Debt Market and Money Market

8/8/2019 Debt Market and Money Market

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DEBT MARKET AND MONEY

MARKET

PRESENTATION BY SRIRAM



Introduction

Debt- definition

Characteristics- Definition

Types

Classification of Debt securities- by issuer, by

security, by tax status



Important terms

Coupon

Determinants of bond yield- Term to Maturity,

Defaults, Marketability & Tax Treatment

Yield To Maturity (YTM)

Current yield

Term to maturity

Yield coupon bonds

Zero Coupon bonds

Yield curve



Central Government Securities

Evolution

Types

Participants

Auction



Other Bonds

State Government bonds

Financial Institution Bonds

PSU Bonds

Private Corporates



Major Market Segments

Central GovtSecurities

-T-bills

-Dated securitiesState GovtSecurities

- State development

loans- State guaranteed

bonds

PSU bonds

- Financial

institutions

- Taxable and tax

free bonds

Corporate Bonds

- Commercial paper - Debentures

- Structured

obligations



OTHER SEGMENTS

Mutual funds

- Income,gilt,short term,floating rate andliquid funds

Inter-banks markets- Call and notice money

- Term money markets

Fixed/ Inter Corporate deposits

CPs/CDs

PTCs & others



Changes in Govt borrowings

Auction mechanism for bond

issuance

Primary dealer system Yield curve and mark to market

- RBI yield curve

- FIMMDA yield curveDVP settlement

Re-emergence of repos



Other Borrowings in the

system

Contractual rate borrowings

- Public provident fund

- Post office savings- Employees Provident fund

- Special borrowing schemes : IVP

RBI Relief BondsBank deposits



Importance about Govt

securities

Largest issuer in primary markets

Dominant segment of secondary

marketsBenchmark rates in the economy

Linkage between growth rates,

inflation and interest ratesInterest rates and forex rates



State Govt securities

RBI issues bonds at mark-up to g-

secs

Upto 35% can be issued by stategovts

State Govt Guaranteed Bonds

- Credit risk- Dormant institutional buyers



Auction process

Announcement by RBI: notifies

Sealed bids from banks, Pds and

SGL participantsNon-competitive bids

Allotment Process

- Uniform price auction- Discriminatory price auction



Dutch and French Auctions

Uniform Price Auction ( Dutch)

- All successful bidders pay cut-off prices

- Noise in bidding process

- Better yield for issuer

Discriminatory Price Auction ( French)

- All successful bidders pay what they bid for

- Close bids and wider participation- Winner¶s curse

- Downward price bias



How Govt borrows?

Auction of T-bills and dated securities

Price band auction

- Re-issue of existing securities

- Consolidation and strips

Yield based auction

- Fresh security creation

- Varying coupon and redemption dates

Both types are being used



Money Market Instruments

Overnight Call Money Rates

Repo / Reverse repo

Treasury Bills

Commercial Paper

Certificate of Deposits



Calculating the Yield and Price

Define cash flows and use ³Yield´function to find YTM

Price fro any required level of yieldcan be computed using the ³price´function

If the settlement period is different

from the date of payment of coupon,the calculations have to be adjustedfor the actual no of days to the cashflows.



Day Count Conventions

Money market instruments:

Actual/365

Govt securities: 30/360Corporate Bonds: Actual / Actual

Mutual funds : Actual/365



Clean and dirty price

If a bond is purchased between coupon

periods,buyer will receive interest on the

coupon date, a part of which belongs to the

seller. Interest that belongs to the seller iscalled accrued interest

Price that includes the accrued interest is

called full price or dirty price

Clean price or flat price is calculated a s

dirty price less accrued interest



Theories of the Term Structure

Expectation Hypothesis

Liquidity Premium

Market Segmentation



Measuring Bond Sensitivity

Understanding the impact of rate

changes on the value of the bond and

the sensitivity of bond to rate changes



Realized yield

The actual return from a holding a bondaccrues from

- coupon payments

- Reinvestment income- Sale proceeds

Current yield captures only one of thesecomponents

YTM captures all of them with a limitingassumption



Limitation of YTM

YTM will be equal to the realized yield, if

the coupon payments are reinvested at the

YTM rate.

If required return alters during the life of thebond,price and reinvestment income alter,

in opposite directions. The net effect of

these two changes in income varies.

It may not be possible therefore to protect

the YTM even if the bond is held to

maturity.

Debt Market and Money Market

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