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About FIMMDA
What is FIMMDA?
What are the objectives of
FIMMDA?
Who are the members of FIMMDA?
Why should my organization
be a member of FIMMDA?
About
Fixed Income Securities - General:
What are securities?
What
are fixed income securities?
What
are the types of fixed income securities?
What
is the difference between a fixed income security and equity?
What
are fixed interest rate securities and floating interest
rate securities?
What
are the key components of fixed income securities?
What
is credit quality?
What
is the yield on a security?
What
is maturity?
What
are coupon payments?
Why
is there a difference between coupon rate and yield?
Why
do long term securities offer more return than short- term
securities?
What
are callable securities?
What
is the relationship between price and Yield?
About
Derivatives:
What
are derivatives?
What
are the different types of derivatives?
What
is a forward contract?
What
is a forward rate agreement?
What
is a futures contract?
What
are options?
What
are interest rate swaps?
What
are Overnight Interest Swaps?
Who
Regulates Indian G-Secs and Debt Market?
RBI
SEBI
What
factors determine interest rates?
What
are G-Secs?
What
are Gilt edged securities?
What
is Government of India dated securities (G-Secs) & What
type of new G-Secs are issued by Government of India?
What
are T-Bills? Who issued it ? Who can invest in it ?
What
are various types of T-bills?
Who
can invest in T-Bill ?
What
is a Debenture?
What
are the different types of debentures?
What
is exactly meant by the term secured redeemable debenture?
What
is a difference between a bond and a debenture?
What
is Call Money Market ?
What
are Money Market Instruments?
What
is Commercial Paper ?
What
are Certificates of deposit (CD)
What
is Debt Market?
What
is Debt Instrument?
Who
are institutional investors in the Indian Debt Market ?
What
is SDL?
What
is auction of Securities?
What
is PSU Bonds?
What
are Bonds of Public Financial Institutions (PFIs)/ AIFIs
?
What
is the Coupon rate of the Security?
What
is meant by a Maturity date for Security?
What
is Redemption of Bond/Debenture?
What
is meant by Current yield?
What
is Yield to maturity (YTM)?
What
is record date/shut period?
What
do you mean by "Cum-Interest" and "Ex-Interest"?
What
do you mean by the terms Face Value, Premium and Discount
in a Securities Market?
Who
are Primary Dealers & Satellite Dealers?
What
role do Primary Dealers play?
What
is Day count convention?
What are the types of risks
involved in investments in G-Sec?
What is interest
rate risk, re-investment risk and default risk?
What
is a Repo and a Reverse Repo?
What is OMO, who conducts it and
why is it conducted?
What
is a Constituent SGL Account?
What
is Bootstrapping ?
What
is Yield Curve ?
Zero
Coupon Yield Cure ?
About
FIMMDA securities
What is FIMMDA?
[Top ]
FIMMDA stands for The
Fixed Income Money Market and Derivatives Association of
India (FIMMDA). It is an Association of Commercial Banks,
Financial Institutions and Primary Dealers. FIMMDA is a
voluntary market body for the bond, Money And Derivatives
Markets.
What
are the objectives of FIMMDA?
[Top
]
- To function as the
principal interface with the regulators on various issues
that impact the functioning of these markets.
- To undertake developmental
activities, such as, introduction of benchmark rates and
new derivatives instruments, etc.
- To provide training
and development support to dealers and support personnel
at member institutions.
- To adopt/develop international
standard practices and a code of conduct in the above
fields of activity.
- To devise standardized
best market practices.
- To function as an
arbitrator for disputes, if any, between member institutions.
- To develop standardized
sets of documentation.
- To assume any other
relevant role facilitating smooth and orderly functioning
of the said markets.
Who
are the members of FIMMDA? [Top
]
FIMMDA
has members representing all major institutional segments
of the market. The membership includes Nationalized Banks
such as State Bank of India, its associate banks, Bank of
India, Bank of Baroda; Private sector Banks such as ICICI
Bank, HDFC Bank, IDBI Bank; Foreign Banks such as Bank of
America, ABN Amro, Citibank, Financial institutions such
as ICICI, IDBI, UTI, EXIM Bank; and Primary Dealers.
