Government Securities Market

A Primer

RESERVE BANK OF INDIA

Internal Debt Management Department
Mumbai

June 2015

Disclaimer
The contents of this primer are for general information and guidance purpose only. The
Reserve Bank will not be liable for actions and/or decisions taken based on this Primer.
Readers are advised to refer to the specific circulars issued by Reserve Bank of India from
time to time. While every effort has been made to ensure that the information set out in
this document is accurate, the Reserve Bank of India does not accept any liability for any
action taken, or reliance placed on, any part, or all, of the information in this document or
for any error in or omission from, this document.

PREFACE
The G-Secs market has witnessed significant changes during the past decade.
Introduction of an electronic screen based trading system, dematerialized holding, straight
through processing, establishment of the Clearing Corporation of India Ltd. (CCIL) as the
Central Counter Party (CCP) for guaranteed settlement, new instruments, and changes in
the legal environment are some of the major aspects that have contributed to the rapid
development of the G-Sec market.
Major participants in the G-Secs market historically have been large institutional
investors. With the various measures for development, the market has also witnessed the
entry of smaller entities such as co-operative banks, small pension, provident and other
funds etc. These entities are mandated to invest in G-Secs through respective regulations.
However, some of these new entrants have often found it difficult to understand and
appreciate various aspects of the G-Secs market. The Reserve Bank of India has,
therefore, taken several initiatives to bring awareness about the G-Secs market among
small investors. These include workshops on the basic concepts relating to fixed income
securities/ bonds like G-Secs,, trading and investment practices, the related regulatory
aspects and the guidelines.
This primer is yet another initiative of the Reserve Bank to disseminate information
relating to the G-Secs market to the smaller institutional players as well as the public. An
effort has been made in this primer to present a comprehensive account of the market and
the various processes and operational aspects related to investing in G-Secs in an easyto-understand, question-answer format. The primer also has, as annexes, a list of primary
dealers (PDs), useful excel functions and glossary of important market terminology. I hope
the investors, particularly the smaller institutional investors will find the primer useful in
taking decisions on investment in G-Secs. Reserve Bank of India would welcome
suggestions in making this primer more user-friendly.

Shri H R Khan
Deputy Governor

Contents
Sl. No
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Annex 1
Annex 2
Annex 3
Annex 4
Annex 5
Annex 6
Annex 7

Question
What is a Government security?
Why should one invest in G-Secs?
How are the G-Secs issued?
What are the different types of auctions used for issue of
securities?
What are Open Market Operations (OMOs)?
What is Liquidity Adjustment Facility (LAF) and whether Re-repo in
Government Securities Market allowed?
How and in what form can G-Secs be held?
How does the trading in G-Secs take place?
Who are the major players in the G-Secs market?
What are the Dos and Donts prescribed by RBI for the Cooperative banks dealing in G-Secs?
How are the dealing transactions recorded by the dealing desk?
What are the important considerations while undertaking security
transactions?
Why does the price of G-Sec change?
How does one get information about the price of a G-Sec?
How are the G-Secs transactions reported?
How do the G-Secs transactions settle?
What is shut period?
What is Delivery versus Payment (DvP) settlement?
What is the role of the Clearing Corporation of India Limited
(CCIL)?
What is the When Issued market and Short Sale?
What are the basic mathematical concepts one should know for
calculations involved in bond prices and yields?
How is the Price of a bond calculated? What is the total
consideration amount of a trade and what is accrued interest?
What is the relationship between yield and price of a bond?
How is the yield of a bond calculated?
What are the day count conventions used in calculating bond
yields?
How is the yield of a Treasury Bill calculated?
What is Duration?
What are the important guidelines for valuation of securities?
What are the risks involved in holding G-Secs? What are the
techniques for mitigating such risks?
What is money market?
What is the role of FIMMDA?
What are the various websites that give information on G-Secs?
Specimen of a G-Sec
List of Primary Dealers
Sample of Auction Calendar
Sample of Auction notification
Specimen of Deal slip
Important Excel functions for bond related calculations
Glossary of Important Terms and commonly used Market
Terminology

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Government Securities Market in India A Primer

Background
1.
1.1

What is a Bond?
A bond is a debt instrument in which an investor loans money to an entity (typically

corporate or governmental) which borrows the funds for a defined period of time at a
variable or fixed interest rate. Bonds are used by companies, municipalities, states and
sovereign governments to raise money and finance a variety of projects and activities.
Owners of bonds are debt holders, or creditors, of the issuer.
What is a Government Security (G-Sec)?
1.2 A Government Security (G-Sec) is a tradable instrument issued by the Central
Government or the State Governments. It acknowledges the Governments debt
obligation.

Such securities are short term (usually called treasury bills, with original

maturities of less than one year) or long term (usually called Government bonds or dated
securities with original maturity of one year or more). In India, the Central Government
issues both, treasury bills and bonds or dated securities while the State Governments
issue only bonds or dated securities, which are called the State Development Loans
(SDLs). G-Secs carry practically no risk of default and, hence, are called risk-free giltedged instruments.
a.

Treasury Bills (T-bills)

1.3 Treasury bills or T-bills, which are money market instruments, are short term debt
instruments issued by the Government of India and are presently issued in three tenors,
namely, 91 day, 182 day and 364 day. Treasury bills are zero coupon securities and pay
no interest. They are issued at a discount and redeemed at the face value at maturity. For
example, a 91 day Treasury bill of `100/- (face value) may be issued at say ` 98.20, that
is, at a discount of say, `1.80 and would be redeemed at the face value of `100/-. The
return to the investors is the difference between the maturity value or the face value (that
is `100) and the issue price (for calculation of yield on Treasury Bills please see answer to
question no. 26).
b. Cash Management Bills (CMBs)
1.4 In 2010, Government of India, in consultation with RBI introduced a new short-term
instrument, known as Cash Management Bills (CMBs), to meet the temporary mismatches
in the cash flow of the Government of India. The CMBs have the generic character of Tbills but are issued for maturities less than 91 days.

c. Dated G-Secs
1.5 Dated G-Secs are securities which carry a fixed or floating coupon (interest rate) which
is paid on the face value, on half-yearly basis. Generally, the tenor of dated securities is
between 5 years and 30 years. In the recent auction calendar for dated G-Secs, there is a
plan to issue 40 year dated security in 2015-16.
The Public Debt Office (PDO) of the Reserve Bank of India acts as the
registry / depository of G-Secs and deals with the issue, interest payment
and repayment of principal at maturity. Most of the dated securities are fixed
coupon securities.

The nomenclature of a typical dated fixed coupon G-Sec contains the following features coupon, name of the issuer, maturity and face value. For example, 7.49% GS 2017 would
mean:
Coupon
Name of Issuer

: 7.49% paid on face value

: Government of India

Date of Issue

: April 16, 2007

Maturity

: April 16, 2017

Coupon Payment Dates

: Half-yearly (October 16 and April 16) every year

Minimum Amount of issue/ sale

: `10,000

In case, there are two securities with the same coupon and are maturing in the same year,
then one of the securities will have the month attached as suffix in the nomenclature. eg.
6.05% GS 2019 FEB, would mean that G-Sec having coupon 6.05% that mature in
February 2019 along with the other similar security having the same coupon. In this case,
there is another paper viz. 6.05%GS2019 which bears same coupon rate and is also
maturing in 2019 but in the month of June. Each security is assigned a unique no. called
ISIN (International Security Identification Number) at the time of issuance itself to avoid
any misunderstanding among the traders of the security.

If the coupon payment date falls on a Sunday or any other holiday, the coupon payment is
made on the next working day [para 46 (a) of Government Securities Manual, 1966 (4th
edition)]. However, if the maturity date falls on a Sunday or a holiday, the redemption
proceeds are paid on the previous working day (as per provisions of Sec 25 of NI Act,
1881).

