What is the Debt Market?
The Debt Market is the market where fixed income securities of various types and features are issued and traded. Debt Markets are therefore, markets for fixed income securities issued by Central and State Governments, Municipal Corporations, Govt. bodies and commercial entities like Financial Institutions, Banks, Public Sector Units, Public Ltd.companies and also structured finance instruments.

What is the Money Market?
The Money Market is basically concerned with the issue and trading of securities with short term maturities or quasi-money instruments. The Instruments traded in the moneymarket are Treasury Bills, Certificates of Deposits (CDs), Commercial Paper (CPs), Bills of Exchange and other such instruments of short-term maturities (i.e. not exceeding 1 year with regard to the original maturity)

Why should one invest in fixed income securities? Fixed Income securities offer a predictable stream of payments by way of interest and repayment of principal at the maturity of the instrument. The debt securities are issued by the eligible entities against the moneys borrowed by them from the investors in these instruments. Therefore, most debt securities carry a fixed charge on the assets of the entity and generally enjoy a reasonable degree of safety by way of the security of the fixed and/or movable assets of the company.
	The investors benefit by investing in fixed income securities as they preserve and increase their invested capital and also ensure the receipt of regular interest income.
	The investors can even neutralize the default risk on their investments by investing in Govt. securities, which are normally referred to as risk-free investments due to the sovereign guarantee on these instruments.
	The prices of Debt securities display a lower average volatility as compared to the prices of other financial securities and ensure the greater safety of accompanying investments.
	Debt securities enable wide-based and efficient portfolio diversification and thus assist in portfolio risk-mitigation.

Who can issue fixed income securities?
Fixed income securities can be issued by almost any legal entity like Central and State Govts., Public Bodies, Banks and Institutions, statutory corporations and other corporate bodies. There may be legal and regulatory restrictions on each of these bodies on the type of securities that can be issued by each of them

What are the different types of instruments, which are normally traded in this market?
The instruments traded can be classified into the following segments based on the
characteristics of the identity of the issuer of these securities:

The G-secs are referred to as SLR securities in the Indian markets as they are eligible securities for the maintenance of the SLR ratio by the Banks. The other non-Govt securities are called Non-SLR securities.

What is the importance of the Debt Market to the economy? The key role of the debt markets in the Indian Economy stems from the following reasons:
	Efficient mobilization and allocation of resources in the economy
	Financing the development activities of the Government
	Transmitting signals for implementation of the monetary policy
	Facilitating liquidity management in tune with overall short term and long term objectives.

Since the Government Securities are issued to meet the short term and long term
financial needs of the government, they are not only used as instruments for raising debt, but have emerged as key instruments for internal debt management, monetary management and short term liquidity management.
The returns earned on the government securities are normally taken as the benchmark rates of returns and are referred to as the risk free return in financial theory. The Risk Free rate obtained from the G-sec rates are often used to price the other non-govt. securities in the financial markets.

What are the benefits of an efficient Debt Market to the financial system and the economy?
	Reduction in the borrowing cost of the Government and enable mobilization of resources at a reasonable cost.
	Provide greater funding avenues to public-sector and private sector projects and reduce the pressure on institutional financing.
	Enhanced mobilization of resources by unlocking illiquid retail investments like gold.
	Development of heterogeneity of market participants
	Assist in development of a reliable yield curve and the term structure of interest rates.

What are the different types of risks with regard to debt securities? The following are the risks associated with debt securities:
	Default Risk: This can be defined as the risk that an issuer of a bond may be unable to make timely payment of interest or principal on a debt security or to otherwise comply with the provisions of a bond indenture and is also referred to as credit risk.
	Interest Rate Risk: can be defined as the risk emerging from an adverse change in the interest rate prevalent in the market so as to affect the yield on the existing instruments. A good case would be an upswing in the prevailing interest rate scenario leading to a situation where the investors’ money is locked at lower rates whereas if he had waited and invested in the changed interest rate scenario, he would have earned more.
	Reinvestment Rate Risk: can be defined as the probability of a fall in the interest rate resulting in a lack of options to invest the interest received at regular intervals at higher rates at comparable rates in the market.

