2n

rD &< #S D 124.%4%6

rD 15< #S D &&.4

9 + (159 )(124.74766120)

(124.747699.40 )

D 1.1230

55


56/103

d

2 ($%&)

d (&2 )


57/103

Indian Bond *arket:

Strikin+ a "hord 5ith AsianPeers

>he Asian !ororate Bond +aret started deve$oing rather $ate' after the Asian finan!ia$

!risis in 1998 "rior to this' Asian ond marets 4ere modest$y deve$oed and dominated

so$e$y y government issan!es8 >he a!e of deve$oment a!!e$erated ost the finan!ia$ !risis

in 200 ese!ia$$y in e!onomies $ie oth orea' ingaore and +a$aysia 4ho have

e;tensive$y deve$oed their ond marets in re!ent years8

>he #ndian ond maret 4ith arti!$ar referen!e to the !ororate ond maret is often

toted to e nder deve$oed 4hen vie4ed in $ine 4ith the ond marets a!ross the

g$oe8 >here are demand and s$y side isses8 >here are fe4 issers in the maret

4hi!h trans$ate into a $o4er s$y for f$oating det 4ith a referen!e for an $oans'reg$atory isses on dis!$osres and other re$ated !osts' stam dty varying a!ross states

and so on8 On the demand side traditiona$$y high tattory Di


58/103

ingaore' >hai$and' "hi$iines and =ietnam8 @hi$e Paan is a different maret' it has eenin!$ded in this !omarative stdy to rovide ossi$e en!hmars8

ive ase!ts of the ond maret are !overed in this' !overing

A8 Aggregate ond marets! >he sie and e;anse of the ond maret'

! >he finan!ing rofi$e of the e!onomy

! >rnover in the se!ondary maret

B8 Government ond maret

! oreign ho$ding in domesti! ond maret

! >he investor rofi$e of the government ond maret8

A. A++re+ate bond markets

. SiJe and e1panse of the bond market

#ndia rans forth in sie among its Asian eers 4ith a tota$ ond maret of U 12

i$$ion as of +ar!h 201/ 4ith a strong resen!e of Government onds of -.9 n

(308/F in terms of G6") and a re$ative$y sma$$er !ororate ond maret of 2/28- n

(13F in terms of G6")8ororate onds in a$$ a!!ont for on$y 30F of tota$

otstanding onds in #ndia8 #nteresting$y' for a$most a$$ the !ontries' the ond maret

is dominated y the government se!tor8 >his is intitive sin!e a deve$oed governmentond maret is often !onsidered to e a re? rehe ta$e and e;hiit e$o4 give an overvie4 of the sie of ond marets in Asian

!ontries8

>he $argest among the sam$e is Paan 4ith 9'990 i$$ion 4hi!h is not a srrisesin!e it has an e;tensive ond maret ana$ogos to those of 4estern deve$oed

!ontries8 *o4ever' the Paanese ond maret is dominated y government onds

(92F of tota$)8 >he !ororate ond maret is minis!$e in !omarison (&. n)

and is on$y 1&F in terms of G6" (government onds in !omarison are 203F of

G6")8

hina stands ahead of #ndia as it has the se!ond $argest ond maret 4ith net

otstanding det of /'&2/ n 4hi!h is -083F of G6"' higher than #ndia y &F8

>he hinese ond maret a$so fo$$o4s the !onvention of government domination

as !ororates a!!ont to on$y 3-F of the tota$ ond maret8

oth orea is third 4ith a sie of 1'./1 n8 *o4ever' it is an e;!etion in thesam$e as it has a $arger !ororate ond maret re$ative to the government ond

maret8 ororate onds a!!ont for arond .1F of otstanding onds in the

!ontry and 4as 12-F of the G6" of the !ontry sggesting the ond maret ise;tensive$y deve$oed for the sie of the e!onomy8

58


59/103

33

23

61

318 1%

43

13

5

22

14

43

5

1

15

2

25

N G I HP G# ) P S: T FN IN

8

:overnment ond )ar0et a' < o- :P

or/orate ond )ar0et a' < o- :P

Total ond )ar0et a' < o- :P

+a$aysia' >hai$and and ingaore' the medim sied e!onomies 4ithin this Asiangro have a ond maret 4orth 312 n' 2&- n and 2/2 n rese!tive$y8