Why
should my organization be a member of FIMMDA?[Top
]
FIMMDA
addresses issues that affect the entire industry. Some of
the work done in past pertains to issues like legal and
accounting norms, documentation requirements and valuation
methodologies. Planned initiatives include providing training
and certification to members, setting up a dispute resolution
mechanism as well as creating new products and addressing
the attendant details. As a member, you have the opportunity
to participate in all of FIMMDA's activities and contribute
to the development of the Indian debt markets.
About
Fixed Income Securities-General:
What are securities? [Top
]
Securities
are financial instruments that represent a creditor relationship
with a corporation or government. Generally they represent
agreements to receive a certain amount depending on the
terms contained within the agreement.
What
are fixed income securities?
[Top ]
Fixed-income
securities are investments where the cash flows are according
to a predetermined amount of interest, paid on a fixed schedule.
What
are the types of fixed income securities? [Top
]
The different
types of fixed income securities include government securities,
corporate bonds, commercial paper, treasury bills, strips
etc.
What
is the difference between a fixed income security and equity?
[Top ]
Holders
of fixed-income securities are creditors of the issuer,
not owners. Equity represents a share in the ownership of
the issuer.
What
are fixed interest rate securities and floating interest
rate securities?
[Top ]
Fixed interest rate securities
are those in which the interest payable is fixed beforehand.
Floating interest rate securities are those in which the
interest payable is reset from at pre-determined intervals
according to a pre-determined benchmark.
What
are the key components of fixed income securities?
[Top ]
Credit
quality, yield, and maturity are key components of fixed-income
securities.
What
is credit quality? [Top
]
Credit
quality is an indicator of the ability of the issuer of
the fixed income security to pay back his obligation. The
credit quality of fixed-income securities is usually assessed
by independent rating agencies such as Standard & Poor's,
Moody's in the U.S. and CRISIL in India. Most large financial
institutions also have their own internal rating systems.
What
is the yield on a security? [Top
]
Yield
on a security is the implied interest offered by a security
over its life, given its current market price.
What
is maturity? [Top
]
Maturity
indicates the life of the security i.e. the time over which
interest flows will occur.
What
are coupon payments?[Top
]
Coupon
payments are the cash flows that are offered by a particular
security at fixed intervals. The coupon expressed as a percentage
of the face value of the security gives the coupon rate.
Why
is there a difference between coupon rate and yield? [Top
]
The difference
between coupon rate and yield arises because the market
price of a security might be different from the face value
of the security. Since coupon payments are calculated on
the face value, the coupon rate is different from the implied
yield.
Why
do long term securities offer more return than short- term
securities?
[Top ]
Long-term
securities typically offer more return than short-term securities
because investors usually prefer to lend money for shorter
terms. Hence money lent out for longer terms will have a
higher yield.
What
are callable securities? [Top
]
Callable
securities are those which can be called by the issuer at
a predetermined time/times, by repaying the holder of the
security a certain amount which is fixed under the terms
of the security.
What
is the relationship between price and Yield?
[Top
]
Prices and interest rates
are inversely related.
About
Derivatives:
What
are derivatives?[Top
]
Derivative
securities are those whose value depends on the value of
another asset (called the underlying asset)
What
are the different types of derivatives? [Top
]
The different types of
derivatives include forwards, futures, options, swaps etc.
What
is a forward contract? [Top
]
A forward contract is
a contract to trade in a particular asset (which may be
another security) at a particular price on a pre-specified
date.
What
is a forward rate agreement? [Top
]
A forward
rate agreement is an agreement to lend money on a particular
date in the future at a rate that is determined today. It
is like a forward contract where the underlying asset is
a bond.
What
is a futures contract?[Top
]
Futures
are standardized forward contract that are traded on an
exchange and where the counter-party (the party with which
the contract has been signed) is the exchange itself.
What
are options?[Top
]
Options
are one-way contract where one party has the right but not
the obligation to trade in a particular asset at a particular
price on a pre-determined date/dates or in a particular
time interval.
