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1.

What is a Bond?

1.

What is a Bond?

A bond is a debt instrument in which an investor loans money to an entity (typically corporate or government) which borrows the funds for a defined period of time at a variable or fixed interest rate. Bonds are used by companies, municipalities, states and sovereign governments to raise money to finance a variety of projects and activities. Owners of bonds are debt holders, or creditors, of the issuer.

2.

What is a Government Security (G-Sec)?

2.

What is a Government Security (G-Sec)?

A Government Security (G-Sec) is a tradeable instrument issued by the Central Government or the State Governments. It acknowledges the Government's debt obligation. Such securities are short term (usually called treasury bills, with original maturities of less than one year) or long term (usually called Government bonds or dated securities with original maturity of one year or more). In India, the Central Government issues both, treasury bills and bonds or dated securities while the State Governments issue only bonds or dated securities, which are called the State Development Loans (SDLs). G-Secs carry practically no risk of default and, hence, are called risk-free giltedged instruments.

3.

What are Treasury Bills (T-bills)?

3.

What are Treasury Bills (T-bills)?

Treasury bills or T-bills, which are money market instruments, are short term debt instruments issued by the Government of India and are presently issued in three tenors, namely, 91-day, 182 day and 364 days. Treasury bills are zero coupon securities and pay no interest. Instead, they are issued at a discount and redeemed at the face value at maturity. For example, a 91-day Treasury bill of `100/- (face value) may be issued at say ` 98.20, that is, at a discount of say, `1.80 and would be redeemed at the face value of `100/-. The return to the investors is the difference between the maturity value or the face value (that is `100) and the issue price.

4.

What are Cash Management Bills (CMBs)?

4.

What are Cash Management Bills (CMBs)?

In 2010, Government of India, in consultation with RBI introduced a new short-term instrument, known as Cash Management Bills (CMBs), to meet the temporary mismatches in the cash flow of the Government of India. The CMBs have the generic character of T-bills but are issued for maturities less than 91 day.

5.

What are Dated G-Secs?

5.

What are Dated G-Secs?

  • Dated G-Secs are securities which carry a fixed or floating coupon (interest rate) which is paid on the face value, on half-yearly basis. Generally, the tenor of dated securities ranges from 5 years to 40 years.
  • The nomenclature of a typical dated fixed coupon G-Sec contains the following features -
  • coupon, name of the issuer, maturity year. For example, - 7.17% GS 2028 would mean:
  • Coupon: 7.17% paid on face value
  • Name of Issuer: Government of India
  • Date of Issue: January 8, 2018
  • Maturity: January 8, 2028
  • Coupon Payment Dates: Half-yearly (July 08 and January 08) every year
  • Minimum Amount of issue/ sale: `10,000
  • In case, there are two securities with the same coupon and are maturing in the same year,
  • then one of the securities will have the month attached as suffix in the nomenclature. e.g.
  • 6.05% GS 2019 FEB, would mean that G-Sec having coupon 6.05% that mature in
  • February 2019 along with the other similar security having the same coupon. In this case,
  • there is another paper viz. 6.05%GS2019 which bears same coupon rate and is also
  • maturing in 2019 but in the month of June. Each security is assigned a unique number
  • called ISIN (International Security Identification Number) at the time of issuance itself to avoid any misunderstanding among the traders.
  • If the coupon payment date falls on a Sunday or any other holiday, the coupon payment is made on the next working day. However, if the maturity date falls on a Sunday or a holiday, the redemption proceeds are paid on the previous working day.

6.

What are Fixed Rate Bonds?

6.

What are Fixed Rate Bonds?

These are bonds on which the coupon rate is fixed for the entire life (i.e. till maturity) of the bond. Most Government bonds in India are issued as fixed rate bonds. For example - 8.24%GS2018 was issued on April 22, 2008 for a tenor of 10 years maturing on April 22, 2018. Coupon on this security will be paid half-yearly at 4.12% (half yearly payment being half of the annual coupon of 8.24%) of the face value on October 22 and April 22 of each year.

7.

What are Floating Rate Bonds (FRB)?

7.

What are Floating Rate Bonds (FRB)?

FRBs are securities which do not have a fixed coupon rate. Instead, it has a variable coupon rate which is re-set at pre-announced intervals (say, every six months or one year). FRBs were first issued in September 1995 in India. For example, an FRB was issued on November 07, 2016 for a tenor of 8 years, thus maturing on November 07, 2024. The variable coupon rate for payment of interest on this FRB 2024 was decided to be the average rate rounded off up to two decimal places, of the implicit yields at the cut-off prices of the last three auctions of 182-day T- Bills, held before the date of notification. The coupon rate for payment of interest on subsequent semi-annual periods was announced to be the average rate (rounded off up to two decimal places) of the implicit yields at the cut-off prices of the last three auctions of 182-day T-Bills held up to the commencement of the respective semi-annual coupon periods.