*ong ong and #ndonesia have a m!h sma$$er ond maret at 19- n and

10 n8 =ietnam is the sma$$est in the sam$e 4ith a ond maret sie of 29 n

on$y8

Table #/ SiBe o the )ond Market (in >S. )illions0 Dhibit #/ )ond

Markets in Asian Countries as 8 o .,

Countrie

s


60/103

T(e ta+le +elo$ de/ict' t(e nature o- dome'tic 7nancing in India

and it' 'ian /eer'.

ome'tic credit >i.e. credit di'+ur'ed +y +an0'? i' t(e /rimary'ource -or 7nancing in (ina >%3.&


61/103

Ha/an (a' t(e (ig(e't turnover ratio o- 4.56 $it( government+ond' (aving a multi/le o- 4.&. T(e turnover in t(e cor/orate+ond mar0et i' relatively lo$er at .3.

India i' 'econd $it( a (ealt(y turnover in t(e +ond mar0et at3.46. T(ere i' a 'trong 'econdary government 'ecuritie' turnovero- 4.%. IndiaJ' /o'ition in term' o- turnover i' mirrored in t(ecor/orate +ond' mar0et a' $ell $it( a turnover ratio o- .6%;$(ic( i' 'till (ig(er t(an t(at o- Ha/an.

(ina lead' in t(e cor/orate 'egment $it( a multi/le o- 1.6. In-act; (ina (a' a turnover ratio o- a+ove 1 in +ot( t(e 'egment'.

T(ailand i' t(ird $it( a total turnover o- 2.5; $it( a 3.1 turnoverin government +ond' and cor/orate +ond' turnover +eing .26.

C(ile Sout( Gorea (a' a larger cor/orate de+t mar0et 'iBerelative to :Sec'; t(e turnover ratio i' (ig(er -or gilt' at 3.%3com/ared $it( .54 -or cor/orate +ond'.

Table !/ Tradin& volume in the Secondary Market

relative to bonds outstandin&

Countries overnment)onds Corporate )onds All bonds

(ina 1.8 1.55 1.24

Indone'ia .&% .48 .8&

Ha/an 4.&2 .31 4.56

Sout( Gorea 3.%3 .54 1.%6

Singa/ore 1.%% n.a. 1.1

T(ailand 3.& .26 2.46

India 4.66 .66 3.46

Source: ASIAN

BONDS ONLINE,

RBI n.a.: Not

available

T(e a+ove analy'i' indicate' t(at de'/ite (aving a large +ond

mar0et; countrie' li0e (ina and Sout( Gorea (ave a relatively

/a''ive 'econdary mar0et a' o//o'ed to India $(ic( 'tand'

-ourt( in term' o- t(e 'iBe o- +ond mar0et; +ut i' 'econd $it(

re'/ect t(e turnover in +ond mar0et a' a $(ole and al'o in t(e

individual government and cor/orate +ond mar0et'.

:overnment Securitie'

1.oreign olding in :overnment ond'

61


62/103

32.5

8.3 &.2

2&.4

1%.4

1.4

5

1

15

2

25

3

35

I HP G# ) T IN

8

ontries fo$$o4 varying o$i!ies for foreign investments in government onds

ranging from hina 4hi!h adots a very stri!t o$i!y on this front to #ndonesia and

>hai$and 4here oreign #nstittiona$ #nvestments (##s) in government se!rities are

en!oraged 4ith favora$e o$i!ies for foreign investors8

Non?resident investors do not re


63/103

#nstittiona$ #nvestor "rogram are ermitted to invest in the domesti! se!rities

of the !ontry 4ith a very time !onsming ro!ess for the same 4hi!h frther

a!ts as a deterrent for foreign investors from investing in the government onds8

%+Investor ,rofle o overnment Securities

>his se!tion ana$yses the investor ho$ding in government onds in some of the

!ontries in!$ded in the stdy8 >he investors of government onds are road$y

!$assified as the entra$ Ban' Government' ans' !ontra!ta$ saving instittions

(s!h as insran!e !omanies' ension fnds et!8)' ##s and others8

>he ta$e e$o4 !atres the investor rofi$e in government se!rities for se$e!t

Asian !ontries8

Table E/ Investor ,rofle in overnment )onds (as 8 o Total0

Country Central

)ank

overnmen

t

(Sub0

)anks Contractual

Savin&s

=IIs


64/103

a' $ell around 33< o- total government 'ecuritie' are (eld +y+an0'. T(ailand and Sout( Gorea (ave le''er (olding' o- :Sec'+y +an0' at 11.&< and 1%.&< re'/ectively.

