1. PRIN L.N.WELINGKAR INSTITUE OF MANAGEMENTStudy of the Government Bond MarketSAINATTH G WAGHPGDMRoll No: 21 Section: RBI website and NSE India 1

2. Capital Market AssignmentStudy on GSec MarketPreface:The assignment involves study of the government securities market and its fluctuations which have beenobserved in the past six weeks. The debt structure comprises of three categories: The corporate debt market Wholesale Debt Market (WDM) Retail Debt Market (RDM)The sources for the following comprise of:RBI Website: www.rbi.org.inNSE India website: www.nseindia.comFor the purpose of the study the assignment has been divided in two parts:Part I: The inferences through RBI websiteFirst, taking the data of various auction results of 91 day T bill, 182 day T bill and 364 day T bill followingresults were obtained for the dates mentioned below:Wed 18/08: GSec MarketRs.98.46 (YTM is 6.2735%) -- 91 day T billRs.96.88 (YTM is 6.4587%) -- 182 day T billWed 25/08: GSec MarketRs.98.48 (YTM is 6.1908%) -- 91 day T billRs.93.88 (YTM is 6.5369%) -- 364 day T billWed 1/09: GSec MarketRs. 98.51 (YTM is 6.0668%) -- 91 day T billRs. 96.92 (YTM is 6.3732%) -- 182 day T bill Section: RBI website and NSE India2 3. Wed 8/09: GSec MarketRs.98.52 (YTM is 6.0254%) -- 91 day T billRs.93.93 (YTM is 6.4800%) -- 364 day T billConclusion:However, it could be observed from the above quoted value, that the change in the value has been veryminiscule. So it was very difficult to predict for the next week. However even after trying that for theinitial couple of week it was found that the expected value did not match the value arrived at.Part II: Study of the RDM marketIntroduction:The securities have symbol GC which have been issued Government of India. The face value of thesesecurities is 100. The interpretation of the symbols used in naming the securities is as follows: The first four characters represent the coupon rate without the decimal point. The next alphabetical character represents the month of expiration of security. Please find thesymbols and its corresponding month denoted in the table below: Alphabets Months A January BFebruary CMarch D April E May F June GJuly HAugust I September Section: RBI website and NSE India 3 4. JOctober K November LDecember The last two represent the year of expiry.For example, a symbol 0981H12 represents the following as per the nomenclature: 9.81 % coupon interest. Expires in month of August In the year 2012.As of now, the securities available under the GoI issued category are: SecurityCoupon RateRDM Symbol Issue DateMaturity Date CG2013 7.27% 0727I13 03-Sep-0203-Sep-13 CG2015 7.38% 0738I15 03-Sep-0203-Sep-15 CG2012 9.40% 0940I12 11-Sep-0111-Sep-12 CG2026 10.18%1018I26 11-Sep-0111-Sep-26 CG2018 5.69% 0569I18 25-Sep-0325-Sep-18 CG2028 6.01% 0601C28 08-Aug-0325-Mar-28 CG2012 6.85% 0685D1205-Apr-02 05-Apr-12 CG2023 6.30% 0630D2309-Apr-03 09-Apr-23 CG2014 7.37% 0737D1416-Apr-02 16-Apr-14 CG2015 9.85% 0985J1516-Oct-01 16-Oct-15 CG2017 7.49% 0749D1716-Apr-02 16-Apr-17 CG2016 10.71%1071D1619-Apr-01 19-Apr-16From the following set of securities, the following is considered for study: 0738l15These securities involve interest rate which is closer to the MIBOR rate with a difference in the expiry.The MIBOR rate is used to compare the coupon rate of security as NSE refers to it as a benchmark forthe debt instruments.Section: RBI website