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Debt Market

The document provides an overview of the Indian debt market, including key participants and products. It discusses various terms related to bonds such as maturity, coupon rate, yield to maturity. It also describes different types of bonds and segments of the debt market like wholesale and retail. Concepts like repo/reverse repo, duration, convexity and their impact on bond prices are summarized. The relationship between maturity, yield and bond prices is outlined. Finally, the document touches upon callable, puttable bonds and brokerage charges in debt markets.

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4K views20 pages

Debt Market

The document provides an overview of the Indian debt market, including key participants and products. It discusses various terms related to bonds such as maturity, coupon rate, yield to maturity. It also describes different types of bonds and segments of the debt market like wholesale and retail. Concepts like repo/reverse repo, duration, convexity and their impact on bond prices are summarized. The relationship between maturity, yield and bond prices is outlined. Finally, the document touches upon callable, puttable bonds and brokerage charges in debt markets.

Uploaded by

nishantbali
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PPTX, PDF, TXT or read online on Scribd
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DEBT MARKET

By
Nishant Bali
AGENDA
o Introduction of Debt Market
o Participants and products of debt market
o Few terms in Debt Market
o Types of Bonds
o Wholesale Debt Market (WDM) and Retail Debt Market (RDM)
o Repo and Reverse Repo
o Duration in Bond Market
o Convexity
o Relation between YTM and Bond Price
o Relationship between Maturity and Yield
o Callable and Puttable Bonds
o Brokerage Charges
o NSE MIBID/MIBOR
Introduction of Debt Market

o Debt market : A market where fixed income securities are issued and trade

o Share of debt market is much larger than equity market in US, i.e. is close to
$31.4 trillion which is nearly equal to the total GDP of all countries taken
together

o Total size of Indian debt market is in the range of $92 billion to $100 billion i.e.
approximately 30% of Indian GDP.

o Debt market consists of three segments


– Government security market
– Public sector undertaking bond market(PSU)
– Corporate security market

o Govt. securities market accounts for more than 90% of the total turnover
Few terms in Debt Market

o Maturity

o Coupon rate

o Principle

o Yield to Maturity (YTM)

o Current yield
Types of Bonds
o Zero Coupon Bond

o Treasury STRIPS

o Floating Rate Bonds

o Deferred interest bonds

o Step-up bonds

o Deep discount bond

o Senior versus subordinate Bonds

o Catastrophe bonds

o Junk Bonds
CONTI….
o Indexed bonds : Example
Wholesale Debt Market (WDM) and
Retail Debt Market (RDM)
o WDM commenced operation on June 13, 1994 .

o Large investors like corporate, banks, FII’s actively trade in this market

o An increase of 14.57% in trading value to Rs 49,205 crore in April 2009 as


compared to Rs.42,949 crore in February 2009 .
CONTI……

o Security-wise Distribution of WDM Trades : April 09


Retail Debt Market (RDM)

o RDM on NSE has been introduced in January 16, 2003

o Participant includes all classes of investors across the country (including retail
investors).

o Trading in Retail Debt Market is permitted under Rolling Settlement i.e. ( T+2) .

o Eligibility:
• Members who are registered members of NSE
• Members in WDM only, can participate in RDM on submission of a letter in the prescribed
format.
o Silent features of RDM
• CM of Capital Market and TM of the WDM allowed to participate in clearing and Settlement
with minimum net worth of Rs.1 crore.
• Mark to market margins will be applicable on all-open positions and payable on T+1 basis .
Repo and Reverse Repo
o Repo or Repurchase Agreements are short-term money market
instruments .
o What are Repo Transactions ?
o What are Reverse Repo Transactions ?
Duration in Bond Market
o Biggest risks in the bond market - interest rate risk .
o Duration measures how quickly a bond will repay its true cost .
o Duration means “till at what time the interest rate
cannot change the amount that we can receive” .
o Example: a government bond which is having face value Rs 1000,
coupon rate 15%, YTM 17% , maturity 3 years and repayment @
4% premium.
BOND CONVEXITY

o Relationship between price and yield has a convex structure in nature .

Price

Yield

o Tangent line (red) is know as the bond's duration .


o Tangent line shows the rate of change in price as interest rates change .
o Smaller changes in yield , duration does a good job in estimating the actual
price .
Relation between YTM and Bond Price

o Inverse relation between the YTM and Bond Price .

o YTM> Coupon rate then Intrinsic value<Face value and vive a versa.

o Example : Vo = I/(1+Kd)^t + F/(1+kd)^n.

o Here Kd = YTM. Higher the Kd, lower the present value or V0.
Relationship between Maturity and Yield
o Three main pattern created by term structure .

o Normal Yield Curve:

Yield

Maturity

o Flat Yield Curve:


CONTI…..

o Inverted Yield Curve:

Yield

Maturity

o Why the investors chooses invest in such type of Inverted yield Curve?
o When economy faces slowdown ahead
o Lock their investments today, to get better return ahead.
Callable Bonds

o Gives the right to the issuer to purchase the bond from the investor before
the maturity.
o Borrower purchase the bond when YTM<Coupon rate .
o Disadvantage to the investors:-
o Face Re-investment risk.
o Sacrifice the gain, because of low interest rate

2000
Straight Bond
1500

1300

1100
Callable
800 Bond

4% 7% 9% 11% 13% 15%


Puttable Bonds

o Puttable bonds are inverse of Callable bonds.


o Investors sell the bond to the borrower at discount i.e. YTM> Coupon rate.
o Advantage to the investors:-
o Again Re-investment at higher rate .
Brokerage Charges
o NSE has specified the maximum rates of brokerage
o The rate for central government securities ranges from 5 paise
to 25 paise .
Conti….
o These rates are used as benchmarks for majority of deals struck for interest rate
swaps, forward rate agreements .
o MIBID/ MIBOR are based on rates polled by NSE from a representative panel of 33
banks/institutions/primary dealers .
o The rates polled are then processed using the bootstrap method to arrive at an
efficient estimate of the reference rates .

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