ontractual 'aving in'titution' 'uc( a' in'urance com/anie';/en'ion -und' and 'tate and local government retirement -und'

are anot(er 'et o- im/ortant inve'tor' in t(e government'ecuritie' mar0et. Cit(in t(e 'am/le in t(e 'tudy; maximuminve'tment in :Sec' +y contractual 'aving in'titution' i' in

T(ailand at 5.2< -ollo$ed +y )alay'ia at 4.%


65/103

om/ari'on o- +ond o-

India and re't o- t(e$orld

65


66/103

Introduction

A 4e$$?deve$oed !ororate ond maret sorts e!onomi! deve$oment8 #t rovides ana$ternative sor!e of finan!e and s$ements the aning system to meet the re


67/103

remained most$y sta$e in #ndia and hina8 >he sie of otstanding !ororate se!rities (y#s and !ororate issers) to G6" is high in the UA' oth orea and #ta$y8 >his is very $o4for #ndia8 Among the deve$oed !ontries' the U is having a very $o4 ratio8 *o4ever' in!ase of hina' this has in!reased from a $o4 of 13 er !ent in 200- to 2- er !ent y 20118

Table 1: Relative Size of Outstanding Domestic Debt Securities to GDP

(In per cent)

4ear2end >SChina ermany

India

Italy

Fapan South Gorea

>G

25164 4 % 35 121 183 1

44

26161 44 %% 36 136 1&3 13

5

2%166 48 %& 4 142 23 13

48

281%2 4& %1 34 141 228 &3

46

2& 183 51 85 48 151 22& 128 %1

211%8 51 %& 43 145 25 1&

%3

2111%5 46 % 33 14 255 13

%2

6%


68/103

=S (ina :ermany India Italy Ha/an Sout( Gorea =G

5

1

15

2

25

3

1

25 26 2% 28 2& 21 211

Table 1a:Size of outstanding securities of Fis and corporate Issuers relative to GDP

(In per cent)

4ear2end >SChina ermany

India

Italy

Fapan South Gorea

>G

25116 13 31 1 4% 3& 55

14

26114 15 35 2 54 38 58

16

2%11& 16 3% 4 5& 3& 58

16

2811% 18 34 3 63 4 56

15

2&11 22 38 6 58 3% %%

16

68


69/103

21 &6 24 2% 6 52 38 6314

211 8& 25 22 5 51 3% 5811


2

4

6

8

1

12

14

1a

25 26 2% 28 2& 21 211

Table 1b: Size of outstanding debt secrities of corporate issuers relative to GDP

(In per cent)

4ear2end>S

China ermany

India

Italy

Fapan South Gorea

>G

25

2

1 2 4 .5 13 15 3 126 2 3 5 .6 15 15 2% .

6&


70/103

1 &

2%21 3 6 .& 15 1% 22

.8

282 4 8 .6 18 16 23

.6

2&22 % 1 1.5 21 16 3% 1

2122 & 11 1.5 18 16 38

.&

21122 & & 1.1 16 16 3%

.8


5

1

15

2

25

3

35

4

1+

25 26 2% 28 2& 21 211

>he share of #s and !ororates in the tota$ otstanding domesti! det se!rities is very high in!ontries $ie the UA and oth orea (more than ha$f of the tota$ domesti! det se!rities)8 #t is $o4in !ase of Paan and U8 >he share is de!$ining in U' Germany' Paan and U' 4hi!h !o$d e

