Chanchal Goyal, Roll No. 17,m.ba.(2.3)

7/31/2019 Chanchal Goyal, Roll No. 17,m.ba.(2.3)

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Government

Securities

submitted by:Chanchal goyalroll no: 17,M.B.A.(2.3)


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A Government security is a tradable instrument issued by the CentralGovernment or the State Governments.

Such securities are short term (usually called treasury bills, with originalmaturities of less than one year) or long term (usually called Governmentbonds or dated securities with original maturity of one year or more).

In India, the Central Government issues both, treasury bills and bonds ordated securities while the State Governments issue only bonds or datedsecurities, which are called the State Development Loans (SDLs).

Government securities carry practically no risk of default and, hence, arecalled risk-free gilt-edged instruments.

Government of India also issues savings instruments (Savings Bonds,National Saving Certificates (NSCs), etc.) or special securities (oil bonds,Food Corporation of India bonds, fertiliser bonds, power bonds, etc.).They are, usually not fully tradable and are, therefore, not eligible to beSLR securities.


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1) Issued at face value2) No default risk as the securities carry sovereignguarantee.3) Ample liquidity as the investor can sell the securityin the secondary market

4) Interest payment on a half yearly basis on face value5) No tax deducted at source6) Can be held in D-mat form.7) Rate of interest and tenor of the security is fixed atthe time of issuance and is not subject to change (unless

intrinsic to the security like FRBs).8) Redeemed at face value on maturity9) Maturity ranges from of 2-30 years.10) Securities qualify as SLR investments (unlessotherwise stated).


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Primary Market

Secondary Market

1) Primary Market: The PrimaryMarket consists of the issuers of the securities,viz., Central and Sate Government and buyers

include Commercial Banks, Primary Dealers,Financial Institutions, Insurance Companies &Co-operative Banks. RBI also has a scheme ofnon-competitive bidding for small investors


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Dated Government securities are long term securitiesand carry a fixed or floating coupon (interest rate)which is paid on the face value, payable at fixedtime periods (usually half-yearly).

1) They are issued at face value.2)Coupon or interest rate is fixed at the time ofissuance, and remains constant till redemption ofthe security.

3)The tenor of the security is also fixed.4)Interest /Coupon payment is made on a half yearly

basis on its face value.5)The security is redeemed at par (face value) on its

maturity date.


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Zero Coupon bonds are bonds issued at discount to facevalue and redeemed at par. These were issued first on

January 19, 1994 and were followed by two subsequentissues in 1994-95 and 1995-96 respectively.

1)They are issued at a discount to the face value.

2) The tenor of the security is fixed.

3) The securities do not carry any coupon or interest rate.The difference between the issue price (discountedprice) and face value is the return on this security.

4) The security is redeemed at par (face value) on itsmaturity date


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Partly Paid Stock is stock where payment of principal amount is madein installments over a given time frame. It meets the needs ofinvestors with regular flow of funds and the need of Governmentwhen it does not need funds immediately. The first issue of suchstock of eight year maturity was made on November 15, 1994 for

Rs. 2000 crore. Such stocks have been issued a few more timesthereafter.

1)They are issued at face value, but this amount is paid in installmentsover a specified period.

2) Coupon or interest rate is fixed at the time of issuance, and remainsconstant till redemption of the security.

3)The tenor of the security is also fixed.

4) Interest /Coupon payment is made on a half yearly basis on its facevalue.

5)The security is redeemed at par (face value) on its maturity date.


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Floating Rate Bonds are securities which do nothave a fixed coupon rate. The coupon is re-setat pre-announced intervals (say, every sixmonths or one year) by adding a spread over abase rate. In the case of most floating ratebonds issued by the Government of India sofar,the base rate is the weighted average cut-offyield of the last three 364- day Treasury Bill

auctions preceding the coupon re-set date andthe spread is decided through the auction.Floating Rate Bonds were first issued inSeptember 1995 in India.


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Bonds can also be issued with features of optionalitywherein the issuer can have the option to buy-back(call option) or the investor can have the option to sellthe bond (put option) to the issuer during the currency

of the bond. 6.72%GS2012 was issued on July 18, 2002for a maturity of 10 years maturing on July 18, 2012.The optionality on the bond could be exercised aftercompletion of five years tenure from the date ofissuance on any coupon date falling thereafter. The

Government has the right to buyback the bond (calloption) at par value (equal to the face value) while theinvestor has the right to sell the bond (put option) tothe Government at par value at the time of any of thehalf-yearly coupon dates starting from July 18, 2007.


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Capital indexed Bonds are bonds where interestrate is a fixed percentage over the wholesaleprice index. These provide investors with an

effective hedge against inflation. These bondswere floated on December 29, 1997 on tapbasis. They were of five year maturity with acoupon rate of 6 per cent over the wholesale

price index. The principal redemption is linkedto the Wholesale Price Index.


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Qus : From where can g-secs be procured?

Ans : G-secs can be procured either directly fromthe primary market or from the secondary

market. This market pertains to theparticipation in fresh Government of Indiaissues by players like Reserve Bank of India,Primary & Satellite Dealers, Commercial Banks,Financial Institutions, Mutual Funds and othersincluding individuals. And secondary marketrefers to the regular trading activity thatcharacterises any stock market.


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Ques:What are the types of risks involved in g-secs?

Ans:These securities are usually referred to as riskfree securities. But these securities are subjectto interest-rate risks. Subject to changes in theover all interest rate scenario, the price of thesesecurities may appreciate or depreciate.


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This risk is again akin to all those securities,which generate intermittent cash flows in theform of periodic coupons. The most prevalenttool deployed to measure returns over a periodof time is the yield-to-maturity (YTM) method.The YTM calculation assumes that the cashflows generated during the life of a security isre-invested at the rate of the coupon. The risk

here is that the rate at which the interim cashflows are re-invested may fall thereby affectingthe returns.


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The minimum amount of investment in G-Sec isRs. 10,000.00 and that incase of T-Bills is Rs.25,000.00. However, there is no maximum

amount / limit set for investments


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Thank you

Documents

Chanchal Goyal, Roll No. 17,m.ba.(2.3)