The Floating Rate Bond can also carry the coupon, which will have a base rate plus a fixed spread, to be decided by way of auction mechanism. The spread will be fixed throughout the tenure of the bond. For example, FRB 2031 (auctioned on May 4, 2018) carry the coupon with base rate equivalent to Weighted Average Yield (WAY) of last 3 auctions (from the rate fixing day) of 182 Day T-Bills plus a fixed spread decided by way of auction. Zero Coupon Bonds - Zero coupon bonds are bonds with no coupon payments. However, like T- Bills, they are issued at a discount and redeemed at face value. The Government of India had issued such securities in 1996. It has not issued zero coupon bonds after that.

8.

What are Capital index bonds?

8.

What are Capital index bonds?

These are bonds, the principal of which is linked to an accepted index of inflation with a view to protecting the principal amount of the investors from inflation. A 5-year capital index bond, was first issued in December 1997 which matured in 2002.

9.

What are inflation index bonds?

9.

What are inflation index bonds?

IIBs are bonds where in both coupon flows and principal amounts are protected against inflation. The inflation index used in IIBs may be whole sale price index (WPI) OR Consumer Price Index (CPI). Globally, IIBs were first issued in UK. In India, Government of India through RBI issued IIBs (linked to WPI) in June 2013. Based on the success of these IIBs, Government of India in consultation with RBI issued the IIBs (CPI based) exclusively for retail customers in December 2013. Further details on IIBs are available on RBI website under FAQs.

10.

What are Bonds with Call/Put Options?

10.

What are Bonds with Call/Put Options?

Bonds can also be issued with features of optionality wherein the issuer can have the option to sell the bond (put option) to the issuer during the currency of the bond. The first G-sec with both call and put option viz. 6.72% GS2012 was issued on July 18,2002 for a maturity of 10 years maturing on July 18, 2012. The optionality on the bond could be exercised after completion of five years tenure from the date of issuance on any coupon date falling thereafter. The Government has the right to buy-back the bond (call option) at par value (equal to the face value) while the investor had the right to sell the bond (put option) to the Government at par value on any of the halfyearly coupon dates starting from July 18, 2007.

11.

What is special securities?

11.

What is special securities?

Under the market borrowing program, the Government of India also issues, from time to time, special securities to entities like Oil Marketing Companies, Fertilizer Companies, the Food Corporation of India, etc. (popularly called oil bonds, fertiliser bonds and food bonds respectively) as compensation to these companies in lieu of cash subsidies These securities are usually long dated securities and carry a marginally higher coupon over the yield of the dated securities of comparable maturity. These securities are, however, not eligible as SLR securities but are eligible as collateral for market repo transactions. The beneficiary entities may divest these securities in the secondary market to banks, insurance companies / Primary Dealers, etc., for raising funds.

Government of India has also issued Bank Recapitalisation Bonds to specific Public Sector Banks in 2018. These securities are named as Special GoI security and are non-transferable and are not eligible investment in pursuance of any statutory provisions or directions applicable to investing banks. These securities can be held under HTM portfolio without any limit.

12.

What is STRIPS?

12.

What is STRIPS?

Separate Trading of Registered Interest and Principal of Securities. STRIPS are the securities created by way of separating the cash flows associated with a regular G-Sec i.e., each semi-annual coupon payment and the final principal payment to be received from the issuer, into separate securities. They are essentially Zero-Coupon Bonds (ZCBs). However, they are created out of existing securities only and unlike other securities, are not issued through auctions. Stripped securities represent future cash flows (periodic interest and principal repayment) of an underlying coupon bearing bond. Being G-Secs, STRIPS are eligible for SLR. All fixed coupon securities issued by Government of India, irrespective of the year of maturity, are eligible for Stripping/Reconstitution, provided that the securities are reckoned as eligible investment for the purpose of Statutory Liquidity Ratio (SLR) and the securities are transferable. The detailed guidelines of stripping/reconstitution of government securities are available in RBI notification

IDMD.GBD.2783/08.08.016/2018-19 dated May 3, 2018. For example, when `100 of the 8.60% GS 2028 is stripped, each cash flow of coupon (` 4.30 each half year) will become a coupon STRIP and the principal payment (`100 at maturity) will become a principal STRIP. These cash flows are traded separately as independent securities in the secondary market. STRIPS in G-Secs ensure availability of sovereign zero coupon bonds, which facilitate the development of a market determined zero coupon yield curve (ZCYC). STRIPS also provide institutional investors with an additional instrument for their asset liability management (ALM). Further, as STRIPS have zero reinvestment risk, being zero coupon bonds, they can be attractive to retail/non-institutional investors. Market participants, having an SGL account with RBI can place requests directly in e-kuber for stripping/reconstitution of eligible securities (not special securities). Requests for stripping/reconstitution by Gilt Account Holders (GAH) shall be placed with the respective Custodian maintaining the CSGL account, who in turn, will place the requests on behalf of its constituents in e-kuber.