1.6 Instruments:
i)

Fixed Rate Bonds These are bonds on which the coupon rate is fixed for the
entire life (i.e. till maturity) of the bond. Most Government bonds in India are
issued as fixed rate bonds.
For example 8.24%GS2018 was issued on April 22, 2008 for a tenor of 10
years maturing on April 22, 2018. Coupon on this security will be paid halfyearly at 4.12% (half yearly payment being the half of the annual coupon of
8.24%) of the face value on October 22 and April 22 of each year.

ii)

Floating Rate Bonds (FRB) FRBs are securities which do not have a fixed
coupon rate. The coupon is re-set at pre-announced intervals (say, every six
months or one year) by adding a spread over a base rate. In the case of most
floating rate bonds issued by the Government of India so far, the base rate is
the weighted average cut-off yield of the last three 182-day Treasury Bill
auctions preceding the coupon re-set date and the spread is decided through
the auction when the FRBs are first issued. FRBs were first issued in
September 1995 in India For example, a FRB was issued on July 2, 2002 for a
tenor of 15 years, thus maturing on July 2, 2017. The base rate on the bond for
the coupon payments was fixed at 6.50% being the weighted average rate of
implicit yield on 364-day Treasury Bills during the preceding six auctions. In the
bond auction, a cut-off spread (markup over the benchmark rate) of 34 basis
points (0.34%) was decided. Hence the coupon for the first six months was
fixed at 6.84%.

iii)

Zero Coupon Bonds Zero coupon bonds are bonds with no coupon
payments. However, like T- Bills, they are issued at a discount and redeemed
at face value. The Government. of India issued such securities in the nineties,
It has not issued zero coupon bond after that.

iv)

Capital Indexed Bonds These are bonds, the principal of which is linked to an
accepted index of inflation with a view to protecting the Principal amount of the
investors from inflation. A 5 year capital indexed bond, was first issued in
December 1997 which matured in 2002.

v)

Inflation Indexed Bonds (IIBs) - IIBs are bonds wherein both Coupon and
Principal amounts are protected against inflation. The inflation index used in
IIBs may be Whole Sale Price Index (WPI) or Consumer Price Index (CPI).
Globally, IIBs were first issued in 1981 in UK. In India, Government of India
through RBI issued IIBs (linked to WPI) in June 2013. Since then, they were
issued on monthly basis (on last Tuesday of each month) till December 2013.
Based on the success of these IIBs, Government of India in consultation with

RBI issued the IIBs (CPI based) exclusively for the retail customers in
December 2013. Further details on IIBs are available on RBI website under
FAQs.
vi)

Bonds with Call/ Put Options Bonds can also be issued with features of
optionality wherein the issuer can have the option to buy-back (call option) or
the investor can have the option to sell the bond (put option) to the issuer
during the currency of the bond. It may be noted that such bond may have put
only or call only or both options. The first G-Sec with both call and put option
viz. 6.72%GS2012 was issued on July 18, 2002 for a maturity of 10 years
maturing on July 18, 2012. The optionality on the bond could be exercised after
completion of five years tenure from the date of issuance on any coupon date
falling thereafter. The Government has the right to buy-back the bond (call
option) at par value (equal to the face value) while the investor has the right to
sell the bond (put option) to the Government at par value on any of the halfyearly coupon dates starting from July 18, 2007.

vii)

Special Securities - Under the market borrowing programme, the Government

of India also issues, from time to time, special securities to entities like Oil
Marketing Companies, Fertilizer Companies, the Food Corporation of India,
etc. (popularly called oil bonds, fertiliser bonds and food bonds respectively) as
compensation to these companies in lieu of cash subsidies. These securities
are usually long dated securities and carry marginally higher coupon (spread of
about 20-25 bps) over the yield of the dated securities of comparable maturity.
These securities are, however, not eligible SLR securities but are eligible as
collateral for market repo transactions. The beneficiary entities may divest
these securities in the secondary market to banks, insurance companies /
Primary Dealers, etc., for raising funds.

viii)

STRIPS Separate Trading of Registered Interest and Principal of Securities.STRIPS are the securities created by way of separating the cash flows
associated with a regular G-Sec i.e. each semi-annual coupon payment and the
final principal payment to be received from the issuer, into separate securities.
They are essentially Zero Coupon Bonds (ZCBs). However, they are created
out of existing securities only and unlike other securities, are not issued through
auctions. Securities represent future cash flows (periodic interest and principal
repayment) of an underlying coupon bearing bond. Being G-Secs, STRIPS are
eligible for SLR. In India, currently dated securities (other than FRBs, IIBs and
special securities) having their coupon due on Jan 2 and Jul 2 are eligible for
STRIPPING. Guidelines for stripping and reconstitution of G-Secs have already

been issued (IDMD circular dated March 25, 2010). For example, when `100 of
the 8.24%GS2018 is stripped, each cash flow of coupon (` 4.12 each half year)
will become coupon STRIP and the principal payment (`100 at maturity) will
become a principal STRIP. These cash flows are traded separately as
independent securities in the secondary market. STRIPS in G-Secs ensure
availability of sovereign zero coupon bonds, which facilitate the development of
a market determined zero coupon yield curve (ZCYC). STRIPS also provide
institutional investors with an additional instrument for their asset liability
management (ALM). Further, as STRIPS have zero reinvestment risk, being
zero coupon bonds, they can be attractive to retail/non-institutional investors.
The process of stripping/ reconstitution of G-Secs is carried out at RBI, Public
Debt Office (PDO) in the CBS package of RBI i.e. E-Kuber through any of the
Primary Dealer at the option of the holder at any time from the date of issuance
of a G-Sec till its maturity. Physical securities are not eligible for
stripping/reconstitution. Minimum amount of securities that needs to be
submitted for stripping/reconstitution is ` 1 crore (Face Value) and in multiples
thereof. They are currently tradable in both OTC market and in NDS-OM.
d. State Development Loans (SDLs)
1.7 State Governments also raise loans from the market which are called SDLs. SDLs are
dated securities issued through normal auction similar to the auctions conducted for dated
securities issued by the Central Government (please see question 3). Interest is serviced
at half-yearly intervals and the principal is repaid on the maturity date. Like dated
securities issued by the Central Government, SDLs issued by the State Governments also
qualify for SLR. They are also eligible as collaterals for borrowing through market repo as
well as borrowing by eligible entities from the RBI under the Liquidity Adjustment Facility
(LAF).
2. Why should one invest in G-Secs?
2.1 Holding of cash in excess of the day-to-day needs (idle funds) does not give any return
to it. Investment in gold has attendant problems in regard to appraising its purity,
valuation, safe custody, etc. Investing in G-Secs has the following advantages:

Besides providing a return in the form of coupons (interest), G-Secs offer the
maximum safety as they carry the Sovereigns commitment for payment of interest and
repayment of principal.

They can be held in book entry, i.e., dematerialized/ scripless form, thus, obviating the
need for safekeeping.

G-Secs are available in a wide range of maturities from 91 days to as long as 30 years
to suit the duration of varied liability structure of various institutions.

G-Secs can be sold easily in the secondary market to meet cash requirements.

G-Secs can also be used as collateral to borrow funds in the repo market.

The settlement system for trading in G-Secs, which is based on Delivery versus
Payment (DvP), is a very simple, safe and efficient system of settlement. The DvP
mechanism ensures transfer of securities by the seller of securities simultaneously
with transfer of funds from the buyer of the securities, thereby mitigating the settlement
risk.

G-Sec prices are readily available due to a liquid and active secondary market and a
transparent price dissemination mechanism.

Besides banks, insurance companies and other large investors, smaller investors like
Co-operative banks, Regional Rural Banks, Provident Funds are also required to hold
G-Secs as indicated below:

A. Primary (Urban) Co-operative Banks (UCBs)

2.2 Section 24 (2A) of the Banking Regulation Act 1949, (as applicable to co-operative
societies) provides that every primary (urban) cooperative bank shall maintain liquid
assets, the value of which shall not be less than such percentage as may be specified by
Reserve Bank in the Official Gazette from time to time and not exceeding forty percentage
of its DTL in India as on the last Friday of the second preceding fortnight (in addition to the
minimum cash reserve ratio (CRR) requirement). Such liquid assets shall be in the form of
cash, gold or unencumbered Government and other approved securities. This is referred
to as the Statutory Liquidity Ratio (SLR) requirement.
All primary (Urban) co-operative banks are required to maintain assets for SLR, the value
of which shall not at the close of business of any day be less than 22.00% of NDTL as on
last Friday of second preceding fortnight.
B. Rural Co-operative Banks
2.3 As per Section 24 of the Banking Regulation Act 1949, the State Co-operative Banks
(SCBs) and the District Central Co-operative Banks (DCCBs) are required to maintain in
cash, gold or unencumbered approved securities, valued at a price not exceeding the
current market price, an amount which shall not, at the close of business on any day, be
less than 22 per cent of its demand and time liabilities as part of the SLR requirement.
DCCBs are allowed to meet their SLR requirement by maintaining cash balances with
their respective State Co-operative Bank.

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C. Regional Rural Banks (RRBs)

2.4 Since April 2002, all the RRBs are required to maintain their entire Statutory Liquidity
Ratio (SLR) holdings in Government and other approved securities. The current SLR
requirement for the RRBs is 22 percent of their Demand and Time Liabilities (DTL).
D. Provident funds and other entities
2.5 The non- Government provident funds, superannuation funds and gratuity funds are
required by the Central Government, effective from January 24, 2005, to invest 40% of
their incremental accretions in Central and State G-Secs, and/or units of gilt funds
regulated by the Securities and Exchange Board of India (SEBI) and any other negotiable
security fully and unconditionally guaranteed by the Central/State Governments. The
exposure of a trust to any individual gilt fund, however, should not exceed five per cent of
its total portfolio at any point of time. The investment guidelines for non- Government PFs
have been recently revised in terms of which minimum 45% and upto 50% of investments
are permitted in a basket of instruments consisting of (a) G-Secs, (b) Other securities (not
in excess of 10% of total portfolio) the principal whereof and interest whereon is fully and
unconditionally guaranteed by the Central Government or any State Government SDLs
and (c) units of mutual funds set up as dedicated funds for investment in G-Secs (not
more than 5% of the total portfolio at any point of time and fresh investments made in
them shall not exceed 5% of the fresh accretions in the year), effective from April 2015.