%


71/103

attrited to the fis!a$ and monetary stim$s ndertaen y these !ontries in the aftermath of theg$oa$ finan!ia$ !risis (>a$e 2 and 2a)8 #n !ase of hina and #ndia' this share is in!reasing!onsistent$y8 C;!$ding #s' the share of !ororates in the tota$ otstanding domesti! det se!rities isvery $o4 (e;!et in !ase of oth orea)8 #t has een in!reasing !onsistent$y in !ase of hina8

Table : S!are of FIs and corporates in t!e outstanding domestic debt securities(In per cent)

4ear2end>S

China ermany

India

Italy

Fapan South Gorea

>G

ec!5%1 32 45 4 3& 21 55

32

ec!6%1 34 46 6 4 2 56

33

ec!%%2 33 4% & 42 1& 5%

34

ec!868 36 4% & 45 18 61

32

ec!&6 43 45 12 38 16 6

23

ec!154 46 34 14 35 15 5%

2

ec!1151 55 31 14 3% 14 5%

15

1


1

2

3

4

5

6

%

8

2

ec!5 ec!6 ec!% ec!8 ec!& ec!1 ec!11

%1


72/103

Table a: S!are of corporates in t!e outstanding domestic debt securities

(In per cent)

4ear2end>S

China ermany

India

Italy

Fapan South Gorea

>G

ec!513 4 6 1 11 8 3 2

ec!613 6 6 2 11 8 26 2

ec!%12 6 % 2 11 8 21 2

ec!812 8 12 2 13 % 25 1

ec!& 12 14 12 3 14 % 2& 1

ec!112 1% 14 4 12 % 34 1

ec!1112 2 13 4 11 6 36 1


5

1

15

2

25

3

35

4

2a

ec!5 ec!6 ec!% ec!8 ec!& ec!1 ec!11

%2


73/103

Issues and "hallen+es 5ith the development of bond market in India.

>he nderdeve$oment of #ndia5s !ororate ond maret has some histori!a$ erse!tive8 >heig !omanies' at the time of oening of the e!onomy' sa4 more enefits from the sto!

maret $iera$isation than from the ond maret $iera$isation (Armor and De$e 2009' ingh2011' hanna and =arotti$ 2012)8 >he i$t of det in the 19&0s and the 190s 4as in the!ons!iosness of the o$i!y maers8 >hs' the deve$oment of the ond maret did not attra!tthe attention of the o$i!y maers8 @ith the oening of the e!onomy' there 4as high inf$o4 of##s and G6Rs' and it strengthened the rima!y of ehogh there are instan!es of onds se$$ing $ie hot !aes in $i! issan!es' they are fe4 innmer8 #nfrastr!tre onds generated $ot of interest 4ith the a$$o4an!e of Rs820'000 ta;ded!tions8 imi$ar$y' !ororate onds of some finan!ia$ entities 4ith high standing androst distrition !hanne$ a$so sa4 hge ss!rition in $i! issan!es8 >hese ositivee;erien!es indi!ate that right$y ri!ed onds a$ong 4ith an in!entivised distrition !hanne$!an generate the interest of the retai$ investors8 Re!ent$y' the Reserve Ban of #ndia hasadvised ans that at the time of issing sordinated det for raising >ier?## !aita$' to!onsider the otion of raising s!h fnds throgh $i! isse to retai$ investors8

A sim$ified and $o4 stam dty str!tre is an ingredient for i$ding of a virant!ororate ond maret8 #n #ndia' no4?a?days the se!ondary maret transa!tions in !ororate

onds throgh demat transfers do not re68 *o4ever' >6 is sti$$a$i!a$e in !ertain !ases8 Be!ase of >6 on interest ayments' ##s sed to se$$ the ond

efore the !oon ayment date and then rer!hase it after the !oon ayment' a ra!ti!eno4n as !oon 4ashing5 in maret ar$an!e8

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#n genera$' ond finan!ing is e;e!ted to e easier to otain than finan!ing from ans(+ishin 200.)8 *o4ever' #ndian ans genera$$y find it !onvenient to give $oans to!ororates instead of investing in their onds8 >he rovisioning norms in rese!t for $oans areeasier to adot than adoting the mar?to?maret norms in !ase of investment in !ororate

onds8 imi$ar$y' the !ororates a$so refer to go for an $oans than raising fnds from the

ond maret8

ororate onds are sa$$y rated efore they !ome to the maret (4hether the ond is$i!$y issed or rivate$y $a!ed)8 >he $ihe ne4