About IIB

We provide financial planning, advice and resources that investors need. As the financial industry evolves and customer needs become more complex, we have and continue to reinvent, innovate and transform ourselves to be ready for the financial landscape of tomorrow.

Our team is led by Bhavanand Kumar Mishra who has outstanding expertise in the Bond Market, Forex. He is M.B.A, certified associate of Indian Institute of Bankers, certified treasury professional holder from IIBF, Mumbai. He has worked as Chief Dealer in almost all asset classes especially in the Fixed Income in the treasury, with twenty plus years of expertise including overseas experience at London & Birmingham in U.K. in the Punjab National Bank, which is the second largest PSU Bank in India. Mr. Mishra is supported by a team of young professionals.

Why Do You Need To Invest in Bonds?

The size of Indian Bond market is increasing substantially year on year basis and so the opportunity also multiplies. Indian Bond market consists of Central Government securities (G-Secs), State Development Loans (SDLs), Treasury Bills, these securities are also called as Sovereign assets classes. Particularly State Development Loans is a higher yield asset class and suitable for the retail investors. State Development Loans (SDLs) maintains 25 to 50 bps spread from the G-Secs in the respective maturities however, these spread is not sacrosanct and may vary depends on the multiple variables.

As far as Corporate Bonds are concerned, Public Sector Undertakings like PFC, REC, NABARD, NHAI, etc, Private Companies, NBFC are issuing multiple bonds round the year having different maturities. These corporate bonds carry substantial spread from the G-Sec.

Generally, before investing in Bank/Corporate Fixed Deposit, depositors compares the rate of different bank's offered rate of interest and then decides where to invest in. Generally, investors don't give importance to the fact that their deposits per bank is secured only up to INR 5 Lakh. Further, if the individual left with additional surplus money, he/she chooses to invest in the Debt MFs. In the debt MFs, there are multiple entry or/and exit load and other charges which makes their return less profitable than their direct investment in the bond. At the end of day, Fund Managers of the Debt MFs invest in the bonds only which are available in the market.

Summary - The diversification of the investment portfolio is the key to manage hard earned savings. While we don't negate the importance of Bank's Fixed Deposit, but at the same time we also don't appreciate investing all the money either in the Bank/Corporate FDs or in the MFs. In the modern era, when all the information are widely and easily available, we must change the investing habits a little bit to earn more without putting any extra effort. Interestingly, investing in the bond is quite easier than our believe as everything can be done sitting at the home.

What are the Different Types of Investments?

Bonds are issued by organizations generally for a period of more than one year to raise money by borrowing. Following are the types of bonds:

  • Fixed Rate Bonds
    In Fixed Rate Bonds, the interest remains fixed through out the tenure of the bond. Owing to a constant interest rate, fixed rate bonds are resistant to changes and fluctuations in the market.
  • Floating Rate Bonds
    Floating rate bonds have a fluctuating interest rate (coupons) as per the current market reference rate.
  • Zero Interest Rate Bonds
    Zero Interest Rate Bonds do not pay any regular interest to the investors. In such types of bonds, issuers only pay the principal amount to the bond holders.
  • Inflation Linked Bonds
    Bonds linked to inflation are called inflation linked bonds. The interest rate of Inflation linked bonds is generally lower than fixed rate bonds.
  • Perpetual Bonds
    Bonds with no maturity dates are called perpetual bonds. Holders of perpetual bonds enjoy interest throughout.
  • Subordinated Bonds
    Bonds which are given less priority as compared to other bonds of the company in cases of a close down are called subordinated bonds. In cases of liquidation, subordinated bonds are given less importance as compared to senior bonds which are paid first.
  • Bearer Bonds
    Bearer Bonds do not carry the name of the bond holder and anyone who possesses the bond certificate can claim the amount. If the bond certificate gets stolen or misplaced by the bond holder, anyone else with the paper can claim the bond amount.
  • War Bonds
    War Bonds are issued by any government to raise funds in cases of war.
  • Serial Bonds
    Bonds maturing over a period of time in installments are called serial bonds.
  • Climate Bonds
    Climate Bonds are issued by any government to raise funds when the country concerned faces any adverse changes in climatic conditions.

What are Bonds and Debentures?

In general, Bonds and Debentures are interchangeably used in conversation but they have their own definition and characteristics related to them.

What Are The Different Types Of Bonds and Debentures In India?

Here is the list of popular Bonds and Debentures available in India.

  • Central Government Bonds
  • State Government Bonds
  • Municipal And Local Authority Bonds
  • Corporate Bonds
  • Public Sector Bonds
  • Tax-Free Bonds