3. How are the G-Secs issued?

3.1 G-Secs are issued through auctions conducted by RBI. Auctions are conducted on
the electronic platform called the E-Kuber, the Core Banking Solution (CBS) platform of
RBI. Commercial banks, scheduled UCBs, Primary Dealers (a list of Primary Dealers with
their contact details is given in Annex 2), insurance companies and provident funds, who
maintain funds account (current account) and securities accounts (SGL account) with RBI,
are members of this electronic platform. All members of E-Kuber can place their bids in
the auction through this electronic platform. All non-E-Kuber members including nonscheduled UCBs can participate in the primary auction through scheduled commercial
banks or PDs (called as Primary Members-PMs). For this purpose, the UCBs need to
open a securities account with a bank / PD such an account is called a Gilt Account. A
Gilt Account is a dematerialized account maintained with a scheduled commercial bank or
PD. The proprietary transactions in G-Secs undertaken by PMs are settled through
Subsidiary General Ledger (SGL) account maintained by them with RBI at PDO. The
transactions in G-Secs undertaken by Gilt Account Holders (GAHs) through their PMs are

11

settled through Constituent Subsidiary General Ledger CSGL

account maintained by

them with RBI at PDO for its constituent (e.g., a non-scheduled UCB).

3.2 The RBI, in consultation with the Government of India, issues an indicative half-yearly
auction calendar which contains information about the amount of borrowing, the range of
the tenor of securities and the period during which auctions will be held. A Notification and
a Press Communique giving exact particulars of the securities, viz., name, amount, type of
issue and procedure of auction are issued by the Government of India about a week prior
to the actual date of auction. RBI places the notification and a Press Release on its
website (www.rbi.org.in) and also issues advertisements in leading English and Hindi
newspapers. Information about auctions is also available with the select branches of
public and private sector banks and the PDs. These are conducted on Friday for
settlement on T+1 basis (i.e. securities are issued on next working day i.e. Monday). The
investors are thus given adequate time to plan for the purchase of G-Secs through such
auctions. A specimen of a dated security in physical form is given at Annex 1. The details
of all the dated securities issued by the Government of India are available on the RBI
website at http://www.rbi.org.in/Scripts/ financialmarketswatch.aspx. A sample of the
auction calendar and the auction notification are given in Annex 3 and 4 respectively.

3.3 The Reserve Bank of India conducts auctions usually every Wednesday to issue Tbills. Payments for the T-bills purchased are made on T+1 day i.e. on the working day
following the trade day. The 91 day T-bills are auctioned on every Wednesday. The
Treasury bills of 182 days and 364 days tenure are auctioned on alternate Wednesdays.
T-bills of 364 days tenure are auctioned on the Wednesday preceding the reporting Friday
while 182 T-bills are auctioned on the Wednesday prior to a non-reporting Friday. The
Reserve Bank releases a quarterly calendar of T-bill issuances for a financial year in the
last week of each quarter for the upcoming quarter e.g. calendar for April-June period is
notified in the last week of March. The Reserve Bank of India announces the issue details
of T-bills through a press release on its website every week. The settlement of the auction
is on T+1 basis.

3.4 Like T-bills, Cash Management Bills (CMBs) are also issued at a discount and
redeemed at face value on maturity. The tenor, notified amount and date of issue of the
CMBs depend upon the temporary cash requirement of the Government. The
announcement of their auction is made by Reserve Bank of India through a Press Release
on its website. The settlement of the auction is on T+1 basis. The non-competitive bidding
scheme (referred to in paragraph number 4.3 and 4.4 under question No. 4) has not been

12

extended to the CMBs. However, these instruments are tradable and qualify for ready
forward facility. Investment in CMBs is also reckoned as an eligible investment in G-Secs
by banks for SLR purpose under Section 24 of the Banking Regulation Act, 1949. First set
of CMBs were issued on May 12, 2010.
3.5 Floatation of State Government Loans (State Development Loans)
In terms of Sec. 21A (1) (b) of the Reserve Bank of India Act, 1934, the RBI may, by
agreement with any State Government undertake the management of the public debt of
that State. Accordingly, the RBI has entered into agreements with 29 State Governments
and one Union Territory (UT of Puducherry) for management of their public debt. Under
Article 293(3) of the Constitution of India (Under section 48A of Union territories Act, in
case of Union Territory), a State Government has to obtain the permission of the Central
Government for any borrowing as long as there is any outstanding loan that the State
Government may have from the Centre.

Market borrowings are raised by the RBI on behalf of the State Governments to the extent
of the allocations under the Market Borrowing Programme as approved by the Ministry of
Finance in consultation with the Planning Commission.

RBI in consultation with State Governments announces the indicative quantum of

borrowing on a quarterly basis. All State Governments have issued General notifications
which specify the terms and conditions for issue of State Government securities. Before
every auction, respective state governments issue specific notifications indicating details
of the securities being issued in the particular auction. RBI places a press release in its
website and also issues advertisements in leading English and vernacular newspapers of
the respective states.

Currently, SDL auctions are held on second and fourth Tuesdays every month. As in case
of Central G-Secs, auction is held on the E-Kuber Platform. Here 10% of the notified
amount is reserved for the retail investors under the non-competitive bidding.
4. What are the different types of auctions used for issue of securities?
Prior to introduction of auctions as the method of issuance, the interest rates were
administratively fixed by the Government. With the introduction of auctions, the rate of
interest (coupon rate) gets fixed through a market based price discovery process.

13

4.1 An auction may either be yield based or price based.

i.

Yield Based Auction: A yield based auction is generally conducted when a new
G-Sec is issued. Investors bid in yield terms up to two decimal places (e.g., 8.19%,
8.20%, etc.). Bids are arranged in ascending order and the cut-off yield is arrived
at the yield corresponding to the notified amount of the auction. The cut-off yield is
then fixed as the coupon rate for the security. Successful bidders are those who
have bid at or below the cut-off yield. Bids which are higher than the cut-off yield
are rejected. An illustrative example of the yield based auction is given below:

Yield based auction of a new security

Maturity Date: December 22, 2023
Coupon: It is determined in the auction (8.22% as shown in the
illustration below)
Auction date: December 20, 2013
Auction settlement date/Issue date: December 23, 2013*
Notified Amount: `1000 crore
* December 21 and 22 being holidays (Saturday and Sunday),
settlement is done on December 23, 2013 (T+1 settlement).

Details of bids received in the increasing order of bid yields

Amount of bid Cumulative
Bid
Price*
with
(`crore)
amount (`Cr)
Bid No.
Yield
coupon as 8.22%
1
8.19%
300
300
100.19
2
8.20%
200
500
100.14
3
8.20%
250
750
100.13
4
8.21%
150
900
100.09
5
8.22%
100
1000
100
6
8.22%
100
1100
100
7
8.23%
150
1250
99.93
8
8.24%
100
1350
99.87
The issuer would get the notified amount by accepting bids up to bid at sl. no. 5.
Since the bid number 6 also is at the same yield, bid numbers 5 and 6 would get
allotment on pro-rata basis so that the notified amount is not exceeded. In the
above case each of bidder at sl. no. 5 and 6 would get Rs. 50 crore. Bid numbers
7 and 8 are rejected as the yields are higher than the cut-off yield.
*Price corresponding to the yield is determined as per the relationship given
under YTM calculation in question 24.

ii. Price

Based

Auction:

price

based

auction

is

conducted

when

GovernmentGovernment of India re-issues securities which have already been

issued earlier. Bidders quote in terms of price per `100 of face value of the security

14

(e.g., `102.00, `101.00, `100.00, ` 99.00, etc., per `100/-). Bids are arranged in
descending order and the successful bidders are those who have bid at or above
the cut-off price. Bids which are below the cut-off price are rejected. An illustrative
example of price based auction is given below:

Price based auction of an existing security 8.24% GS 2018

Maturity Date: April 22, 2018
Coupon: 8.24%
Auction date: December 20, 2013
Auction settlement date: December 23, 2013*
Notified Amount: `1000 crore
* December 21 and 22 being holidays (Saturday and Sunday), settlement is done
on December 23, 2013under T+1 cycle.

Details of bids received in the decreasing order of bid price

Amount of bid Implicit
(` Cr)
Cumulative amount (`Cr)
Bid no. Price of bid
yield
1
100.31
300
8.1912%
300
2
100.26
200
8.1987%
500
3
100.25
250
8.2002%
750
4
100.21
150
8.2062%
900
5
100.20
100
8.2077%
1000
6
100.20
100
8.2077%
1100
7
100.16
150
8.2136%
1250
8
100.15
100
8.2151%
1350
The issuer would get the notified amount by accepting bids up to 5. Since the bid
number 6 also is at the same price, bid numbers 5 and 6 would get allotment in
proportion so that the notified amount is not exceeded. In the above case each of
bidders at sl. no. 5 and 6 would get securities worth ` 50 crore. Bid numbers 7 and 8
are rejected as the price quoted is less than the cut-off price.
4.2 Depending upon the method of allocation to successful bidders, auction may be
conducted on Uniform Price basis or Multiple Price basis. In a Uniform Price auction, all
the successful bidders are required to pay for the allotted quantity of securities at the
same rate, i.e., at the auction cut-off rate, irrespective of the rate quoted by them. On the
other hand, in a Multiple Price auction, the successful bidders are required to pay for the
allotted quantity of securities at the respective price / yield at which they have bid. In the
example under (ii) above, if the auction was Uniform Price based, all bidders would get
allotment at the cut-off price, i.e., `100.20. On the other hand, if the auction was Multiple
Price based, each bidder would get the allotment at the price he/ she has bid, i.e., bidder 1
at `100.31, bidder 2 at `100.26 and so on.