The following are the risks associated with trading in debt securities:
Counter Party Risk: is the normal risk associated with any transaction and refers to the failure or inability of the opposite party to the contract to deliver either the promised security or the sale-value at the time of settlement.

Price Risk: refers to the possibility of not being able to receive the expected price on any order due to a adverse movement in the prices.

MARKET STRUCTURE
What is the trading structure in the Wholesale Debt Market?
The Debt Markets in India and all around the world are dominated by Government securities, which account for between 50 75% of the trading volumes and the market capitalization in all markets. Government securities (G-Secs) account for 70 75% of the outstanding value of issued securities and 90-95% of the trading volumes in the Indian Debt Markets. State Government securities & Treasury Bills account for around 3-4 % of the daily trading volumes. The trading activity in the G-Sec. Market is also very concentrated currently (in terms of liquidity of the outstanding G-Secs.) with the top 10 liquid securities accounting for around 70% of the daily volumes.

Who are the main investors of Govt. Securities in India?
Traditionally, the Banks have been the largest category of investors in G-secs accounting for more than 60% of the transactions in the Wholesale Debt Market.

The Banks are a prime and captive investor base for G-secs as they are normally required to maintain 25% of their net time and demand liabilities as SLR but it has been observed that the banks normally invest 10% to 15% more than the normal requirement in Government Securities because of the following requirements:-
	Risk Free nature of the Government Securities
	Greater returns in G-Secs as compared to other investments of comparable nature

Who regulates the fixed income markets?
The issue and trading of fixed income securities by each of these entities are regulated by different bodies in India. For eg: Government securities and issues by Banks, Institutions are regulated by the RBI. The issue of non-government securities comprising basically issues of Corporate Debt is regulated by SEBI.

What are the main features of G-Secs and T-Bills in India?
All G-Secs in India currently have a face value of Rs.100/- and are issued by the RBI on behalf of the Government of India. All G-Secs are normally coupon (Interest rate) bearing and have semi-annual coupon or interest payments with a tenor of between 5 to 30 years. This may change according to the structure of the Instrument.

Eg: a 11.50% GOI 2005 security will carry a coupon rate(Interest Rate) of 11.50% p.a. on a face value per unit of Rs.100/- payable semi-annually and maturing in the year 2005.

Treasury Bills are for short-term instruments issued by the RBI for the Govt. for financing the temporary funding requirements and are issued for maturities of 91 Days and 364 Days. T-Bills have a face value of Rs.100 but have no coupon (no interest payment). Tbills are instead issued at a discount to the face value (say @ Rs.95) and redeemed at par (Rs.100). The difference of Rs. 5 (100 95) represents the return to the investor obtained at the end of the maturity period.

State Government securities are also issued by RBI on behalf of each of the state governments and are coupon-bearing bonds with a face value of Rs.100 and a fixed tenor. They account for 3-4 % of the daily trading volumes.

What are the segments in the secondary debt market? The segments in the secondary debt market based on the characteristics of the investors and the structure of the market are:
	Wholesale Debt Market where the investors are mostly Banks, Financial Institutions, the RBI, Primary Dealers, Insurance companies, MFs, Corporates and FIIs.
	Retail Debt Market involving participation by individual investors, provident funds, pension funds, private trusts, NBFCs and other legal entities in addition to the wholesale investor classes.

What is the structure of the Wholesale Debt Market?
The Debt Market is today in the nature of a negotiated deal market where most of the deals take place through telephones and are reported to the Exchange for confirmation. It is therefore in the nature of a wholesale market.

Who are the most prominent investors in the Wholesale Debt Market in India?
The Commercial Banks and the Financial Institutions are the most prominent participants in the Wholesale Debt Market in India.

During the past few years, the investor base has been widened to include Co-operative Banks, Investment Institutions, cash rich corporates, Non-Banking Finance companies, Mutual Funds and high net-worth individuals. FIIs have also been permitted to invest 100% of their funds in the debt market, which is a significant increase from the earlier limit of 30%. The government also allowed in 1998-99 the FIIs to invest in T-bills with a view towards broadbasing the investor base of the same.

