Debt Market in India

Debt Market in India

A market where fixed income securities are issued and
trade is called Debt Market

Short Term vs. Long Term Debt Market: Money market

is a short term Debt Market

Market Segments:
Govt. Securities: Securities issued by GoI, State Govt.
and Local Authorities Gilt edged securities PDO
Depository of G-Secs
PSU Bonds: Bonds issued by Central PSUs SAIL, NTPC
etc.
Corporate Bonds: Issued by entities other than Govt.
Overall Market
 Issuer and Participants
Issuer Instrument Maturity Investors
Central Dated Securities 2-20 Years RBI,Banks,Insurance Co., PFs, MFs,
Government PDs,

Central T-Bills 91/364 days RBI, Banks, Insurance Co., PFs,

Government MFs, PDs,Individuals

State Dated Securities 5-10 Years Banks, Insurance Co.,PFs.

Government Individuals

PSUs Bonds 5-10 Years Banks, Insurance Co., PFs, MFs,

PDs,Individuals, Corporates

Corporates Debentures 1-12 Years Banks, Mutual Funds,

Corporates,Individuals

Corporates, Commercial paper 3 months to 1 Banks, Mutual Funds, FI s,

PDs Year Corporates,Individuals

Banks Certificates of 3 months to 1 Banks, Corporates, Individuals

Deposit Year
Primary & Secondary Market
Primary Market:
G-Sec Market:

Auction of T Bills & Dated Securities by RBI

PSU & Corporate Bonds:

Public Issue: Bonds are issued to the market as a
whole

Private Placement: In India, more than 90% of the
corporate bonds are issued through private
placement
Primary & Secondary Market
Secondary Market:
Wholesale Debt Market (WDM):

Investors are mostly Banks, FIs, PDs, Insurance
Companies, MFs, Corporates FIIs, etc.

OTC & Exchange Traded (NDS-OM Platform)

Retail Debt Market (RDM):

Individual investors, private trusts, NBFCs, etc.
besides the wholesale investor classes

Exchange Traded through NEAT
Features of a Bond
Face Value, Coupon Rate, Maturity, Redemption
Value, Market Value, Half Yearly payment

Different Yields: Current Yield, Coupon Yield,

Yield to Maturity/IRR, Yield to Call

Dirty Price vs Clean Price [Dirty Price = Clean

Price + Accrued Interest]

Duration and Modified Duration; Bond Ratings

Features of a Bond
Inverse Relationship between YTM and price
Price at Discount: YTM > Coupon Yield
Price at Premium: YTM < Coupon Yield
At Par: YTM = Coupon Yield

Convexity in Bonds: Unit change in price of the

bond is not proportionate to unit change in yield

Risks involved: Interest Rate Risk, Default Risk,

Liquidity Risk
Capital Market Instruments

Instruments that are used for raising capital

resources in the capital market.

Different variants of Equity & Debt Instruments

have emerged over the time

Provides different risk and return profile to the

investors to chose from
Capital Market Instruments

Equity Shares
Equity Shares with Differential Voting Rights

Preference Shares
Cumulative & Non-Cumulative Preference Shares
Participating & Non-participating Preference Shares
Convertible Preference Shares
Capital Market Instruments
Bonds/Debentures:
Zero Coupon Bonds & STRIPS
Fixed vs. Floating Rate Bonds
Convertible (Fully/Partly) vs. Non-covertible Bonds
Callable Bonds vs. Puttable Bonds
Bonds with Single Redemption vs. Amortizing Bonds
Warrants
Sweat Equity Shares
Secured Premium Notes (SPN)
ADRs/GDRs/IDRs
Derivatives: Futures & Options
Equity & Bond Analytics

Pricing of the Equity or Debt instruments are

carried out based on discounted cash flow
method.

Based on the discounting principle:

Equity & Bond Analytics

Valuation of Equity:

Generalized Model:

Zero Growth Model:

Constant Growth Model:

Equity & Bond Analytics

Valuation of a Bond:

Generalized Model:

Annuity Based Formula:

Zero Coupon Bond:

Perpetual Bond:

Approximation for YTM:

Illustrations Try it Yourself
1. What rate of return is expected from a stock that sells
for Rs. 130 per share, pays Rs. 12 annually in
dividends and is expected to sell for Rs. 150 per share
in one year?

2. XYZ Ltd. preferred stock has a par value of Rs.1,000

and a dividend equal to 13.0% of the par value. The
stock is currently selling for Rs. 907. What discount
rate is being used to value the stock?

3. A company pay out all of its earnings as dividends. It

will pay its next Rs. 40 per share dividend in a year.
The discount rate is 12%. What is the PE Ratio of the
company?
Illustrations Try it Yourself
4. A bond with a par value of Rs. 1000 and a coupon
rate of 8% is selling at a price of Rs 950. What is
current yield on the bond?

5. Find the value of a 20 year Rs. 1000 zero-coupon

bond when the market required rate of return in 9%.

6. Suppose market interest rate increase from 8% to

9%. Which bond will suffer the greater percentage
decline in price: a 30 year bond paying annual
coupons of 8 percent or a 30 year zero coupon
bond? Why?
Thank You