debt bond market
TRANSCRIPT
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Presented By:
Ms Arleen Afonso
Bond Market
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Topics to be discussed
What are bond markets?
Segmentation of the bond market
Participants in the bond market
Instruments traded in the bond market Measures to strengthen market infrastructure
NDS (Negotiated Dealing System)
CCIL (Clearing Corporation of India Ltd)
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Topics to be discussed
What are bond markets?
Segmentation of the bond market
Participants in the bond market
Instruments traded in the bond market
Measures to strengthen market infrastructure NDS (Negotiated Dealing System)
CCIL (Clearing Corporation of India Ltd)
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Debt Market???
Debt Market, also known as the fixed income
securities market.
The oldest market to have emerged in the world.
In India, debt markets play a vital role
as they enable the government and the
corporate to channelize the nations financial
resources for the infrastructural, industrial growth
of the country.
At the same time, provide investors with a safe
avenue to invest their funds in.4
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What are bonds???
A long-termdebt security issued bycorporations and governments offering fixedinterest payments periodically for a period ofmore than one year.
Holding a bond does not represent ownership
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Difference between bonds and
debentures
The debt securities issued by the Central and
State government are known as bonds.
The debt securities issued by private corporate
enterprises are known as debentures.
However, the two terms are often used
interchangeably.
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Features of Bonds
Issue date: The date on which an investor buysthe bond is called the issue date.
Principal: The amount that the investor invests inthe bond is called the principal amount. It is also
called as the par value orface value.
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Features of bonds
Typically the face value of bonds in the Indian
bond market is Rs. 100
The name of the bond signifies the various
features of the bond.
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Coupon
Coupon refers to the periodic interest payments
made by the issuer of the bond (i.e. the borrower
of the money) to the subscriber (i.e. the lender).
The coupons are specified directly as a fixed
percentage of the principal amount or
Floating rate
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Debt Market Segmentation
Private Corporate Debt Market
Public sector undertaking bond market
Government securities market
Government securities is the principal segment of
the debt market
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Participants in the Debt Market
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Central & State Governments Primary Dealers
Public Sector Undertakings
Corporates
Banks
Mutual Funds
Insurance Companies
FIIs PF (Provident Funds & Pension Funds)
Charitable Institutions and Trusts
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Types of Instruments traded in the Debt
Market
MarketSegment
Issuer Instruments
Government
Securities
Central Government Zero Coupon Bonds, Coupon Bearing Bonds,
Treasury Bills, Floating Rate Bonds, STRIPS,
Govt. Dated Securities
State Government Coupon Bearing Bonds, Floating Rate Bonds
Public Sector
Bonds
Government
Agencies/ Statutory
Bodies
Government Guaranteed Bonds, Debentures
Public Sector Units PSU Bonds, Taxable & Tax-free, Debentures,
Commercial Paper, Deep Discount Bonds.
Private
Sector
Bonds
Corporates Debentures, Bonds, Commercial Paper,
Floating Rate Bonds, Secured Premium
Notes, Zero Coupon Bonds, Inter- Corporate
Deposits
Banks CDs, Debentures, Bonds
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Zero Coupon Bond
No coupon payments are made.
These bonds are issued at a discount to their
face value.
The effective return that the investor earns is thedifference between the face value minus the
discounted value of the bond.
Also called as a Deep Discount Bond
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Floating Rate Bonds
The rate at which coupon is paid changesperiodically.
It is tied to a benchmark rate like a particularGovernment security.
A few floating rate bonds also have caps and
floors.
These are also called as Range Notes, as theymove within a certain range.
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Callable & Puttable Bonds
Callable bonds:
The issuer can redeem or repay the principal
amount to the investor before the original maturity
date
Also called as bonds embedded with options
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Advantages to the Issuer
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Whenever the rates fall below the rate that the
issuer has offered, the issuer can repay the bond
and issue a new bond at the lower rates.
Thus the company has to pay less for the same
amount of money that it borrows.
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Disadvantages to the Investor
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Investor loses an opportunity to stay invested in a
security that pays higher returns even when the
rates have dropped.
The investor is also faced by reinvestment risk.
The rates offered for the callable bonds areslightly higher that those offered in regular bonds.
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Puttable bonds:
The put option gives the investor the right to ask
for redemption or repayment of the face value
and retire the bond before the original maturity
date.
This option will be exercised by the investor when
the rates rise above the rates that they are
offered in the existing bond investment
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Advantages to the Investor
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The advantage to the investor is that when the
rates rise above the rates currently offered to him,he can ask for repayment of the principal and
reinvest the money in a bond that offers the
current high rate.
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Disadvantages to the Issuer
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The disadvantage to the issuer is that, this willexpose him to re-pricing risk.
The issuer will now have to re-issue the bond,
offering a higher coupon rate. To compensate the issuer for this, rate offered by
the issuer for puttable bonds are lower thanregular bonds.
The Central Government has issued a bond withembedded option of both the call and put.
This gives both the government and thebondholder the right to retire the bond.