$atform ringing additiona$ $ihe reg$atory rdentia$ norms for the arti!iants in #ndia5s !ororate ond maret a$soaear restri!tive8 >he ans' +s and insran!e !omanies fa!e $imits on the investmentamont and on the rating stats of the !ororate onds to mae investment8

#n #ndia' !ororate onds are deemed risy as the $ega$ frame4or for re!overing theinvestment is too $engthy8 A$so' enfor!ement of !ontra!ts is very oor8 @or$d Ban' in itsre!ent 6oing Bsiness Reort' has $a!ed #ndia at 1/ ot of the 1- !ontries as er the

enfor!ement of the !ontra!t arameter8 #t may e high$ighted that the time taen to reso$ve a

%4


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diste is 1/20 days on an average in #ndia' 4hereas it is 3.0 days in !ase of *ong ong8>his de$ay is a deterrent for any finan!ia$ entity trying to invest in the !ororate ond8

Overa$$' a m$titde of fa!tors ranging from higher !osts' ro!edra$ hass$es' to $ong $ega$remedies are osta!$es in the gro4th of !ororate ond maret in #ndia8 >he need of the hor

is to ring reform in a$$ the aove ase!ts and a$$o4 the !ororate ond maret to tae off8

Impact o bondmarket in an

economy

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A 4e$$?deve$oed !ororate ond maret sorts e!onomi! deve$oment8 #t rovides ana$ternative sor!e of finan!e and s$ements the aning system to meet the rehis affe!ts the amont of $ihis determines ho4 easy or diffi!$t it is to y things on !redit' tae ot $oans for !ars'

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hoses or ed!ation' and e;and sinesses8 #n other 4ords' onds affe!t everything in thee!onomy8

>reasry onds ima!t the e!onomy y roviding e;tra sending money for the governmentand !onsmers8 >his is e!ase treasry onds are essentia$$y a $oan to the government that is

sa$$y r!hased y domesti! !onsmers8 *o4ever' for a variety of reasons' foreigngovernments have een r!hasing a $arger er!entage of >reasry onds' in effe!t rovidingthe U88 government 4ith a $oan8 >his a$$o4s the government to send more' 4hi!hstim$ates the e!onomy8

>reasry onds a$so he$ the !onsmer8 @hen there is a great demand for onds' it $o4ers theinterest rate e!ase the government doesn5t have to offer as m!h to attra!t yers8 Do4erinterest rates on onds means $o4er interest rates on mortgages8 >his a$$o4s homeo4ners toafford more e;ensive homes8

+ost imortant' onds affe!t mortgage interest rates8 Bond investors !an !hoose among a$$

the different tyes of onds' as 4e$$ as mortgages so$d on the se!ondary maret8 >hey are!onstant$y !omaring the ris vs re4ard offered y interest rates8

Bonds o4erf$ re$ationshi to the e!onomy means yo !an a$so se them for fore!asting8>hatEs e!ase ond yie$ds te$$ yo 4hat investors thin the e!onomy 4i$$ do8 Norma$$y' theyie$ds on $ong?term notes are higher' e!ase investors rereasry onds8

%%


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)ond market vHse'uity market

%8


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India Government Bond -? //;20-he #ndia Government Bond 10S in!reased to &8&. er!ent in +ar!h from &8&2 er!ent inerary of 201-8 >he #ndia Government Bond 10S averaged 9819 from 199/ nti$ 201-'rea!hing an a$$?time high of 1/8&. in Ari$ of 199. and a re!ord $o4 of /89. in O!toer of20038

%&

A!ta$ "revios *ighest Do4est re


80/103

Genera$$y' a government ond is issed y a nationa$ government and is denominated in the!ontryKs o4n !rren!y8 Bonds issed y nationa$ governments in foreign !rren!ies arenorma$$y referred to as sovereign onds8 >he yie$d re+ and BC ense; (as $aid do4n aforesaid)

it is very !$ear that the yie$d !rve is de!reasing 4hi$e ense; is !onsidera$y in!reasing8

