Debt Market

  • Debt market is a market meant for buying or selling of debt securities also called as bonds or fixed income securities.
  • The debt market in India consists of mainly two categories the government securities or the G-Sec markets comprising central government and state government securities, and the corporate bond market.
  • In order to finance its fiscal deficit, the government floats fixed income instruments and borrows money by issuing G-Secs that are sovereign securities issued by the Reserve Bank of India (RBI) on behalf of the Government of India.

Bonds

  • A bond is simply a loan with a definitive instrument features taken (issued) by an entity from the lender. Here, the entities taking a loan could be governments (central, state or municipal bodies) or companies (PSUs, private corporates, financial institutions etc) and are called as Issuers.
  • The corporate bond market (also known as the non-Gsec market) consists of financial institutions (FI) bonds, public sector units (PSU) bonds, and corporate bonds/debentures.
  • The lender could be individuals, corporates, mutual funds, banks or anybody who invests in order to receive periodic income and are called as Investors.

Corporate Bonds

  • Corporate bonds are debt securities issued by private and public corporations.
  • Bond is simply a loan between the issuer (borrower) and the bondholder (lender). When you purchase a bond, you are lending money to any entity known as issuer. In return, you receive a bond and issuer pays fixed interest on the amount of money you lend.

CHARACTERISTICS

Total amount invested by the bondholder in a bond issue is the principal amount. For example you invest Rs 10,000 and you get total 10 bonds with face value worth of Rs 1000 each.

Term to maturity of a bond changes every day from the date of issue of the bond until its maturity. The issuer has to repay the principal amount on the maturity date

Total amount invested by the bondholder in a bond issue is the principal amount. For example you invest Rs 10,000 and you get total 10 bonds with face value worth of Rs 1000 each.

The coupon is the interest rate that the issuer pays to the security holder. It refers to the periodic interest payments that are made by the issuer of the bond to the bond holder and are expressed as a percentage of the face value. For example, just like your Bank FD payments.

TYPES OF FIXED INCOME PRODUCTS

These bonds have no maturity. The investor gets a fixed interest every year. The issuer generally has a call option to redeem the Bonds after 5-10 years. Issued by Banks and NBFC to meet the capital adequacy requirements.

Have a fixed maturity period of 5-10 years after which the bonds are redeemed to the Investor. Has a coupon or interest rate fixed until maturity of a bond. Issued by PSUs, Banks, NBFCs, Corporates.

These bonds are issued normally by Public Financial Institutions such as REC, NHAI, HUDCO, IIFCL and the annual interest received from these Bonds in tax-free in hands of Investor.