What
are interest rate swaps?
[Top
]
Interest
rate swaps are agreements where one side pays the other
a particular interest rate (fixed or floating) and the other
side pays the other a different interest rate (fixed or
floating).
Accordingly,
swaps are:
Fixed
vs Floating swaps: Where one
side pays the other a fixed interest rate and the other
pays a floating rate determined by some benchmark and reset
at fixed time intervals.
Basis
swaps: Where the two sides
pay each other rates determined by different benchmarks.
What
are Overnight Interest Swaps? [Top
]
Overnight
interest rate swaps are currently prevalent to the largest
extent. They are swaps where the floating rate is an overnight
rate (such as NSE MIBOR) and the fixed rate is paid in exchange
of the compounded floating rate over a certain period.
What
is Call Money Market ?[Top
]
The call
money market is an integral part of the Indian Money Market,
where the day-to-day surplus funds (mostly of banks) are
traded. The loans are of short-term duration varying from
1 to 14 days. The money that is lent for one day in this
market is known as "Call Money", and if it exceeds
one day (but less than 15 days) it is referred to as "Notice
Money". Term Money refers to Money lent for 15 days
or more in the InterBank Market.
Banks borrow in this
money market for the following purpose:
· To
fill the gaps or temporary mismatches in funds
· To
meet the CRR & SLR mandatory requirements
as stipulated by the Central bank
· To
meet sudden demand for funds arising out of large outflows.
Thus call money usually
serves the role of equilibrating the short-term liquidity
position of banks
Call Money Market Participants
:
1.Those
who can both borrow as well as lend in the market - RBI
(through LAF) Banks, PDs
2.Those who can only
lend Financial institutions-LIC, UTI, GIC, IDBI, NABARD,
ICICI and mutual funds etc.
Reserve Bank of India
has framed a time schedule to phase out the second category
out of Call Money Market and make Call Money market as exclusive
market for Bank/s & PD/s.
What
are Money Market Instruments?[Top
]
By convention, the term
"Money Market" refers to the market for short-term requirement
and deployment of funds. Money market instruments are those
instruments, which have a maturity period of less than one
year.The most active part of the money market is the market
for overnight call and term money between banks and institutions
and repo transactions. Call Money / Repo are very short-term
Money Market products. The below mentioned instruments are
normally termed as money market instruments:
1) Certificate
of Deposit (CD)
2) Commercial
Paper (C.P)
3) Inter
Bank Participation Certificates
4) Inter
Bank term Money
5) Treasury
Bills
6) Bill
Rediscounting
7) Call/
Notice/ Term Money
What
is Commercial Paper ? [Top
]
Commercial
Papers are short term borrowings by Corporates, FIs, PDs,
from Money Market.
Features
· Commercial
Papers when issued in Physical Form are negotiable by
endorsement and delivery and hence highly flexible instruments
· Issued
subject to minimum of Rs 5 lakhs and in the multiples
of Rs. 5 Lac thereafter,
· Maturity
is 15 days to 1 year
· Unsecured
and backed by credit of the issuing company
· Can
be issued with or without Backstop facility of Bank
/ FI
Eligibility
Criteria
Any private/public sector co. wishing
to raise money through the CP market has to meet the following
requirements:
· Tangible
net-worth not less than Rs 4 crore - as per last audited
statement
· Should
have Working Capital limit sanctioned by a bank / FI
· Credit
Rating not lower than P2 or its equivalent - by Credit
Rating Agency approved by Reserve Bank of India.
· Board
resolution authorizing company to issue CPs
· PD
and AIFIs can also issue Commercial Papers
Commercial
Papers can be issued in both physical and demat form. When
issued in the physical form Commercial Papers are issued
in the form of Usance Promissory Note. Commercial Papers
are issued in the form of discount to the face value.
Commercial
Papers are short-term unsecured borrowings by reputed companies
that are financially strong and carry a high credit rating.
These are sold directly by the issuers to the investors
or else placed by borrowers through agents / brokers etc.
FIMMDA
has issued operational and documentation guidelines, in
consultation with Reserve Bank of India, on Commercial Paper
for market.
