Meaning of debt securitiesThe debt market isany market wheretrading of debtinstruments/ securities take place.
Government Securities Market CLASSIFIACTION OF INDIAN DEBT MARKETBondMarket
Government Securities Market (G-Sec Market): It consists of central and state government securities. It means that, loans are being taken by the central and state government. It is also the most dominant category in the India debt market.More than 80% - Debt securities
Features Issued of atGovernment Liquidity Securities Face Value Features Debt Fixed rate of Safety Instru investment Government Of Securities -ment Interest Issued Exemption IIs are the By main Maturity on participa RBI Tax nt
Players in Government Securities 1. Central & State Government 2. Commercial Banks, RBI, SBI, Cooperative Banks. 3. Specialized Financial Institutions Like:- IDBI, IFCI, SFC etc. 4. Joint Stock companies. 5. Non Banking Financial Companies. 6. Investing institutions like:- LIC, GIC & UTI. 7. Provident Funds 8. Individuals (w.e.f. Dec., 2001)
Bond Market:It consists of Financial Institutions bonds, Corporate bondsand debentures and Public Sector Units bonds. These bondsare issued to meet financial requirements at a fixed cost.
Features of Bond Instruments 1. Higher Risky 2. High Rate of Return 3. Taxable • Bonds issued by corporations or government are usually taxable • Bonds issued by state governments or municipalities are usually exempt from tax 4. Maturity 5. INTEREST RATES
Central State Government Governme RBI nt Corporat e Primary treasurie Dealers sFinancial PARTICIPANTS IN THE PublicInstitutio Sector ns DEBT MARKET Charitabl e Banks Institutio ns Mutual Provident Foreign Funds Funds Institutio nal Investors
PRIMARY ISSUANCE PROCESS Issue Through AuctionIssue of securities with Pre announced Coupon Rate Issue of securities through tap sale Issue in conversion of T.bills Issuance process of T.bills State government securities
PRIMARY MARKET• It is that market in which shares, debentures and other securities are sold for the first time for collecting long term capital.• This market is concerned with new issues. Therefore the primary market is also called “new issue market”.• In this market, the flow of funds is from savers to borrowers. Hence, it helps directing in the capital formation of the country
Clearing and SettlementClearingClearing is all steps of the post-trade processesapart from the final settlement — i.e. apart fromthe final payment and change in ownership.SettlementSettlement is the last step in the post-tradeprocess. Settlement is a two way process whichinvolves transfer of funds and securities on thesettlement date.
Salient features of Clearing and Settlement in Debt Market segment1. Clearing and settlement of all trades in the Debt Market shall be subject to the Bye Laws, Rules and Regulations of the Capital Market Segment and such regulations, circulars and requirements etc. as may be brought into force from time to time in respect of clearing and settlement of trading in Debt Market (Government securities).2. Settlement in Debt Market is on T + 2 Rolling basis viz. on the 2nd working day. For arriving at the settlement day all intervening holidays, which include bank holidays, NSE holidays, Saturdays and Sundays are excluded. Typically trades taking place on Monday are settled on Wednesday, Tuesdays trades settled on Thursday and so on.3. NSCCL shall compute member obligations and make available reports/data by T+1.4. The existing clearing bank accounts shall be used for funds settlement.
STRIPS• Separate Trading of Registered Interest and Principal Securities (STRIPS)• It is that whose interest and principal portions of the security have been separated, or "stripped"; these may then be sold separately in the secondary market.
Example• a Treasury note with 10 years remaining to maturity consists of a single principal payment, due at maturity, and 20 interest payments, one every six months over a10 year duration. When this note is converted to STRIPS form, each of the 20 interest payments and the principal payment becomes a separate security.
• Generally the following convention is followed for calculating price/yield of STRIPS:• 100• P = ---------------------• (1+y/2)^((r/s)+n)•• Where• P = Price of strip• y = Gross redemption yield• r = Number of days from the settlement date to the next quasi coupon date*• s = Exact number of days in the current quasi coupon period• n = Number of remaining quasi coupon periods after the current period
Features of STRIPS• STRIPS let investors hold and trade the individual interest and principal components of eligible Treasury notes and bonds as separate securities.• STRIPS are popular with investors who want to receive a known payment on a specific future date.• It is issued at discount.• These are zero coupon instrument with single maturity value.
CONCLUSION• The debt markets play an important role in efficient mobilization and allocation of resources in the economy , financing the development activities of the Government ,transmitting signals for implementation of the monetary policy, facilitating liquidity management in tune with overall short term and long term objectives.