15

4.3 An investor, depending upon his eligibility, may bid in an auction under either of the
following categories:
i. Competitive Bidding: In a competitive bidding, an investor bids at a specific price /
yield and is allotted securities if the price / yield quoted is within the cut-off price / yield.
Competitive bids are made by well informed institutional investors such as banks, financial
institutions, PDs, mutual funds, and insurance companies. The minimum bid amount is

`10,000 and in multiples of `10,000 in dated securities and minimum ` 25,000 in case of
T-Bills and in multiples of ` 25,000 thereafter. Multiple bidding is also allowed, i.e., an
investor may put in multiple bids at various prices/ yield levels.
ii. Non-Competitive Bidding (NCB): With a view to providing retail investors, who may
lack skill and knowledge about G-Sec market or who have low demand and to enable
them to participate in the auction directly, the scheme of NCB in dated securities was
introduced in January 2002. NCB is open to individuals, HUFs, RRBs, co-operative banks,
firms, companies, corporate bodies, institutions, provident funds, and trusts. Under the
scheme, eligible investors apply for a certain amount of securities in an auction without
mentioning price/yield. Such bidders are allotted securities at the weighted average
price/yield of the auction. In the illustration given under 4.1 (ii) above, the notified amount
being `1000 crore, the amount reserved for NCB will be ` 50 crore (5% of the notified
amount). Non-competitive bidders will be allotted at the weighted average price which is
`100.26 in the given illustration. The participants in NCB are, however, required to hold a
gilt account with a bank or PD. RRBs and co-operative banks which hold SGL and Current
Account with the RBI can also participate under the scheme of NCB without holding a gilt
account. The amount reserved for NCB is 10% of the notified amount in case of SDL
auctions and 20% of the notified amount in case of auction of Inflation Indexed Bonds
(IIBs). Banks/PDs are required to consolidate the individual requirements of their clients
and allowed to submit only a single bid under NCB.
4.4 In every auction of dated securities, a maximum of 5% of the notified amount is
reserved for such non-competitive bids. In the case of auction for Treasury Bills, the
amount accepted for non-competitive bids is over and above the notified amount and there
is no limit placed. However, NCB in Treasury Bills is available only to State Governments,
eligible Provident Funds, select foreign central banks and is not available to the cooperative banks for proprietary bids. Only one bid is allowed to be submitted by an
investor either through a bank or PD. For bidding under the scheme, an investor has to fill
in an undertaking and send it along with the application for allotment of securities through
a bank or a PD. The minimum amount and the maximum amount for a single bid is

16

`10,000 and `2 crore respectively in the case of an auction of dated securities. A bank or
a Primary Dealer can charge an investor up to maximum of 6 paise per `100 of application
money as commission for rendering their services In case, the total applications received
for non-competitive bids exceed the ceiling of 5 per cent of the notified amount of the
auction for dated securities, the bidders are allotted securities on a pro-rata basis.
4.5 NCB scheme has been introduced in the SDLs from August 2009. The aggregate
amount reserved for the purpose in the case of SDLs is 10% of the notified amount (eg.

`100 Crore for a notified amount of `1000 Crore) and the maximum amount an investor
can bid per auction is capped at 1% of the notified amount (as against ` 2 Crore in GSecs). The bidding and allotment procedure is similar to that of G-Secs.
5. What are the Open Market Operations (OMOs)?
OMOs are the market operations conducted by the RBI by way of sale/ purchase of GSecs to/ from the market with an objective to adjust the rupee liquidity conditions in the
market on a durable basis. When the RBI feels that there is excess liquidity in the market,
it resorts to sale of securities thereby sucking out the rupee liquidity. Similarly, when the
liquidity conditions are tight, the RBI may buy securities from the market, thereby releasing
liquidity into the market.

5 (b) What is meant by buyback of G-Secs?

Buyback of G-Secs is a process whereby the Government of India and State
Governments buy back their existing securities from the holders. The objectives of
buyback can be reduction of cost (by buying back high coupon securities), reduction in the
number of outstanding securities and improving liquidity in the G-Secs market (by buying
back illiquid securities) and infusion of liquidity in the system. State Governments
generally buy-back their high coupon (high cost debt) bearing securities to reduce their
interest outflows in the times when interest rates show a falling trend. States also retire
their high cost debt pre-maturely in order to fulfil some of the conditions put by
international lenders like Asian Development Bank, World Bank etc. to grant them low cost
loans. Governments make provisions in their budget for buying back of existing securities.
Buyback can be done through an auction process (generally if amount is large) or through
the secondary market route, i.e. NDS-OM (if amount is not large).
6. What is Liquidity Adjustment Facility (LAF) and whether Re-repo in Government
Securities Market allowed?

17

LAF is a facility extended by the RBI to the scheduled commercial banks (excluding
RRBs) and PDs to avail of liquidity in case of requirement or park excess funds with the
RBI in case of excess liquidity on an overnight basis against the collateral of G-Secs
including SDLss. Basically, LAF enables liquidity management on a day to day basis. The
operations of LAF are conducted by way of repurchase agreements (repos and reverse
repos please refer to paragraph numbers 30.4 to 30.8 under question no. 30 for more
details) with RBI being the counter-party to all the transactions. The interest rate in LAF is
fixed by the RBI from time to time. Currently the rate of interest on repo under LAF
(borrowing by the participants) is 7.50% and that of reverse repo (lending funds to RBI) is
6.50%. LAF is an important tool of monetary policy and liquidity management.
Scheduled commercial banks, Primary Dealers along with Mutual Funds and Insurance
Companies (subject to the approval of the regulators concerned) maintaining Subsidiary
General Ledger account with the RBI are permitted to re-repo the government securities,
including state development loans and Treasury Bills, acquired under reverse repo,
subject to various conditions and guidelines prescribed by RBI time to time.
7. How and in what form can G-Secs be held?
7.1 The Public Debt Office (PDO) of the RBI, acts as the registry and central depository
for the G-Secs. They may be held by investors either as physical stock or in
dematerialized (demat/electronic) form. From May 20, 2002, it is mandatory for all the RBI
regulated entities to hold and transact in G-Secs only in dematerialized (SGL) form.
a.

Physical form: G-Secs may be held in the form of stock certificates.

A stock

certificate is registered in the books of PDO. Ownership in stock certificates can not
be transferred by way of endorsement and delivery. They are transferred by
executing a transfer form as the ownership and transfer details are recorded in the
books of PDO. The transfer of a stock certificate is final and valid only when the
same is registered in the books of PDO.
b.

Demat form: Holding G-Secs in the electronic or scripless form is the safest and the
most convenient alternative as it eliminates the problems relating to their custody,
viz., loss of security. Besides, transfers and servicing of securities in electronic form
is hassle free. The holders can maintain their securities in dematerialsed form in
either of the two ways:
i. SGL Account: Reserve Bank of India offers SGL Account facility to select entities
who can hold their securities in SGL accounts maintained with the Public Debt
Offices of the RBI. Only financially strong entities viz. Banks, PDs, select UCBs and

18

NBFCs which meet RBI guidelines (please see RBI circular IDMD.DOD.No.
13/10.25.66/2011-12 dt Nov 18, 2011) are allowed to maintain SGL with RBI.
ii. Gilt Account: As the eligibility to open and maintain an SGL account with the RBI is
restricted, an investor has the option of opening a Gilt Account with a bank or a PD
which is eligible to open a CSGL account with the RBI. Under this arrangement, the
bank or the PD, as a custodian of the Gilt Account holders, would maintain the
holdings of its constituents in a CSGL account (which is also known as SGL II
account) with the RBI. The servicing of securities held in the Gilt Accounts is done
electronically, facilitating hassle free trading and maintenance of the securities.
Receipt of maturity proceeds and periodic interest is also faster as the proceeds are
credited to the current account of the custodian bank / PD with the RBI and the
custodian (CSGL account holder) immediately passes on the credit to the Gilt
Account Holders (GAH).
7.2 Investors also have the option of holding G-Secs in a dematerialized account with a
depository (NSDL / CDSL, etc.). This facilitates trading of G-Secs on the stock exchanges.
8. How does the trading in G-Secs take place?
8.1 There is an active secondary market in G-Secs. The securities can be bought / sold in
the secondary market either through (i) Negotiated Dealing System-Order Matching (NDSOM) (anonymous online trading) or through (ii) Over the Counter (OTC) and reported on
NDS-OM or NDS-OM-Web.
i. NDS-OM
In August, 2005, RBI introduced an anonymous screen based order matching module
called NDS-OM. This is an order driven electronic system, where the participants can
trade anonymously by placing their orders on the system or accepting the orders already
placed by other participants. Anonymity ensures a level playing field for various categories
of participants. NDS-OM is operated by the CCIL on behalf of the RBI (Please see answer
to the question no.19 about CCIL). Direct access to the NDS-OM system is currently
available only to select financial institutions like Commercial Banks, Primary Dealers, well
managed and financially sound UCBs and NBFCs, etc. Other participants can access this
system through their custodians i.e. with whom they maintain Gilt Accounts. The
custodians place the orders on behalf of their customers . The advantages of NDS-OM are
price transparency and better price discovery.
8.2 Gilt Account holders have been given indirect access to the reporting module of NDSOM through custodian institutions. A member (who has the direct access) can report on