What
are Certificates of deposit (CD): [Top
]
CDs are short-term borrowings
in the form of Usance Promissory Notes having a maturity
of not less than 15 days up to a maximum of one year.
CD is
subject to payment of Stamp Duty under Indian Stamp Act,
1899 (Central Act)
They
are like bank term deposits accounts. Unlike traditional
time deposits these are freely negotiable instruments and
are often referred to as Negotiable Certificate of Deposits
Features
of CD
· All
scheduled banks (except RRBs and Co-operative banks)
are eligible to issue CDs
· Issued
to individuals, corporations, trusts, funds and associations
· They
are issued at a discount rate freely determined by the
issuer and the market/investors.
· Freely
transferable by endorsement and delivery. At present
CDs are issued in physical form (UPN)
These are issued in denominations
of Rs.5 Lacs and Rs. 1 Lac thereafter. Bank CDs have maturity
up to one year. Minimum period for a bank CD is fifteen days.
Financial Institutions are allowed to issue CDs for a period
between 1 year and up to 3 years. CDs issued by AIFI are also
issued in physical form (in the form of Usance promissory
note) and is issued at a discount to the face value.
What
is Debt Market? [Top
]
There
is no single location or exchange where debt market participants
interact for common business. Participants talk to each
other, over telephone, conclude deals, and send confirmations
by Fax, Mail etc. with back office doing the settlement
of trades. In the sense, the wholesale debt market is a
virtual market. The daily transaction volume of all the
debt instruments traded would be about Rs.4000 - 5000 crores
per day. In India, NSE has its separate segment, which allows
online trades in the listed debt securities through its
member brokers. Recently BSE as well as OTCI have introduced
Debt Market Segment. Reserve Bank of India has proposed
Negotiated Dealing System (NDS) for trades in the G-Secs
and Repos. NDS is likely to be operational by October 2001.
What
is Debt Instrument?[Top
]
A tradable
form of loan is normally termed as a Debt Instrument. They
are usually obligations of issuer of such instrument as
regards certain future cash flow representing Interest &
Principal, which the issuer would pay to the legal owner
of the Instrument. Debt Instruments are of various types.
The distinguishing factors of the Debt Instruments are as
follows: -
1) Issuer
class
2) Coupon
bearing / Discounted
3) Interest
Terms
4) Repayment
Terms (Including Call / put etc. )
5) Security
/ Collateral / Guarantee
Who
are institutional investors in the Indian Debt Market ?
[Top
]
Institutional
investors operating in the Indian Debt Market are :
· Banks
· Insurance
companies
· Provident
funds
· Mutual
funds
· Trusts
· Corporate
treasuries
· Foreign
investors (FIIs)
Who
Regulates Indian G-Secs and Debt Market?[Top
]
RBI:The
Reserve Bank of India is the main regulator for the Money
Market. Reserve Bank of India also controls and regulates
the G-Secs Market. Apart from its role as a regulator, it
has to simultaneously fulfill several other important objectives
viz. managing the borrowing program of the Government of
India, controlling inflation, ensuring adequate credit at
reasonable costs to various sectors of the economy, managing
the foreign exchange reserves of the country and ensuring
a stable currency environment.
RBI controls
the issuance of new banking licenses to banks. It controls
the manner in which various scheduled banks raise money
from depositors. Further, it controls the deployment of
money through its policies on CRR, SLR, priority sector
lending, export refinancing, guidelines on investment assets
etc.
Another
major area under the control of the RBI is the interest
rate policy. Earlier, it used to strictly control interest
rates through a directed system of interest rates. Each
type of lending activity was supposed to be carried out
at a pre-specified interest rate. Over the years RBI has
moved slowly towards a regime of market determined controls.
SEBI[Top
]
Regulator
for the Indian Corporate Debt Market is the Securities and
Exchange Board of India (SEBI). SEBI controls bond market
and corporate debt market in cases where entities raise
money from public through public issues.