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Convertible BondsA convertible option provides the investor with an
option to convert the outstanding bond into equityof the company
The number of shares allotted i.e. the conversionratio and the conversion price to be applied isspecified in the indentures (the terms andconditions) of the bond in the beginning
Fully convertible bonds
Partially convertible bonds
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Secured Premium Notes
SPN is a secured debenture redeemable at premium
issued along with a detachable warrant
Redeemable after a notice period of 4-7years
The warrants attached to SPN gives the holder the
right to apply and get allotted equity shares; provided
the SPN is fully paid
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Contd..
There is a lock-in period for SPN
The SPN holder has an option to sell back the
SPN to the company
The conversion of detachable warrants into equity
shares will have to be done within the time limit
notified by the company
Eg-TISCO
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STRIPS (Separate Trading for Registered
Interest and Principal of Securities)
STRIPS is a process of stripping a conventional
coupon bearing security into a number of zero coupon
securities which can be traded separately
Split on the basis of Coupons and Principal
repayment
Easy calculation of yield
Easy calculation of cash flows
Free from default risk24
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Government Dated Securities
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Medium to long term obligations issued by RBI onbehalf of the Govt. to finance the deficit and
development programs
Predominantly coupon bearing & coupon is paid
semi-annually
Also issued at floating rate and as zero coupon
bonds
No TDS is applicable Eligible for SLR and highly liquid
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Risks associated with Debt Securities Default Risk
Interest Rate Risk
Reinvestment Risk
Risks associated with trading in Debt
Securities Counter party risk
Price risk
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Segments of the Debt Market
Primary Segment
Fresh Issues
Secondary Segment
OTCEI
WDM NSE
BSE
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Primary Issuance Process
The issuance process for G-secs has undergonesignificant changes over the last few years:
The introduction of the auction mechanism.
Creation of the system of primary dealers.
The introduction of non-competitive bids.
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What is an auction mechanism?
This is basically a price discovery mechanism.
Used to discover the price of the govt. sec. being
floated in the market.
Auction is a process of calling of bids with an
objective of arriving at the market price.
RBI conducts the option on behalf of the govt.
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RBI announces the auction of government securities
through a press notification, and invites bids.
The sealed bids are opened at an appointed time.
Successful bidders are those that bid at the highest
price.
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The objectives of auction design are:
Higher auction volumes that satisfy the target
borrowing requirement.
Broadening participation to ensure that bids are
not concentrated and
Ensuring efficiency through achieving the optimalcost of borrowing for the government.
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Primary dealers
They are market intermediaries appointed by the
Reserve Bank of India who:
Underwrite and make market in government
securities, and
Have access to the call markets and repo markets for
funds.
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The objectivesof setting up thesystem of primary dealers are:
To strengthen the infrastructure in the Gsecs market
in order to make it vibrant, liquid and broad-based;
To improve secondary market trading system.
enhance liquidity and turnover and
encourage voluntary holding of government
securities among a wider investor base;
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Non competitive bids
The non competitive bids were introduced, with a
view to expand the bond market and allow individual
investors to invest in the G-secs.
The allocation is according to the discretion of RBI,
and the price is that discovered through the auction.
The number of securities allocated here, is a
percentage of the amount issue typically 5%.
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Subsidiary General Ledger (SGL)
account
(SGL) account is a securities account maintained by
banks, primary dealers and financial institutions with
the RBI, to hold their investments in G secs. and
T- bills in the electronic book entry form. These institutions can settle their trades for
securities held in SGL through a delivery versus
payment (DvP) mechanism, which ensures
simultaneous movement of funds and securities.
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Constituent Subsidiary General Ledger
(CSGL)
As individual investors do not have access to the
SGL system, RBI has permitted such investors to
open a account with any entity authorized by RBI forthis purpose and thus avail of the DvP settlement.
RBI permits Clearing houses, banks and PDs to
offer CSGL account facility to an investor who is
interested in participating in the governmentsecurities market.
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Features of CSGL Accounts
CSGL account gets debited or credited on the sale
or purchase of the securities ,similar to a bank
account. The account holder receives a statement at periodic
intervals showing the balance of securities in his
account.
All the securities are maintained in demat mode,which can be converted into physical mode
whenever required by the Account Holder.
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Trading Mechanism
The trades on the Whole Sale Debt market (WDM)
segment can be executed in the:
Continuous market or
Negotiated market.
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Continuous market
Here, orders entered by the trading members are
matched by the trading system.
For each order entering the trading system, thesystem scans for a probable match in the order
books.
On finding a match, a trade takes place.
In case the order does not find a suitable counterorder in the order books, it is stored in the order
books as a passive order.
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Negotiated Market
In the negotiated market, deals are negotiated
between the two counter parties and are reported on
the trading system for approval.
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Negotiated Dealing System
(NDS)
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NDS
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Provides an online electronic bidding facility in theprimary auctions of the Central/State Government
securities, OMOs auctions
It enables screen based electronic bidding &
reporting of transactions
Banks, financial institutions, Primary Dealers
having SGL Accounts or current accounts are
eligible to participate in NDS
Members are expected to report all the trades
negotiated outside the system for settlement
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Clearing Corporation of India Ltd
(CCIL)
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CCIL
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It is a clearing and settling agency in respect of alltrades
NDS is integrated with CCIL
All the transactions that take place on NDS are
settled over CCIL
All transactions upto Rs. 20 crore are to be
settled through CCIL
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