19

the NDS-OM the transaction of a Gilt Account holder in G-Secs. Similarly, Gilt Account
holders have also been given indirect access to NDS-OM through the custodians.
ii. Over the Counter (OTC)/ Telephone Market
8.3 In this market, a participant, who wants to buy or sell a G-Sec, may contact a bank /
PD/financial institution either directly or through a broker registered with SEBI and
negotiate price and quantity of security Such negotiations are usually done on telephone
and a deal may be struck if both counterparties agree on the amount and rate. In the case
of a buyer, like an UCB wishing to buy a security, the bank's dealer (who is authorized by
the bank to undertake transactions in G-Secs) may get in touch with other market
participants over telephone and obtain quotes. Should a deal be struck, the bank should
record the details of the trade in a deal slip (specimen given at Annex 5). The dealer must
exercise due diligence with regard to the price quoted by verifying with available sources
(See question number 14 for information on ascertaining the price of G-Secs). All trades
undertaken in OTC market are reported on the Reported segment of NDS-OM, the details
of which are given under the question number 15.
iii. NDS-OM-Web
8.4 RBI has launched NDS-OM-Web on June 29, 2012 for facilitating direct participation of
gilt account holders (GAH) on NDS-OM through their primary members (PM) (as risk
controller only and not having any role in pricing of trade). The GAH have access to the
same order book of NDS-OM as the PM. GAH are in a better position to control their
orders (place/modify/cancel/hold/release) and have access to real time live quotes in the
market. Since notifications of orders executed as well as various queries are available
online to the GAH, they are better placed to manage their positions. Web based interface
that leverages on the gilt accounts already maintained with the custodian Banks/PDs
provides an operationally efficient system to retail participants. Just like NDS-OM, RBI
provides this facility also at no cost to its users. PMs, however, may recover the actual
charges paid by them to CCIL for settlement of trades or any other charges like
transaction cost, annual maintenance charges (AMC) etc. More details can be had from
RBI website (Home- Financial Market Watch- Government securities market-NDS-OMWeb).
iv. Stock Exchanges
8.4 As advised by SEBI, the stock exchanges (like NSE, BSE, MCX) have been asked to
create dedicated debt segment in their trading platforms. In compliance to this, stock
exchanges have launched debt trading (G-Secs as also corporate bonds) segment which

20

generally cater to the needs of retail investors. The process involved in trading of G-Secs
in Demat form in stock exchanges is as follows:
a. The Gilt Account Holder (GAH) say XYZ provident fund approaches his custodian bank
(say HDFC bank) to convert his CSGL holdings (to the extent he wish to trade say `
10,000) into Demat form.
b. HDFC bank reduce the GAHs security balance by ` 10,000 and advise the depository
of stock exchange (NSDL/CSDL) to increase XYZs Demat account by ` 10,000. HDFC
also advises to PDO, Mumbai to reduce its CSGL balance by ` 10,000 and increase the
CSGL balance of NSDL/CSDL by ` 10,000.
c. NSDL/CSDL increases the Demat balance of XYZ by ` 10,000.
d. XYZ can now trade in G-Sec on stock exchange.
9. Who are the major players in the G-Secs market?
Major players in the G-Secs market include commercial banks and PDs besides
institutional investors like insurance companies. PDs play an important role as market
makers in G-Secs market. A market maker provides firm two way quotes in the market i.e.
both buy and sell executable quotes for the concerned securities. Other participants
include co-operative banks, regional rural banks, mutual funds, provident and pension
funds. Foreign Institutional Investors (FIIs) are allowed to participate in the G-Secs market
within the quantitative limits prescribed from time to time. Corporates also buy/ sell the GSecs to manage their overall portfolio.
10. What are the Do's and Donts prescribed by RBI for the Co-operative banks
dealing in G-Secs?
While undertaking transactions in securities, UCBs should adhere to the instructions
issued by the RBI. The guidelines on transactions in G-Secs by the UCBs have been
codified in the master circular UBD.BPD. (PCB). MC.No 12/16.20.000/2014-15 dated July
1, 2014 which is updated from time to time. This circular can also be accessed from the
RBI

website

under

the

Notifications

Master

circulars

section

(http://rbi.org.in/scripts/BS_CircularIndexDisplay.aspx?Id=8124). The important guidelines

to be kept in view by the UCBs relate to formulation of an investment policy duly approved
by their Board of Directors, defining objectives of the policy, authorities and procedures to
put through deals, dealings through brokers, preparing panel of brokers and review thereof

21

at annual intervals, and adherence to the prudential ceilings fixed for transacting through
each of the brokers, etc.
The important Dos & Donts are summarized in the Box I below.

BOX I
Dos & Donts for Dealing in G-Secs
Dos

Segregate dealing and back-office functions. Officials deciding about purchase and
sale transactions should be separate from those responsible for settlement and
accounting.

Monitor all transactions to see that delivery takes place on settlement day. The funds
account and investment account should be reconciled on the same day before close of
business.

Keep a proper record of the SGL forms received/issued to facilitate counter-checking

by their internal control systems/RBI inspectors/other auditors.

Seek a Scheduled Commercial Bank (SCB), a PD or a Financial Institution (FI) as

counterparty for transactions.

Give preference for direct deals with counter parties.

Use CSGL/ Gilt Accounts for holding the securities and maintain such accounts in the
same bank with whom the cash account is maintained.

Insist on Delivery versus Payment for all transactions.

Take advantage of the NCB facility for acquiring G-Secs in the primary auctions
conducted by the RBI.

Restrict the role of the broker only to that of bringing the two parties to the deal
together, if a deal is put through with the help of broker.

Have a list of approved brokers. Utilize only brokers registered with NSE or BSE or
OTCEI for acting as intermediary.

Place a limit of 5% of total transactions (both purchases and sales) entered into by a
bank during a year as the aggregate upper contract limit for each of the approved
brokers. A disproportionate part of the business should not be transacted with or
through one or a few brokers.

Maintain and transact in G-Secs only in dematerialized form in SGL Account or Gilt
Account maintained with the CSGL Account holder.

Open and maintain only one Gilt or dematerialized account.

22

Open a funds account for securities transactions with the same Scheduled
Commercial bank or the State Cooperative bank with whom the Gilt Account is
maintained.

Ensure availability of clear funds in the designated funds accounts for purchases and
sufficient securities in the Gilt Account for sales before putting through the
transactions.

Observe prudential limits for investment in permitted non-SLR securities (bonds of

nationalized banks, unlisted securities, unlisted shares of all-India Financial Institutions
and privately placed debt securities).

The Board of Directors to peruse all investment transactions at least once a month

Donts

Do not undertake any purchase/sale transactions with broking firms or other

intermediaries on principal to principal basis.

Do not use brokers in the settlement process at all, i.e., both funds settlement and
delivery of securities should be done with the counter-parties directly.

Do not give power of attorney or any other authorisation under any circumstances to
brokers/intermediaries to deal on your behalf in the money and securities markets.

Do not undertake G-Secs transaction in the physical form with any broker.

Do not routinely make investments in non-SLR securities (e.g., corporate bonds, etc)
issued by companies or bodies other than in the co-operative sector.

11. How are the dealing transactions recorded by the dealing desk?
11.1 For every transaction entered into by the trading desk, a deal slip should be generated
which should contain data relating to nature of the deal, name of the counter-party, whether
it is a direct deal or through a broker (if it is through a broker, name of the broker), details of
security, amount, price, contract date and time and settlement date. The deal slips should
be serially numbered and verified separately to ensure that each deal slip has been
properly accounted for. Once the deal is concluded, the deal slip should be immediately
passed on to the back office (it should be separate and distinct from the front office) for
recording and processing. For each deal, there must be a system of issue of confirmation
to the counter-party. The timely receipt of requisite written confirmation from the counterparty, which must include all essential details of the contract, should be monitored by the
back office. The need for counterparty confirmation of deals matched on NDS-OM will not
arise, as NDS-OM is an anonymous automated order matching system. In case of trades
finalized in the OTC market and reported on NDS-OM reported segment, both the buying

23

and selling counter parties report the trade particulars separately on the reporting platform
which should match for the trade to be settled.
11.2 Once a deal has been concluded through a broker, there should not be any
substitution of the counterparty by the broker. Similarly, the security sold / purchased in a
deal should not be substituted by another security under any circumstances.