It regulates
the manner in which such moneys are raised and tries to
ensure a fair play for the retail investor. It forces the
issuer to make the retail investor aware, of the risks inherent
in the investment, by way and its disclosure norms. SEBI
is also a regulator for the Mutual Funds, SEBI regulates
the entry of new mutual funds in the industry. It also regulates
the instruments in which these mutual funds can invest.
SEBI also regulates the investments of debt FIIs.
Apart
from the two main regulators, the RBI and SEBI, there are
several other regulators specific for different classes
of investors, eg the Central Provision Fund Commissioner
and the Ministry of Labour regulate the Provident Funds.
Religious
and Charitable trusts are regulated by some of the State
governments of the states, in which these trusts are located.
What
factors determine interest rates?[Top
]
When
we talk of interest rates, there are different types of
interest rates - rates that banks offer to their depositors,
rates that they lend to their borrowers, the rate at which
the Government borrows in the bond/G-Sec,market, rates offered
to small investors in small savings schemes like NSC rates
at which companies issue fixed deposits etc.
The factors
which govern the interest rates are mostly economy related
and are commonly referred to as macroeconomic. Some
of these factors are:
1) Demand
for money
2) Government
borrowings
3) Supply
of money
4) Inflation
rate
5) The
Reserve Bank of India and the Government policies which
determine some of the variables mentioned above.
What
are G-Secs? [Top
]
G-Secs
or Government of India dated Securities are Rupees One hundred
face-value units / debt paper issued by Government of India
in lieu of their borrowing from the market. These can be
referred to as certificates issued by Government of India
through the Reserve Bank acknowledging receipt of money
in the form of debt, bearing a fixed interest rate (or otherwise)
with interests payable semi-annually or otherwise and principal
as per schedule, normally on due date on redemption
What
are Gilt edged securities? [Top
]
The
term government securities encompass all Bonds & T-bills
issued by the Central Government, state government. These
securities are normally referred to, as "gilt-edged" as
repayments of principal as well as interest are totally
secured by sovereign guarantee.
Gilt Securities are issued
by the RBI, the central bank, on behalf of the Government
of India. Being sovereign paper, gilt securities carry absolutely
no risk of default.
What
is Government of India dated securities (G-Secs) & What
type of new G-Secs are issued by Government of India? [Top
]
Like
Treasury Bills, G-Secs are issued by the Reserve Bank of
India on behalf of the Government of India. These form a
part of the borrowing program approved by the parliament
in the union budget. G- Secs are normally issued
in dematerialized form (SGL). When issued in the physical
form they are issued in the multiples of Rs. 10,000/-. Normally
the dated Government Securities, have a period of 1 year
to 20 years. Government Securities when issued in physical
form are normally issued in the form of Stock Certificates.
Such Government Securities when are required to be traded
in the physical form are delivered by the transferor to
transferee along with a special transfer form designed under
Public Debt Act 1944.
The transfer
does not require stamp duty. The G-Secs cannot be subjected
to lien. Hence, is not an acceptable security for lending
against it. Some Securities issued by Reserve Bank of India
like 8.5% Relief Bonds are securites specially notified
& can be accepted as Security for a loan.
Earlier,
the RBI used to issue straight coupon bonds ie bonds with
a stated coupon payable periodically. In the last few years,
new types of instruments have been issued. These are :-
Inflation
linked bonds: These are bonds
for which the coupon payment in a particular period is linked
to the inflation rate at that time - the base coupon rate
is fixed with the inflation rate (consumer price index-CPI)
being added to it to arrive at the total coupon rate.
The idea
behind these bonds is to make them attractive to investors
by removing the uncertainty of future inflation rates, thereby
maintaining the real value of their invested capital.
FRBs
or Floating Rate Bonds comes
with a coupon floater, which is usually a margin over and
above a benchmark rate. E.g, the Floating Bond may be nomenclature/denominated
as +1.25% FRB YYYY ( the maturity year ). +1.25% coupon
will be over and above a benchmark rate, where the benchmark
rate may be a six month average of the implicit cut-off
yields of 364-day Treasury bill auctions. If this average
works out 9.50% p.a then the coupon will be established
at 9.50% + 1.25% i.e., 10.75%p.a. Normally FRBs (floaters)
also bear a floor and cap on interest rates. Interest so
determined is intimated in advance before such coupon payment
which is normally,Semi-Annual.
