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8/8/2019 Debt Market and Money Market
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DEBT MARKET AND MONEY
MARKET
PRESENTATION BY SRIRAM
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Introduction
Debt- definition
Characteristics- Definition
Types
Classification of Debt securities- by issuer, by
security, by tax status
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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
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Central Government Securities
Evolution
Types
Participants
Auction
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Other Bonds
State Government bonds
Financial Institution Bonds
PSU Bonds
Private Corporates
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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
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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
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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
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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
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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
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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
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Auction process
Announcement by RBI: notifies
Sealed bids from banks, Pds and
SGL participantsNon-competitive bids
Allotment Process
- Uniform price auction- Discriminatory price auction
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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
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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
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Money Market Instruments
Overnight Call Money Rates
Repo / Reverse repo
Treasury Bills
Commercial Paper
Certificate of Deposits
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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.
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Day Count Conventions
Money market instruments:
Actual/365
Govt securities: 30/360Corporate Bonds: Actual / Actual
Mutual funds : Actual/365
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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
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Theories of the Term Structure
Expectation Hypothesis
Liquidity Premium
Market Segmentation
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Measuring Bond Sensitivity
Understanding the impact of rate
changes on the value of the bond and
the sensitivity of bond to rate changes
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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
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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.