and NSE India 4 5. Observations:RDM Symbol: 0738l15 Date NSE MIBORPrevious Close Close Price Change (`)26-Aug-10 6.91%102.24 102.380.1427-Aug-10 6.86%102.38 102.37-0.0130-Aug-10 6.88%102.37 102.460.0931-Aug-10 6.90%102.46 98.95 -3.511-Sep-106.95%98.9598.53 -0.422-Sep-106.92%98.5399.77 1.243-Sep-106.93%99.7799.08 -0.696-Sep-106.91%99.0898.43 -0.657-Sep-106.95%98.4399.01 0.588-Sep-107.00%99.0198.62 -0.399-Sep-106.95%98.62 98.9 0.2813-Sep-10 7.01% 98.999.05 0.1514-Sep-10 7.06%99.0599.18 0.1315-Sep-10 7.09%99.1899.02 -0.1616-Sep-10 7.17%99.02 99.1 0.0817-Sep-10 7.27% 99.199.06 -0.0420-Sep-10 7.29%99.0698.93 -0.1321-Sep-10 7.31%98.9399.04 0.1122-Sep-10 7.38%99.04100.511.4723-Sep-10 7.48%100.5199.5 -1.0124-Sep-10 7.42% 99.599.67 0.17Section: RBI website and NSE India 5 6. As the fact suggests, if the coupon rate exceeds the market interest rate then the bond trades atpremium and there is huge demand for the bond due to higher coupon. However if the coupon rate isless than the market interest rate then the bond will be traded at discount and also there will be drop inthe demand due to lower coupon. When the MIBID interest rate is below the coupon interest rate, thesecurity traded at premium as per highlighted in yellow for the date (27-Aug). Also in the latestobservation on (24-Sep) it was found that, when MIBID rate was more than the coupon rate, thesecurity was traded at discount. However this principle does not remain consistent for all the tradingdays. For example when MIBOR rate is evaluated, the ideal price of security should be the face value,however the closing price of security was found to be `100.51 as highlighted in yellow for the date (22-Sep). The average change ( in terms of absolute value) measured for each day is `0.54.Bond Valuation:RDM Symbol: 0738l15PreviousClosePV of FuturePV of Par Price of Bond Date Buy/Overvalued ClosePrice Cash FlowsValue(Max.) 26-Aug-10 102.24102.3831.24 70.75101.99Overvalued 27-Aug-10 102.38102.3731.27 70.93102.20Overvalued 30-Aug-10 102.37102.4631.21 70.90102.11Overvalued 31-Aug-10 102.46 98.9531.18 70.85102.03Overvalued 01-Sep-1098.95 98.5331.13 70.69101.81Buy 02-Sep-1098.53 99.7731.14 70.80101.94Buy 03-Sep-1099.77 99.0831.11 70.78101.90Buy 06-Sep-1099.08 98.4331.09 70.89101.98Buy 07-Sep-1098.43 99.0131.04 70.77101.81Buy 08-Sep-1099.01 98.6230.99 70.61101.60Buy 09-Sep-1098.62 98.9 31.01 70.79101.81Buy 13-Sep-1098.999.0530.91 70.64101.55Buy 14-Sep-1099.05 99.1830.86 70.48101.34Buy 15-Sep-1099.18 99.0230.82 70.39101.21BuySection: RBI website and NSE India6 7. Previous ClosePV of FuturePV of ParPrice of Bond Date Buy/Overvalued Close Price Cash FlowsValue (Max.) 16-Sep-1099.0299.1 30.7470.13 100.87Buy 17-Sep-1099.199.06 30.6569.81 100.46Buy 20-Sep-1099.06 98.93 30.5969.78 100.37Buy 21-Sep-1098.93 99.04 30.5669.73 100.29Buy 22-Sep-1099.04 100.5130.4969.51 100.00Buy 23-Sep-10 100.5199.5 30.4069.18 99.59 Overvalued 24-Sep-1099.599.67 30.4469.40 99.84 BuyConclusionThere seems to be some time lag in terms of security prices adjusting to the market interest rates. Therecommendation in the above table, in the last column, refers to the Overvalued or Buy status isbased on the MIBOR interest rate as the discounting factor. However, the MIBOR rate itself is subject tovolatility with a coefficient of variation of 2.82%, with average being 7.08% and standard deviation of0.002.Section: RBI website and NSE India7