Zero coupon bonds: These are bonds for which there is no
coupon payment. They are issued at a discount to face value
with the discount providing the implicit interest payment.
In effect, zero coupon bonds are like long duration T -
Bills.
What
is SDL? [Top
]
State government securities
(State Loans) : SDLs These are issued by the respective
state governments but the RBI coordinates the actual process
of selling these securities. Each state is allowed to issue
securities up to a certain limit each year. The planning
commission in consultation with the respective state governments
determines this limit. Generally, the coupon rates on state
loans are marginally higher than those of GOI-Secs issued
at the same time.
The
procedure for selling of state loans, the auction process
and allotment procedure is similar to that for GOI-Sec.
State Loans also qualify for SLR status Interest payment
and other modalities are similar to GOI-Secs. They are also
issued in dematerialized form.
SGL Form State Government
Securities are also issued in the physical form (in the
form of Stock Certificate) and are transferable. No stamp
duty is payable on transfer for State Loans as in the case
of GOI-Secs. In general, State loans are much less liquid
than GOI-Secs.
What
are T-Bills? Who issued it ? Who can invest in it ? [Top
]
Treasury
bills are actually a class of Central Government Securities.
Treasury bills, commonly referred to as T-Bills are issued
by Government of India against their short term borrowing
requirements with maturities ranging between 14 to 364 days.
The T-Bill of below mentioned periods are currently issued
by Government/Reserve Bank of India in Primary Market 91-day
and 364-day T-Bills. All these are issued at a discount-to-face
value. For example a Treasury bill of Rs. 100.00 face value
issued for Rs. 91.50 gets redeemed at the end of it's tenure
at Rs. 100.00. 91 days T-Bills are auctioned under uniform
price auction method where as 364 days T-Bills are auctioned
on the basis of multiple price auction method.
What
are various types of T-bills? [Top
]
Treasury
Bills are short term GOI Securities. They are issued for
different maturities viz. 14-day, 28 days (announced in
Credit policy but yet to be introduced), 91 days, 182 days
and 364 days. 14 days T-Bills had been discontinued recently.
182 days T-Bills were not re-introduced.
Who
can invest in T-Bill ?[Top
]
Banks,
Primary Dealers, State Governments, Provident Funds, Financial
Institutions, Insurance Companies, NBFCs, FIIs (as per prescribed
norms), NRIs & OCBs can invest in T-Bills.
What
is auction of Securities?[Top
]
Auction
is a process of calling of bids with an objective of arriving
at the market price. It is basically a price discovery mechanism.
There are several variants of auction. Auction can be price
based or yield based. In securities market we come across
below mentioned auction methods.
French
Auction System : After receiving
bids at various levels of yield expectations, a particular
yield level is decided as the coupon rate. Auction participants
who bid at yield levels lower than the yield determined
as cut-off get full allotment at a premium. The premium
amount is equivalent to price equated differential of the
bid yield and the cut-off yield. Applications of bidders
who bid at levels higher than the cut-off levels are out-right
rejected. This is primarily a Yield based auction.
(b) Dutch Auction Price : This is identical to the
French auction system as defined above. The only difference
being that the concept of premium does not exist. This means
that all successful bidders get a cut-off price of Rs. 100.00
and do not need to pay any premium irrespective of the yield
level bid for.
(c)
Private Placement : After having discovered the coupon
through the auction mechanism, if on account of some circumstances
the Government / Reserve Bank of India decides to further
issue the same security to expand the outstanding quantum,
the government usually privately places the security with
Reserve Bank of India. The Reserve Bank of India in turn
may sell these securities at a later date through their
open market windiow albeit at a different yield.
(d)
On-tap issue : Under this scheme of arrangements
after the initial primary placement of a security, the issue
remains open to yet further subscriptions. The period for
which the issue remains open may be sometimes time specific
or volume specific
What
is a Debenture? [Top
]
A
Debenture is a debt security issued by a company (called
the Issuer), which offers to pay interest in lieu of the
money borrowed for a certain period. In essence it represents
a loan taken by the issuer who pays an agreed rate of
interest during the lifetime of the instrument and repays
the principal normally, unless otherwise agreed, on maturity.