11.3 On the basis of vouchers passed by the back office (which should be done after
verification of actual contract notes received from the broker / counter party and
confirmation of the deal by the counter party), the books of account should be
independently prepared.
12. What are the important considerations while undertaking security transactions?
The following steps should be followed in purchase of a security:
i)

Which security to invest in Typically this involves deciding on the maturity and
coupon. Maturity is important because this determines the extent of risk an investor
like an UCB is exposed to higher the maturity, higher the interest rate risk or
market risk. If the investment is largely to meet statutory requirements, it may be
advisable to avoid taking undue market risk and buy securities with shorter
maturity. Within the shorter maturity range (say 5-10 years), it would be safer to
buy securities which are liquid, that is, securities which trade in relatively larger
volumes in the market. The information about such securities can be obtained from
the website of the CCIL (http://www.ccilindia.com/OMMWCG.aspx), which gives
real-time secondary market trade data on NDS-OM. Since pricing is more
transparent in liquid securities, prices for these securities are easily obtainable
thereby reducing the chances of being misled/misinformed on the price in these
cases. The coupon rate of the security is equally important for the investor as it
affects the total return from the security. In order to determine which security to
buy, the investor must look at the Yield to Maturity (YTM) of a security (please refer
to Box III under para 24.4 for a detailed discussion on YTM). Thus, once the
maturity and yield (YTM) is decided, the UCB may select a security by looking at
the price/yield information of securities traded on NDS-OM or by negotiating with
bank or PD or broker.

ii)

Where and Whom to buy from- In terms of transparent pricing, the NDS-OM is the
safest because it is a live and anonymous platform where the trades are
disseminated as they are struck and where counterparties to the trades are not
revealed. In case, the trades are conducted on the telephone market, it would be

24

safe to trade directly with a bank or a PD. In case one uses a broker, care must be
exercised to ensure that the broker is registered on NSE or BSE or OTC Exchange
of India. Normally, the active debt market brokers may not be interested in deal
sizes which are smaller than the market lot (usually ` 5 crore). So it is better to
deal directly with bank / PD or on NDS-OM, which also has a screen for odd-lots.
Wherever a broker is used, the settlement should not happen through the broker.
Trades should not be directly executed with any counterparties other than a bank,
PD or a financial institution, to minimize the risk of getting adverse prices.

iii)

How to ensure correct pricing Since investors like UCBs have very small
requirements, they may get a quote/price, which is worse than the price for
standard market lots. To be sure of prices, only liquid securities may be chosen for
purchase. A safer alternative for investors with small requirements is to buy under
the primary auctions conducted by RBI through the non-competitive route. Since
there are bond auctions about twice every month, purchases can be considered to
coincide with the auctions. Please see question 14 for details on ascertaining the
prices of the G-Secs.

13. Why does the price of G-Sec change?

The price of a G-Sec, like other financial instruments, keeps fluctuating in the secondary
market. The price is determined by demand and supply of the securities. Specifically, the
prices of G-Secs are influenced by the level and changes in interest rates in the economy
and other macro-economic factors, such as, expected rate of inflation, liquidity in the
market, etc. Developments in other markets like money, foreign exchange, credit and
capital markets also affect the price of the G-Secs. Further, developments in international
bond markets, specifically the US Treasuries affect prices of G-Secs in India. Policy
actions by RBI (e.g., announcements regarding changes in policy interest rates like Repo
Rate, Cash Reserve Ratio, Open Market Operations, etc.) can also affect the prices of GSecs.

14. How does one get information about the price of a G-Sec?
14.1 The return on a security is a combination of two elements (i) coupon income that is,
interest earned on the security and (ii) the gain / loss on the security due to price changes
and reinvestment gains or losses.

14.2 Price information is vital to any investor intending to either buy or sell G-Secs.
Information

on

traded prices

of

securities is

25

available

on

the

RBI

website

http://www.rbi.org.in under the path Home Financial Markets Financial Markets

Watch Order Matching Segment of Negotiated Dealing System. This will show a table
containing the details of the latest trades undertaken in the market along with the prices.
Additionally,

trade

information

can

also

be

seen

on

CCIL

website

http://www.ccilindia.com/OMHome.aspx. This page can also be accessed from the RBI

website through the link provided. In this page, the list of securities and the summary of
trades is displayed. The total traded amount (TTA) on that day is shown against each
security. Typically liquid securities are those with the largest amount of TTA. Pricing in
these securities is efficient and hence UCBs can choose these securities for their
transactions. Since the prices are available on the screen they can invest in these
securities at the current prices through their custodians. Participants can thus get near
real-time information (there is a lag of about 1 minute between the trade time and time of
availability of information on the website) on traded prices and make informed decision
while buying / selling G-Secs. The screenshots of the above website page are given
below:
NDS-OM Market

The website of the Fixed Income, Money Market and Derivatives Association (FIMMDA),
(www.fimmda.org) is also a right source of price information, especially on securities that
are not traded frequently.

26

15. How are the G-Secs transactions reported?

15.1 Transactions undertaken between market participants in the OTC/telephone market
are expected to be reported on the NDS-OM platform within 15 minutes after the deal is
put through over telephone. All OTC trades are required to be mandatorily reported on the
NDS-OM reported segment for settlement. Reporting on NDS-OM is a two stage process
wherein both the seller and buyer of the security have to report their leg of the trade.
System validates all the parameters like reporting time, price, security etc. and when all
the criterias of both the reporting parties match, the deals get matched and trade details
are sent by NDS-OM system to CCIL for settlement.

15.2 Reporting on behalf of entities maintaining gilt accounts with the custodians is done
by the respective custodians in the same manner as they do in case of their own trades
i.e., proprietary trades. The securities leg of these trades settle in the CSGL account of the
custodian. Funds leg settle in the current account of the PM with RBI.

15.3 In the case of NDS-OM, participants place orders (. amount and price) in the desired
security on the system. Participants can modify / cancel their orders. Order could be a bid
(for purchase) or offer (for sale) or a two way quote (both buy and sell) of securities. The
system, in turn, will match the orders based on price and time priority. That is, it matches
bids and offers of the same prices with time priority. It may be noted that bid and offer of
the same entity do not matche i.e. only inter-entity orders are matched by NDS-OM and
not intra-entity. The NDS-OM system has separate screen for trading of the Central
Government papers, State Government securities (SDLs) and Treasury bills (including
Cash Management Bills). In addition, there is a screen for odd lot trading also essentially
for facilitating trading by small participants in smaller lots of less than ` 5 crore or multiple
of ` 5 crore (i.e., the standard market lot). The minimum amount that can be traded in odd
lot is ` 10,000 in dated securities while it is ` 25,000 for T-Bills and CMBs. The NDS-OM
platform is an anonymous platform wherein the participants will not know the counterparty
to the trade. Once an order is matched, the deal ticket gets generated automatically and
the trade details flow to the CCIL. Due to anonymity offered by the system, the pricing is
not influenced by the participants size and standing.
16. How do the G-Sec transactions settle?
Primary Market
16.1 Once the allotment process in the primary auction is finalized, the successful
participants are advised of the consideration amounts that they need to pay to the
GovernmentGovernment on settlement day. The settlement cycle for auction of all kind of

27

G-Secs i.e. dated security, T-Bills, CMBs or SDLs, is T+1, i.e. funds and securities are
settled on next working day from the conclusion of the trade. On the settlement date, the
fund accounts of the participants are debited by their respective consideration amounts
and their securities accounts (SGL accounts) are credited with the amount of securities
allotted to them.

Secondary Market
16.2 The transactions relating to G-Secs are settled through the members securities /
current accounts maintained with the RBI. The securities and funds are settled on a net
basis i.e. Delivery versus Payment System-III (DvP-III). CCIL guarantees settlement of
trades on the settlement date by becoming a central counter-party (CCP) to every trade
through the process of novation, i.e., it becomes seller to the buyer and buyer to the seller.
16.3 All outright secondary market transactions in G-Secs are settled on T+1 basis.
However, in case of repo transactions in G-Secs, the market participants have the choice
of settling the first leg on either T+0 basis or T+1 basis as per their requirement. Further,
all sale and purchase transactions in Government securities, where at least one of the
parties is an FPI, will be settled only on T+2 basis. These will include deals between a
domestic entity and an FPI, deals between two FPIs of different custodians, deals
between a custodian and its FPI Gilt Account Holder, and deals between two FPI Gilt
account Holders of the same custodian
17. What is shut period?
Shut period means the period for which the securities can not be traded. During the
period under shut, no trading of the security which is under shut is allowed. The main
purpose of having a shut period is to facilitate servicing of the securities viz., finalizing the
payment of coupon and redemption proceeds and to avoid any change in ownership of
securities during this process. Currently, the shut period for the securities held in SGL
accounts is one day. For example, the coupon payment dates for the security 8.83% GS
2023 are Nov 25 and May 25 of every year. The shut day will fall on Nov 23 and May 23
for this security i.e. the security cant be taken for settlement on one day prior to the
coupon due date and since settlement is on T+1 basis, the security can not trade on Nov
23 and May 23 and hence can not settle on Nov 24 and May 24 of every year year of the
life of the security.

