DEBT MARKET

By Nishant Bali

AGENDAo o o o o o o o o o o o o Introduction of Debt Market Participants and products of debt market Few terms in Debt Market Types of Bonds Wholesale Debt Market (WDM) and Retail Debt Market (RDM) Repo and Reverse Repo Duration in Bond Market Convexity Relation between YTM and Bond Price Relationship between Maturity and Yield Callable and Puttable Bonds Brokerage Charges 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 Bondso 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, FIIs 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 .

CONTIo 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. 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 .

o Silent features of RDM

Repo and Reverse Repoo Repo or Repurchase Agreements are short-term money market instruments . o What are Repo Transactions ? o What are Reverse Repo Transactions ?

o Biggest risks in the bond market - interest rate risk . o Duration measures how quickly a bond will repay its true cost .

Duration in Bond Market

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 CONVEXITYo 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 Priceo Inverse relation between the YTM and Bond Price . o YTM> Coupon rate then Intrinsic value