Govt sec markts


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Government Security Markets in India

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  • Suppose you invest US$100 in a bond at 10% fixed interest annually. So, it will give you a $10 return every year until maturity when you would receive the US$100 back. The investor can sell the purchased bond before maturity, depending on the market conditions and how that particular bond is rated.
  • Govt sec markts

    1. 1. 1
    2. 2. Contents2Topics Slide No.GS Market Definition, Need, Features &Major Participants2-6Classifications Of 4 Main MarketSecurities7Money Market Security 8-9Capital Market Security 10-13Derivative Market Security 14-16Indirect Invest. Market Security 17-19Non-Marketable Security 20-22Dated Security Bonds 23-25Why GS?? & Conclusion!! 26
    3. 3. • A tradable instrument issued by the Central Government or theState Governments• Acknowledges the Government’s debt obligation• May be short term or long term• Issued by the Reserve Bank of India on behalf of the governmentto finance any deficit and public sector development programs3Definition
    4. 4. Government needs enormous amount of money toperform the following main functions:Creation and maintenance of physical infrastructureThey are issued in order to finance the fiscal deficitand managing the temporary cash mismatches of theGovernment.4Need of GS
    5. 5. • Issued at face value• No default risk as the securities carry sovereign guarantee• Ample liquidity as the investor can sell the security in thesecondary market• Interest payment on a half yearly basis on face value• No tax deducted at source5Features of GS
    6. 6. The Government securities market consists of securitiesissued by the State government and the Centralgovernment.Government securities include Central Governmentsecurities, Treasury bills and State Development Loans.All entities registered in India like banks, financialinstitutions, Primary Dealers, firms, companies, corporatebodies, partnership firms, institutions, mutual funds,Foreign Institutional Investors, State Governments,Provident Funds, trusts, research organizations, NepalRashtra bank and even individuals are eligible to purchaseGovernment Securities. 6Major Participants
    7. 7. Classification of Markets7
    8. 8. Money Market Security8o Stocks, bonds or any other types of securitieswhich can be traded easily in organized financialmarkets or between two investors with the helpof brokers, are known as marketable securities.o Feature:It is easier to trade them and they can beconverted into cash whenever required by theinvestor
    9. 9. Classification
    10. 10. The common stocks in which we trade in the openmarket are classic examples of a capital marketsecurity. In such securities, the maturity period isgreater than one year and for some securities (forexample, stocks), there is no defined maturity period.Capital Market Security10
    11. 11. Classification11
    12. 12.  Fixed Income Securities: These are investments that promise guaranteed income on theamount invested, though at a lower rate of return. Bonds: They are a form of fixed-income securities, and payments are made as per thetime and depending on the conditions mentioned in the deal. Treasury Notes and Bonds: These securities offer higher interests, and they also repaythe principal on maturity. The terms of treasury notes are usually between 1 to 10 yearswhile for the treasury bonds, it is between 10-30 years. Municipal Bonds: These are tax-exempted investments and hence, one of the mostsought after bonds issued by the government. Corporate Bonds: These are almost similar to the treasury bonds with the majordifference that they are issued by corporate entities, so the risk of default is higher. Stocks: Stocks are divided into two types: Preferred stocks : Suppose if a company shuts down or goes broke, common stockshareholders are the last investors to get compensated. Dividend, if it is distributed atall, first goes to creditors, bondholders, and preferred shareholders. Common stocks: The general trading we see in stock markets is done in commonstocks. 12
    13. 13. These class of marketable securities represent thoseinvestments values of which are dependent on theperformance of several other securities. That means,their values are derived from the value of otherinvestment instruments and hence, the namederivatives.Derivative Market Security13
    14. 14. Classification Of Capital Market14
    15. 15. Options: It is an interesting security that provides the holder the right, but notobligation to buy or sell securities at some fixed point of time in the future.The buying is typically known as a call option while selling is popular as a putoption. In case, the holder doesnt carry the transaction within the specifiedtime constraints, the deal expires.Very speculative and hence only ideal for sophisticated investors.Futures: Futures securities are just like options, but with a major differencethat in future securities, the buyer is obligated to fulfill the terms of contractunlike the options.The futures market is extremely liquid, risky and very complex.Rights and Warrants: Similar to options and futures, are rights and warrantsthat grant the shareholders some rights of ownership and profit from thecompanys performance.Rights and warrants are issued by the companies for raising money.Rights are generally for short-term and expire within a week, while warrants maybe traded for one to a few years.15