28

18. What is Delivery versus Payment (DvP) Settlement?

Delivery versus Payment (DvP) is the mode of settlement of securities wherein the
transfer of securities and funds happen simultaneously. This ensures that unless the funds
are paid, the securities are not delivered and vice versa. DvP settlement eliminates the
settlement risk in transactions. There are three types of DvP settlements, viz., DvP I, II
and III which are explained below:
i. DvP I The securities and funds legs of the transactions are settled on a gross basis,
that is, the settlements occur transaction by transaction without netting the payables and
receivables of the participant.
ii. DvP II In this method, the securities are settled on gross basis whereas the funds are
settled on a net basis, that is, the funds payable and receivable of all transactions of a
party are netted to arrive at the final payable or receivable position which is settled.
iii. DvP III In this method, both the securities and the funds legs are settled on a net
basis and only the final net position of all transactions undertaken by a participant is
settled.
Liquidity requirement in a gross mode is higher than that of a net mode since the payables
and receivables are set off against each other in the net mode.

19. What is the role of the Clearing Corporation of India Limited (CCIL)?
The CCIL is the clearing agency for G-Secs. It acts as a Central Counter Party (CCP) for
all transactions in G-Secs by interposing itself between two counterparties. In effect,
during settlement, the CCP becomes the seller to the buyer and buyer to the seller of the
actual transaction. All outright trades undertaken in the OTC market and on the NDS-OM
platform are cleared through the CCIL. Once CCIL receives the trade information, it works
out participant-wise net obligations on both the securities and the funds leg. The payable /
receivable position of the constituents (gilt account holders) is reflected against their
respective custodians. CCIL forwards the settlement file containing net position of
participants to the RBI where settlement takes place by simultaneous transfer of funds and
securities under the Delivery versus Payment system. CCIL also guarantees settlement
of all trades in G-Secs. That means, during the settlement process, if any participant fails
to provide funds/ securities, CCIL will make the same available from its own means. For
this purpose, CCIL collects margins from all participants and maintains Settlement
Guarantee Fund.
20. What is the When Issued market and Short Sale?
'When Issued', a short term of "when, as and if issued", indicates a conditional transaction
in a security notified for issuance but not yet actually issued. All "WI " transactions are on

29

an "if" basis, to be settled if and when the security is actually issued. 'WI transactions in
the Central G-Secs have been permitted to all NDS-OM members and have to be
undertaken only on the NDS-OM platform. WI market helps in price discovery of the
securities being auctioned as well as better distribution of the auction stock. For urban
cooperative banks, detailed guidelines have been issued in the RBI master circular
UBD.BPD. (PCB). MC.No /16.20.000/2014-15 dated July 01, 2014.
Short Sale is defined as sale of securities one does not own. Scheduled Commercial
Banks and Primary Dealers are permitted to undertake short sale of Central Government
dated securities in NDS-OM as well as OTC market, subject to limits and other terms and
conditions prescribed by the RBI from time to time. Certain Urban Cooperative Banks
specifically permitted by the Department of Cooperative Bank Supervision for the purpose,
can also undertake intra-day short sale of Government securities subject to adherence to
the short sale limits, reporting and other risk management requirements prescribed for
eligible entities by the RBI from time to time.
21. What are the basic mathematical concepts one should know for calculations
involved in bond prices and yields?
The time value of money functions related to calculation of Present Value (PV), Future
Value (FV), etc. are important mathematical concepts related to bond market. An outline of
the same with illustrations is provided in the Box II below.

Box II
Time Value of Money
Money has time value as a Rupee today is more valuable and useful than a
Rupee a year later.
The concept of time value of money is based on the premise that an investor
prefers to receive a payment of a fixed amount of money today, rather than an
equal amount in the future, all else being equal. In particular, if one receives
the payment today, one can then earn interest on the money until that
specified future date. Further, in an inflationary environment, a Rupee today
will have greater purchasing power than after a year.
Present value of a future sum
The present value formula is the core formula for the time value of money.
The present value (PV) formula has four variables, each of which can be solved
for:
Present Value (PV) is the value at time=0
Future Value (FV) is the value at time=n
i is the rate at which the amount will be compounded each period
n is the number of periods

30

The cumulative present value of future cash flows can be calculated by adding
the contributions of FVt, the value of cash flow at time=t

An illustration
Taking the cash flows as;
Period (in Yrs)
Amount

1
100

2
100

3
100

Assuming that the interest rate is at 10% per annum;

The discount factor for each year can be calculated as 1/(1+interest rate)^no.
of years
The present value can then be worked out as Amount x discount factor
The PV of Rs.100 accruing after 3 years:
Year Amount
discount factor
P.V.
1
100
0.9091
90.91
2
100
0.8264
82.64
3
100
0.7513
75.13
The cumulative present value = 90.91+82.64+75.13 = Rs.248.69
Net Present Value (NPV)
Net present value (NPV) or net present worth (NPW) is defined as the
present value of net cash flows. It is a standard method for using the time
value of money to appraise long-term projects. Used for capital budgeting, and
widely throughout economics, it measures the excess or shortfall of cash flows,
in present value (PV) terms, once financing charges are met. Use Advanced
Financial Calculators.
Formula
Each cash inflow/outflow is discounted back to its present value (PV). Then
they are summed. Therefore

Where
t - the time of the cash flow

31

N - the total time of the project

r - the discount rate (the rate of return that could be earned on an
investment in the financial markets with similar risk.)
Ct - the net cash flow (the amount of cash) at time t (for educational
purposes, C0 is commonly placed to the left of the sum to emphasize its role as
the initial investment.).
In the illustration given above under the Present value, if the three cash
flows accrues on a deposit of Rs. 240, the NPV of the investment is equal to
248.69-240 = Rs.8.69
22. How is the Price of a bond calculated? What is the total consideration amount of
a trade and what is accrued interest?
The price of a bond is nothing but the sum of present value all future cash flows of the
bond. The interest rate used for discounting the cash flows is the Yield to Maturity (YTM)
(explained in detail in question no. 24) of the bond. Price can be calculated using the excel
function Price (please refer to Annex 6,).

Accrued interest is the interest calculated for the broken period from the last coupon day
till a day prior to the settlement date of the trade. Since the seller of the security is holding
the security for the period up to the day prior to the settlement date of the trade, he is
entitled to receive the coupon for the period held. During settlement of the trade, the buyer
of security will pay the accrued interest in addition to the agreed price and pays the
consideration amount.
An illustration is given below;

For a trade of Rs.5 crore (face value) of security 8.83%2023 for settlement date Jan 30,
2014 at a price of Rs.100.50, the consideration amount payable to the seller of the
security is worked out below:
Here the price quoted is called clean price as the accrued interest component is not
added to it.
Accrued interest:
The last coupon date being Nov 25, 2013, the number of days in broken period till Jan 29,
2014 (one day prior to settlement date i.e. on trade day) are 65.
The accrued interest on Rs.100 face value for 65 days = 8.83x(65/360)
= Rs.1.5943
When we add the accrued interest component to the clean price, the resultant price is
called the dirty price. In the instant case, it is 100.50+1.5943 = Rs.102.0943

32

The total consideration amount

= Face value of trade x dirty price

= 5,00,00,000 x (102.0943/100)
= Rs.5,10,47,150

23. What is the relationship between yield and price of a bond?

If market interest rate levels rise, the price of a bond falls. Conversely, if interest rates or
market yields decline, the price of the bond rises. In other words, the yield of a bond is
inversely related to its price. The relationship between yield to maturity and coupon rate of
bond may be stated as follows:

When the market price of the bond is less than the face value, i.e., the bond sells at a
discount, YTM > current yield > coupon yield.

When the market price of the bond is more than its face value, i.e., the bond sells at a
premium, coupon yield > current yield > YTM.

When the market price of the bond is equal to its face value, i.e., the bond sells at par,
YTM = current yield = coupon yield.

24. How is the yield of a bond calculated?

24.1 An investor who purchases a bond can expect to receive a return from one or more
of the following sources:

The coupon interest payments made by the issuer;

Any capital gain (or capital loss) when the bond is sold; and

Income from reinvestment of the interest payments that is interest-on-interest.

The three yield measures commonly used by investors to measure the potential return
from investing in a bond are briefly described below:
i) Coupon Yield
24.2 The coupon yield is simply the coupon payment as a percentage of the face value.
Coupon yield refers to nominal interest payable on a fixed income security like G-Sec.
This is the fixed return the Government (i.e., the issuer) commits to pay to the investor.
Coupon yield thus does not reflect the impact of interest rate movement and inflation on
the nominal interest that the Government pays.
Coupon yield = Coupon Payment / Face Value
Illustration:
Coupon: 8.24
Face Value: Rs.100
Market Value: Rs.103.00

33

Coupon yield = 8.24/100 = 8.24%

ii) Current Yield

24.3 The current yield is simply the coupon payment as a percentage of the bonds
purchase price; in other words, it is the return a holder of the bond gets against its
purchase price which may be more or less than the face value or the par value. The
current yield does not take into account the reinvestment of the interest income received
periodically.
Current yield = (Annual coupon rate / Purchase price)X100

Illustration:
The current yield for a 10 year 8.24% coupon bond selling for Rs.103.00 per
Rs.100 par value is calculated below:
Annual coupon interest = 8.24% x Rs.100 = Rs.8.24
Current yield = (8.24/Rs.103)X100 = 8.00%
The current yield considers only the coupon interest and ignores other sources of return
that will affect an investors return.
iii) Yield to Maturity
24.4 Yield to Maturity (YTM) is the expected rate of return on a bond if it is held until its
maturity. The price of a bond is simply the sum of the present values of all its remaining
cash flows. Present value is calculated by discounting each cash flow at a rate; this rate is
the YTM. Thus YTM is the discount rate which equates the present value of the future
cash flows from a bond to its current market price. In other words, it is the internal rate of
return on the bond.