Grada$$y $o4er S>+ indi!ates higher maret ri!e of det se!rities and !onse


81/103

de!reasing mode of interest rate y RB# (reo rate has a$ready een de!reased t4i!e) !an e a

good sign in ond8

81


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Bonds v7s A$ternative

investments

&ypes of

'nestmentsRis*Return +eatures ,iquidity

rea$ estateresiden!esQ!ommer!ia$ rea$estateQ ra4 $and8

Darge idiosyn!rati! ris !omonentQrovides good diversifi!ation8

Do48

"rivatee


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Byot fnds4e$$?esta$ished

rivate firms and!ororate sin?offs8

Dess ris than ventre !aita$ fndsQgood diversifi!ation8

Do48

#nfrastr!tre fnds

"$i! infrastr!treassets8

Do4 ris' $o4 retrnQ gooddiversifi!ation8

Do48

!ommoditiesAgri!$tra$

rod!tsQ !rde oi$Qmeta$s8

Do4 !orre$ation 4ith sto!s7onds8air$y $i


84/103

4ith inf$ation8 >hat is a enefit to the investor e!ase they rovide a hedge against inf$ation'

4hi$e sto!s and onds are hrt y inf$ation8

>he retrns on !ommodities have genera$$y een $o4er than sto!s and onds over the eriod

1990,200/' oth on an aso$te asis and a ris?adsted asis8

3ed&e =unds*edge fnds generated higher aso$te and ris?adsted retrns than sto!s and onds over

the eriod 1990,200/8 >he hedge nd !omosite #nde; (h!#) retrn' standard deviation'

and hare ratio 4ere 138/.F' -8&1F' and 18.1' rese!tive$y8 *edge fnds raned et4een

onds and sto!s in the more re!ent eriod of 2000,200/' 4here the !orresonding nmers

4ere .8/F' /83F' and 08.8 or the more re!ent eriod' the mean retrn and hare ratio

is higher than the measres for sto!s' t they are oth $o4er than the measres for onds8

As 4as the !ase for most of the revios a$ternative investments' a /07/0720 sto!7ond7

h!# ortfo$io had a higher retrn and $o4er standard deviation than the -07-0 sto!7 ondortfo$io over oth the 1990,200/ and 2000,200/ eriods8

*edge fnds vary 4ide$y' ho4ever' so the enefits of investing in one of any given sty$e 4i$$

differ8 igre rovides a reresentative $ist of the est and 4orst erforming fnds 4ith

their !orre$ations4ith the H" -00 and the Dehman government7!ororate Bond #nde;8 >he$ast t4o ro4s in igre !omment on ea!h inde;5s retrn and ho4 4e$$ it added

diversifi!ation over the eriod 1990,200/8

=i&ure/ 3ed&e =und Strate&y IndeD ,erormance =rom #$$"%""E

Measure

(annualized)

Short

Sellin

g

MSCI

Worl

d

Fixed-

Income

Arbitrag

e

Equit

!edg

e

"lob

al

Macr

o

!FC

I(com#o

site)

return K.61?i$$s 823F X Rf

Name Rate F >?i$$s (Rm'Rm )2 (=" . # (Rm' (R m'Rf)

(m'

Ran

BN" 98.0 823 (9.607.49 )2 2811 183& 1.37/2.11=0.6492 -

86

NP ;/ari+u' lexi de+t 6 )ont(' &.6he most !ommon reason for investors to r!hase onds

are e$o4:

iversification:Bonds tend to e $ess vo$ati$e than sto!s and !an therefore stai$ie

the va$e of yor ortfo$io dring times 4hen the sto! maret strgg$es8 *aving a!omination of oth tyes of investments over the $ong term !an often rovide!omara$e retrns 4ith $ess ris than a ortfo$io devoted to on$y one tye ofinvestment8

Stability: #f investors no4 they 4i$$ need a!!ess to $arge sms of money in the near

ftre?for e;am$e' to ay for !o$$ege' a home' et!8?then it does not mae sense to$a!e that money in a high$y vo$ati$e investment $ie sto!s8 Be!ase the maority of

the retrn on onds !omes from the interest ayments (the !oon ayments)'