These are long-term debt instruments
issued by private sector companies. These are issued in
denominations as low as Rs 1000 and have maturities ranging
between one and ten years. Long maturity debentures are
rarely issued, as investors are not comfortable with such
maturities
Debentures enable investors to reap
the dual benefits of adequate security and good returns.
Unlike other fixed income instruments such as Fixed Deposits,
Bank Deposits they can be transferred from one party to
another by using transfer from. Debentures are normally
issued in physical form. However, corporates/PSUs have
started issuing debentures in Demat form. Generally, debentures
are less liquid as compared to PSU bonds and their liquidity
is inversely proportional to the residual maturity. Debentures
can be secured or unsecured.
What are the different types of debentures? [Top
]
Debentures
are divided into different categories on the basis of: (1)convertibility
of the instrument (2) Security
Debentures can be classified on the basis of convertibility
into:
· Non
Convertible Debentures (NCD): These instruments retain
the debt character and can not be converted in to equity
shares
· Partly
Convertible Debentures (PCD): A part of these instruments
are converted into Equity shares in the future at notice
of the issuer. The issuer decides the ratio for conversion.
This is normally decided at the time of subscription.
· Fully
convertible Debentures (FCD): These are fully convertible
into Equity shares at the issuer's notice. The ratio
of conversion is decided by the issuer. Upon conversion
the investors enjoy the same status as ordinary shareholders
of the company.
· Optionally
Convertible Debentures (OCD): The investor has the option
to either convert these debentures into shares at price
decided by the issuer/agreed upon at the time of issue.
On basis of Security,
debentures are classified into:
· Secured
Debentures:
These instruments are secured by a charge on the fixed
assets of the issuer company. So if the issuer fails
on payment of either the principal or interest amount,
his assets can be sold to repay the liability to the
investors
· Unsecured
Debentures:
These instrument are unsecured in the sense that if
the issuer defaults on payment of the interest or principal
amount, the investor has to be along with other unsecured
creditors of the company.
What
is exactly meant by the term secured redeemable debenture?
[Top
]
Secured
refers to the security given by the issuer for the loan
transaction represented by the debenture. This is usually
in the form of a first mortgage or charge on the fixed assets
of the company on a pari passu basis with other first charge
holders like financial institutions etc. Sometimes, the
charge can also be a second charge instead of a first charge.
Most of the times the charge is created on behalf of the
entire pool of debenture holders by a trustee specifically
appointed for the purpose.
Redeemable
refers to the process whereby the debenture is extinguished
on payment of all the obligations due to the holder after
the repayment of the last installment of the principal amount
of the debenture.
What
is a difference between a bond and a debenture?
[Top ]
Long-term
debt securities issued by the Government of India or any
of the State Governments or undertakings owned by
them or by development financial institutions are called
as bonds. Instruments issued by other entities are called
debentures. The difference between the two is actually a
function of where they are registered and pay stamp duty
and how they trade.
Debenture
stamp duty is a state subject and the duty varies from state
to state. There are two kinds of stamp duties levied on
debentures viz issuance and transfer. Issuance stamp duty
is paid in the state where the principal mortgage deed is
registered. Over the years, issuance stamp duties have been
coming down. Stamp duty on transfer is paid to the state
in which the registered office of the company is located.
Transfer stamp duty remains high in many states and is probably
the biggest deterrent for trading in debentures in physical
segment, resulting in lack of liquidity.
On issuance,
stamp duty is linked to mortgage creation, wherever applicable
while on transfer, it is levied in accordance with the laws
of the state in which the registered office of the company
in question is located. A debenture transfer, has to be
effected through a transfer form prescribed for under Companies
Act.
Issuance of stamp duty
on bonds is under Indian Stamp Act 1899 (Central Act). A
bond is transferable by endorsement and delivery without
payment of any transfer stamp duty.