What is the issuance process of G-secs?
G-secs are issued by RBI in either a yield-based (participants bid for the coupon payable) or price-based (participants bid a price for a bond with a fixed coupon) auction basis. The Auction can be either a Multiple price (participants get allotments at their quoted prices/ yields) Auction or a Uniform price (all participants get allotments at the same price).

RBI has recently announced a non-competitive bidding facility for retail investors in Gsecs through which non-competitive bids will be allowed up to 5 percent of the notified amount in the specified auctions of dated securities.

What are the types of trades in the Wholesale Debt Market? There are normally two types of transactions, which are executed in the Wholesale Debt Market
	An outright sale or purchase and
	A Repo trade.

What is a Repo trade and how is it different from a normal buy or sell transaction?
An outright Buy or sell transaction is a one where there is no intended reversal of the trade at the point of execution of the trade. The Buy or sell transaction is an independent trade and is in no way connected with any other trade at the same or a later point of time.

A Ready Forward Trade (which is normally referred to as a Repo trade or a Repurchase Agreement ) is a transaction where the said trade is intended to be reversed at a later point of time at a rate which will include the interest component for the period between the two opposite legs of the transactions.

So in such a transaction, one participant sells securities to other with an agreement to purchase them back at a later date. The trade is called a Repo transaction from the point of view of the seller and it is called a Reverse Repo transaction from point of view of the buyer. Repos therefore facilitate creation of liquidity by permitting the seller to avail of a specific sum of money (the value of the repo trade) for a certain period in lieu of payment of interest by way of the difference between the two prices of the two trades.

Repos and reverse repos are commonly used in the money markets as instruments of short-term liquidity management and can also be termed as a collateralised lending and borrowing mechanism. Banks and Financial Institutions usually enter into reverse repo transactions to manage their reserve requirements or to manage liquidity.

BOND ANALYTICS
What is Yield?
Yield refers to the percentage rate of return paid on a stock in the form of dividends, or the effective rate of interest paid on a bond or note. There are many different kinds of yields depending on the investment scenario and the characteristics of the investment.

Yield To Maturity (YTM) is the most popular measure of yield in the Debt Markets and is the percentage rate of return paid on a bond, note or other fixed income security if you buy and hold the security till its maturity date.

Current Yield is the coupon divided by the Market Price and gives a fair approximation of the present yield.

Therefore, Current Yield = Coupon of the Security (in %) x Face Value of the Security (viz. 100 in case of G-Secs.)/Market Price of the Security

Eg: Suppose the market price for a 10.18% G-Sec 2012 is Rs.120. The current yield on the security will be (0.1018 x 100)/120 = 8.48%

The yield on the government securities is influenced by various factors such as level of money supply in the economy, inflation, future interest rate expectations, borrowing program of the government & the monetary policy followed by the government.

How is the Yield to Maturity computed?
The calculation for YTM is based on the coupon rate, length of time to maturity and
market price. It is the Internal Rate of Return on the bond and can be determined by equating the sum of the cash-flows throughout the life of the bond to zero. A critical assumption underlying the YTM is that the coupon interest paid over the life of the bond is assumed to be reinvested at the same rate.

The YTM is basically obtained through a trial and error method by determining the value of the entire range of cash-flows for the possible range of YTMs so as to find the one rate at which the cash-flows sum up to zero.

So, say, a G-Sec 8.00% GOI Loan 2004 with only 2 cash flows remaining to maturity as under:

Maturity Date: 30th January 2004

Interest Payment Dates: 30th January, 30th July

and trading currently at Rs. 115 for 1 Unit, will have a YTM as follows:

Settlement Date: 17th March 2003 (Date at which ownership is transferred to the Buyer)

Frequency of Interest Payments: 2

Day Count Convention: 30/360 (which in MS-EXCEL is taken as Basis 4)

Yield To Maturity: 4.8626%

The same can be computed from MS-EXCEL through the YIELD Formula by input of the parameters given above. It can be checked by discounting the said cash-flows, i.e., the two coupons of