    16. 16. Investments in securities that are made by purchasingshares of an investment company, are known asindirect investments. Just like any other company,even an investment company tries to diversify itsportfolio and generate funds for its businesspurposes.Indirect Investment Market Security16
    17. 17. ClassificationUnit Trusts Investment Trusts Hedge FundsIndirect InvestmentMarket Security17
    18. 18.  Unit Trusts: Also known as open-ended investments, the value of a unit trust dependson the number of units issued and the price of each unit. The success of a unit trustdepends on the expertise and experience of the fund managers handling it. Investment Trusts: One of the most popular investment instruments are the mutualfunds. Investment trusts, like mutual funds, also known as open-end investmentcompanies sell shares of the companies even after the Initial Public Offering (IPO) getsover.Another type of marketable securities are in the form of closed-end investments. Theseare the companies under trusts that dont sell the shares after the IPO of a companygets over. Hedge Funds: Hedge fund is a general, non-legal term used to describe private,unregistered investment pools that traditionally have been limited to sophisticated,wealthy investors.Hedge funds are not mutual funds and, as such, are not subject to the numerousregulations that apply to mutual funds for the protection of investors - includingregulations requiring a certain degree of liquidity.18
    19. 19. Non-Marketable Securities19o Securities that are difficult to trade in a normal financial market are generallycalled non-marketable securities.o It is difficult to get a potential buyer for non-marketable securities and hence,some of the financial instruments that comprise non-marketable securities aretraded in private transactions.o Although these securities cant be traded easily, they from a significant portion ofan investors portfolio.o These securities are traded between investors and large financial institutions likecommercial banks, so it is a risk-free and safe investment.
    20. 20. Classification
    21. 21.  Savings AccountThey are a form of non-marketable securities that earn an interest over a period. Theinterest rates and maturity period depends on the banks. For the account to function,investor needs to maintain some minimum balance as per the directives of the bank. Itis a safe and simple form of investment although, the returns are not very high. Government Savings BondsThose government bonds that cant be traded in the open market, constitute a part ofgovernment savings bonds. These government debt instruments are traded amongstinvestors and financial institutions (banks) indirectly. These bonds earn interest onlywhen they are redeemed. Non-negotiable Certificates of Deposits (CDs)CDs are promissory notes (the bearer is promised some return on investment withinterest) that are issued by commercial banks.CDs have a maturity period of one month to five years and any withdrawal prior tomaturity attracts penalty.Money Market Deposit Accounts (MMDAs)MMDA securities have very high interest rates along with some restrictions as: An investor is allowed a limited number of transactions every month It is also mandatory to maintain a minimum balance that is normally higher than thatin normal savings account.21
    22. 22. Dated Security BondsDated Government securities are longer termsecurities and carry a fixed or floating coupon(interest rate) paid on the face value, payable at fixedtime periods (usually half -yearly).The tenor of dated securities can be up to 30 years22
    23. 23. 23ClassificationDated Security BondsFixedRateBondsFloatingRateBondsZeroCouponBondsCapitalIndexedBondsBonds withCall/Putoptions
    24. 24. o Fixed Rate BondsThese are bonds on which the coupon rate is fixed for the entire life of the bondo Floating Rate BondsFloating Rate bonds are securities which do not have a fixed coupon rate and thecoupon is reset at pre-announced intervals based on a specified methodology.o Zero Coupon BondsZero coupon bonds are bonds with no coupon payments. Like Treasury Bills,theyare issued at a discount to face valueo Capital Indexed BondsThese are bonds, the principal of which is linked to an accepted index ofinflationwith a view to protect the holder from inflationo Bonds with Call/Put optionsBonds can also be issued with features of option wherein the issuer can have theoption to buy back (call option) or the investor might have the option to sell the
    25. 25. Why Government Securities???• It Constitutes the principal segment of the debt market• Acts as a benchmark for pricing corporate papers of varying maturities• Helpful in implementing the fiscal policy of the government• Provide the highest type of collateral for borrowing against theirpledge• Have the highest degree of security of capital and the return on eachsecurity depending on the coupon rate and period of maturity• Switches between the short dated and long dated securities take placeon the basis of difference in redemption yields.25
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