88


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f$!tations in the ri!e of a ond 4i$$ have $itt$e ima!t on the va$e of theinvestment8

"onsistent income: Un$ie sto! dividends' !oon ayments are !onsistent$y

distrited at reg$ar interva$s8 #ndivida$s seeing this !onsistent in!ome might findonds a etter a$ternative than the dividend ayments some sto!s offer8

Income predictability: #f yor oe!tive is to maintain a se!ifi!' steady $eve$ ofin!ome from yor ortfo$io' high a; A!t8 >his is over and aove the Rs 1'00'000ded!tion avai$a$e nder e!tion 08 >hese are $ong?term se!red onds 4hi!hmatre in 10?1- years8

## Dtd and " re!ent$y !$osed their infra ond isses8 A fe4 others' s!h as D#'#nfrastr!tre 6eve$oment inan!e omany' DH> #nfrastr!tre and #ndia#nfrastr!tre inan!e omany' are getting ready to $an!h their isses8

Bonds are often !a$$ed Wfi;ed in!omeW investments' t donEt $et that term foo$ yo8 Bonds are notris$ess investments8 @hi$e they are sa$$y !onsidered m!h safer than sto!s' onds !an sti$$ $oseva$e 4hi$e yo ho$d them8 *ere is a rief $oo at some of the riss asso!iated 4ith onds:

Interest rate risk? Bond ri!es are inverse$y re$ated to interest rates' so if interest

rates in!rease' the ri!e of the ond 4i$$ de!rease8 >he interest rate on a ond is set atthe time it is issed8 Genera$$y' the !oon 4i$$ ref$e!t interest rates at the time ofissan!e8 *o4ever' if interest rates in!rease' eo$e 4i$$ e n4i$$ing to r!hase the

onds in the se!ondary maret at the ear$ier rate8 or e;am$e' if the !oon is set at

.F and interest rates in the maret are at &F' the interest rate on the ond is 4e$$e$o4 4hat yo !o$d get from a different investment8 >herefore' the ri!e of theond 4i$$ de!rease so that the !aita$ are!iation 4i$$ mae for the differen!e ininterest rates8 (or this reason' it !an e risy to y $ong?term onds dring eriodsof $o4 interest rates8)

"redit $isk, A$so no4n as defa$t ris8 Pst as individa$s o!!asiona$$y defa$t on

their $oans or mortgages' some organiations that isse onds o!!asiona$$y defa$t ontheir o$igations8 #f this is the !ase' the remaining va$e of yor investment !an e$ost8 Bonds issed y the federa$ government' for the most art' are immne fromdefa$t (if the government needed money it !o$d st rint more)8 Bonds issed y!ororations are more $ie$y to e defa$ted on ? !omanies often go anrt8+ni!ia$ities o!!asiona$$y defa$t as 4e$$' a$thogh it is m!h $ess !ommon8 >he

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good ne4s is that yo are !omensated for taing on the higher riss asso!iated 4ith!ororate onds and mni!ia$ onds8 >he yie$d on !ororate onds is higher thanthat of mni!ia$ onds' 4hi!h is higher than that of treasry onds8 +oreover' thereis a rating system that ena$es yo to no4 the amont of ris ea!h !$ass of ondentai$s8

"all $isk ? ome onds !an e !a$$ed y the !omany that issed them8 >hat means

the onds have to e redeemed y the ond ho$der' sa$$y so that the isser !an issene4 onds at a $o4er interest rate8 >his for!es yo to reinvest the rin!ia$ soonerthan e;e!ted' sa$$y at a $o4er interest rate8 >his se!t 4i$$ e frther dis!ssedin $ater se!tions8

Inflation $isk? @ith fe4 e;!etions' the interest rate on yor ond is set 4hen it is

issed' as is the rin!ia$ that 4i$$ e retrned at matrity8 #f there is signifi!antinf$ation over the time yo he$d the ond' the rea$ va$e (4hat yo !an r!hase 4iththe in!ome) of yor investment 4i$$ sffer8