What
is PSU Bonds?[Top
]
Public
Sector Undertaking Bonds (PSU Bonds) : These are Medium
or long term debt instruments issued by Public Sector Undertakings
(PSUs). The term usually denotes bonds issued by the central
PSUs (ie PSUs funded by and under the administrative control
of the Government of India). Most of the PSU Bonds are sold
on Private Placement Basis to the targeted investors at
Market Determined Interest Rates. Often investment bankers
are roped in as arrangers to this issue. Most of the PSU
Bonds are transferable and endorsement at delivery and are
issued in the form of Usance Promissory Note.
In case of tax free bonds, normally
such bonds accompany post dated interest cheque / warrants.
What
are Bonds of Public Financial Institutions (PFIs)/ AIFIs
?[Top ]
Apart
from public sector undertakings, Financial Institutions
are also allowed to issue bonds. They issue bonds in 2 ways
:-
1) Through
public issues targeted at retail investors and trusts
2)
Through private placements to large institutional investors.
PFIs
offer bonds with different features to meet the different
needs of investors eg. Monthly return bonds, Quarterly coupon
bearing Bonds, cumulative interest Bonds, step up bonds
etc. Some PFIs are allowed to issue bonds (as per their
respective Acts) in the form of Book entry hence, PFIs like
IDBI, EXIM Bank, NHB, do issue Bonds in physical form (in
the form of holding certificate or debenture certificate
as the case may be,in book entry form) PFIs who have provision
to issue bond in the form of book entry are permitted under
the Respective Acts to design a special transfer form to
allow transfer of such securities. Nominal stamp duty /
transfer fee is payable on transfer transactions.
What
is the Coupon rate of the Security? [Top
]
The Coupon
rate is simply the interest rate that every debenture/Bond
carries on its face value and is fixed at the time of issuance.
For example, a 12% p.a coupon rate on a bond/debenture of
Rs 100 implies that the investor will receive Rs 12 p.a.
The coupon can be payable monthly, quarterly, half-yearly,
or annually or cumulative on redemption
What
is meant by a Maturity date for Security?
[ Top ]
Securities are issued for a fixed period
of time at the end of which the principal amount borrowed
is repaid to the investors. The date on which the term ends
and proceeds are paid out is known as the Maturity date.
It is specified on the face of the instrument. In respect
of Demat Debt instrument due date is known from ISIN Number
of the security.
What
is Redemption of Bond/Debenture?
[Top ]
On reaching
the date of maturity, the issuer repays the money borrowed
from the investors. This is known as Redemption or Repayment
of the bond/debenture.
If the redemption proceeds are more than the face value
of the bond/debentures, the debentures are said to be redeemed
at a premium. If one gets less than the face value, then
they are redeemed at a discount and if one gets the same
as their face value, then they are redeemed at par.
What
is meant by Current yield? [Top
]
This is the yield or return derived by
the investor on purchase of the instrument (yield related
to purchase price)
It is calculated by dividing the coupon rate by the purchase
price of the debenture. For e. g: If an investor buys a
10% Rs 100 debenture of ABC company at Rs 90, his current
Yield on the instrument would be computed as:
Current Yield = (10%*100)/90 X 100 , That is 11.11% p.a.
What
is Yield to maturity (YTM)? [Top
]
The yield or the return on the instrument
is held till its maturity is known as the Yield-to-maturity
(YTM). It basically measures the total income earned by
the investor over the entire life of the Security.
This total income consists of the following:
· Coupon
income: The fixed rate of return that accrues from the
instrument
· Interest-on-interest
at the coupon rate: Compound interest earned on the
coupon income
· Capital
gains/losses: The profit or loss arising on account
of the difference between the price paid for the security
and the proceeds received on redemption/maturity
What
is record date/shut period? [Top
]
G-Sec/Bonds/Debentures keep changing
hands in the secondary market. Issuer pays interest to the
holders registered in its register on a certain date. Such
date is known as record date. Securites are not transferred
in the books of issuer during the period in which such records
are updated for payment of interst etc. Such period is called
as shut period. For G-Secs held in Demat form (SGL) shut
period is 3 working days.
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