Term to maturity: As onds aroa!h matrity' their maret va$e aroa!hes theirfa!e va$e8 #n genera$' the $onger the term to matrity and the $o4er the !oon rate'the more sensitive a ond is to any !hanges in rate8 @hen interest rates in!rease'

onds 4ith distant matrity dates and $o4 !oon rates e;erien!e the greatest fa$$ inri!e8

Special features: +any onds have se!ia$ featres that may have a signifi!ant

ima!t on their ri!e' ris and the retrns yo may earn8 >hey !an e !a$$ed (reaid)ear$y or they !an e !onverted' for e;am$e' into shares of the issing !omany8Bonds !an a$so e e;tended (reayment deferred from the origina$ term to a $aterdate) or other se!ia$ rovisions !an a$y8

&


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Application o

derivativesinstruments on bonds

>ed+in+ tools:

erivatives:A derivative is an instrment 4hose va$e is derived from the va$e of one ormore nder$ying' 4hi!h !an e !ommodities' re!ios meta$s' !rren!y' onds' sto!s' sto!sindi!es' et!8 or most !ommon e;am$es of derivative instrments are or4ards' tres'Otions and 4as8

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@or5ard:A for4ard !ontra!t is a !stomied !ontra!t et4een t4o arties' 4here sett$ement

taes $a!e on a se!ifi! date in ftre at a ri!e agreed today8 >he main featres of for4ard

!ontra!ts are

>hey are i$atera$ !ontra!ts and hen!e e;osed to !onter?arty ris8

Ca!h !ontra!t is !stom designed' and hen!e is nihey !an e regarded as ortfo$ios of for4ard!ontra!ts8 >he t4o !ommon$y sed s4as are interest rate s4as and !rren!y s4as8

#nterest rate s4as: >hese invo$ve s4aing on$y the interest re$ated !ash f$o4s et4een thearties in the same !rren!y8

rren!y s4as: >hese entai$ s4aing oth rin!ia$ and interest et4een the arties' 4iththe !ash f$o4s in one dire!tion eing in a different !rren!y than those in the oositedire!tion8

%ptions:Otions are of t4o tyes ? !a$$s and ts8 a$$s give the yer the right t not theo$igation to y a given


93/103

Macro2economicvariables a5ectin& inthe value o bond in

India(Interest rates* inJation rate* per capita income* eDport and imports*leadin&* la&&in& and concurrent indicators* 7orld beta* .emand and

supply* political a5airs* social and economic a5airs0

Interest rate risk:Intere't rate ri'0 i' t(e ri'0 o- c(ange' in a +ond' /rice due toc(ange' in /revailing intere't rate'. (ange' in '(ort!term ver'u' long!term

intere't rate' can a9ect variou' +ond'.

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1elationship bet7een bonds and interest rates

C(en you +uy a +ond; eit(er directly or t(roug( a mutual -und; youre lendingmoney to t(e +ond' i''uer; $(o /romi'e' to /ay you +ac0 t(e /rinci/al >or /arvalue? $(en t(e loan i' due >on t(e +ond' maturity date?. In t(e meantime; t(e

i''uer al'o /romi'e' to /ay you /eriodic intere't /ayment' to com/en'ate you-or t(e u'e o- your money. T(e rate at $(ic( t(e i''uer /ay' you K t(e +ond''tated intere't rateor cou/on rateK i' generally 7xed at i''uance.

An Inverse $elationship

@hen ne4 onds are issed' they tyi!a$$y !arry !oon rates at or !$ose to the revai$ingmaret interest rate8 #nterest rates and ond ri!es have 4hatEs !a$$ed an Winverse re$ationshiW

, meaning' 4hen one goes ' the other goes do4n8 >he he ans4er $ies in the !on!et of Woortnity !ost8W

#nvestors !onstant$y !omare the retrns on their !rrent investments to 4hat they !o$d gete$se4here in the maret8 As maret interest rates !hange' a ondEs !oon rate , 4hi!h'rememer' is fi;ed , e!omes more or $ess attra!tive to investors' 4ho are therefore 4i$$ingto ay more or $ess for the ond itse$f8 DetEs $oo at an e;am$e8

ose the AB omany offers a ne4 isse of onds !arrying a &F !oon8 >his means it4o$d ay yo &0 a year in interest8 After

dissertation on debt securities market in india

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