The calculation of YTM involves a trial-and-error procedure. A

calculator or software can be used to obtain a bonds YTM easily (please see the Box III).
Box III
YTM Calculation
YTM could be calculated manually as well as using functions in any standard
spread sheet like MS Excel.
Manual (Trial and Error) Method
Manual or trial and error method is complicated because G-Secs have many
cash flows running into future. This is explained by taking an example below.
Take a two year security bearing a coupon of 8% and a price of say Rs. 102
per face value of Rs. 100; the YTM could be calculated by solving for r below.
Typically it involves trial and error by taking a value for r and solving the
equation and if the right hand side is more than 102, take a higher value of r

34

and solve again. Linear interpolation technique may also be used to find out
exact r once we have two r values so that the price value is more than 102
for one and less than 102 for the other value.
102 = 4/(1+r/2)1+ 4/(1+r/2)2 + 4/(1+r/2)3 + 104/(1+r/2)4
Spread Sheet Method using MS Excel
In the MS Excel programme, the following function could be used for
calculating the yield of periodically coupon paying securities, given the price.
YIELD (settlement,maturity,rate,price,redemption,frequency,basis)
Wherein;
Settlement is the security's settlement date. The security settlement date is
the date on which the security and funds are exchanged. Maturity is the
security's maturity date. The maturity date is the date when the security
expires.
Rate is the security's annual coupon rate.
Price is the security's price per Rs.100 face value.
Redemption is the security's redemption value per Rs.100 face value.
Frequency is the number of coupon payments per year. (2 for
Government bonds in India)
Basis is the type of day count basis to use. (4 for Government bonds
in India which uses 30/360 basis)

25. What are the day count conventions used in calculating bond yields?
Day count convention refers to the method used for arriving at the holding period (number
of days) of a bond to calculate the accrued interest. As the use of different day count
conventions can result in different accrued interest amounts, it is appropriate that all the
participants in the market follow a uniform day count convention.
For example, the conventions followed in Indian market are given below.
Bond market: The day count convention followed is 30/360, which means that irrespective
of the actual number of days in a month, the number of days in a month is taken as 30
and the number of days in a year is taken as 360.
Money market: The day count convention followed is actual/365, which means that the
actual number of days in a month is taken for number of days(numerator) whereas the
number of days in a year is taken as 365 days. Hence, in the case of T-Bills, which are
essentially money market instruments, money market convention is followed.
In some countries, participants use actual/actual, some countries use actual/360 while
some use 30/actual. Hence the convention changes in different countries and in different
markets within the same country (eg. Money market convention is different than the bond
market convention in India).
26. How is the yield of a T- Bill calculated?
It is calculated as per the following formula
100-P

365

35

Yield

--------- X ----P
D

X 100

Wherein;
P Purchase price
D Days to maturity
Day Count: For T- Bills, D = [actual number of days to maturity/365]

Illustration
Assuming that the price of a 91 day T-- bill at issue is Rs.98.20, the yield on the same
would be
Yield = 100-98.20X365X100 = 7.3521%
98.20

91

After say, 41 days, if the same T- bill is trading at a price of Rs. 99, the yield would then be
Yield = 100-99X365X100 = 7.3737%
99

50

Note that the remaining maturity of the T-Bill is 50 days (91-41).

27. What is Duration?
27.1 Duration (also known as Macaulay Duration) of a bond is a measure of the time taken
to recover the initial investment in present value terms. In simplest form, duration refers to
the payback period of a bond to break even, i.e., the time taken for a bond to repay its own
purchase price. Duration is expressed in number of years. A step by step approach for
working out duration is given in the Box IV below.
Box: IV
Calculation for Duration
First, each of the future cash flows is discounted to its respective present value for each
period. Since the coupons are paid out every six months, a single period is equal to six
months and a bond with two years maturity will have four time periods.
Second, the present values of future cash flows are multiplied with their respective time
periods (these are the weights). That is the PV of the first coupon is multiplied by 1, PV of
second coupon by 2 and so on.
Third, the above weighted PVs of all cash flows is added and the sum is divided by the
current price (total of the PVs in step 1) of the bond. The resultant value is the duration in
no. of periods. Since one period equals to six months, to get the duration in no. of year,
divide it by two. This is the time period within which the bond is expected to pay back its
own value if held till maturity.

36

Illustration:
Taking a bond having 2 years maturity, and 10% coupon, and current price of Rs.102, the
cash flows will be (prevailing 2 year yield being 9%):
Time period (years)
Inflows (Rs.Cr)
PV at an yield of 9%
PV*time

1
5
4.78
4.78

2
5
4.58
9.16

3
5
4.38
13.14

4
105
88.05
352.20

Total
101.79
379.28

Duration in number of periods = 379.28/101.79 = 3.73

Duration in years = 3.73/2 = 1.86 years

More formally, duration refers to:

a) The weighted average term (time from now to payment) of a bond's cash flows or
of any series of linked cash flows.

b) The higher the coupon rate of a bond, the shorter the duration (if the term of the
bond is kept constant).

c) Duration is always less than or equal to the overall life (to maturity) of the bond.
d) Only a zero coupon bond (a bond with no coupons) will have duration equal to its
maturity.

e) The sensitivity of a bond's price to interest rate (i.e., yield) movements.

Duration is useful primarily as a measure of the sensitivity of a bond's market price to
interest rate (i.e., yield) movements. It is approximately equal to the percentage change in
price for a given change in yield. For example, for small interest rate changes, the duration
is the approximate percentage by which the value of the bond will fall for a 1% per annum
increase in market interest rate. So a 15-year bond with a duration of 7 years would fall
approximately 7% in value if the interest rate increased by 1% per annum. In other words,
duration is the elasticity of the bond's price with respect to interest rates.
What is Modified Duration?
27.2 Modified duration (MD) is a modified version of Macaulay Duration. It refers to the
change in value of the security to one per cent change in interest rates (Yield). The
formula is

37

Illustration
In the above example given in Box IV, MD = 1.86/(1+0.09/2) = 1.78
What is PV 01?
27.3 PV01 describes the actual change in price of a bond if the yield changes by one
basis point (equal to one hundredth of a percentage point). It is the present value impact
of 1 basis point (0.01%) (1%=100 bps) movement in interest rate. It is often used as a
price alternative to duration (a time measure). Higher the PV01, the higher would be the
volatility (sensitivity of price to change in yield).

Illustration
From the modified duration (given in the illustration under 27.2), we know that the security
value will change by 1.78% for a change of 100 basis point (1%) change in the yield. In
value terms that is equal to 1.78*(102/100) = Rs.1.81.
Hence the PV01 = 1.81/100 = Rs. 0.018, which is 1.8 paise. Thus, if the yield of a bond
with a Modified Duration of 1.78 years moves from say 9% to 9.05% (5 basis points), the
price of the bond moves from Rs.102 to Rs.101.91 (reduction of 9 paise, i.e., 5x1.8 paise).
What is Convexity?
27.4 Calculation of change in price for change in yields based on duration works only for
small changes in prices. This is because the relationship between bond price and yield is
not strictly linear i.e., the unit change in price of the bond is not proportionate to unit
change in yield. Over large variations in prices, the relationship is curvilinear i.e., the
change in bond price is either less than or more than proportionate to the change in yields.
This is measured by a concept called convexity, which is the change in duration of a bond
per unit change in the yield of the bond.
28. What are the important guidelines for valuation of securities?
28.1 For the Cooperative banks, investments classified under 'Held to Maturity' (HTM)
category need not be marked to market and will be carried at acquisition cost unless it is
more than the face value, in which case the premium should be amortized over the period
remaining to maturity. The individual scrip in the Available for Sale (AFS) category in the

38

books of the cooperative banks will be marked to market at the year-end or at more
frequent intervals. The individual scrip in the Held for Trading (HFT) category will be
marked to market at monthly or at more frequent intervals. The book value of individual
securities in AFS and HFT categories would not undergo any change after marking to
market.

28.2 Central G-Secs should be valued by taking the prices/ yields put out by the Fixed
Income Money Market and Derivatives Association of India (FIMMDA) and the Primary
Dealers Association of India (PDAI) jointly on the website of the FIMMDA. Prices of all
Central G-Secs are given out everyday while prices and yield curve for valuation are given
at the end of every month. For example, the FIMMDA valuation of a Central G-Sec,
7.46%2017 as on March 31, 2009 was Rs.101.69. If a cooperative bank was holding the
same security in AFS or HFT categories at a book value of Rs.102, the bank would be
required to book a depreciation of Rs.0.31 per Rs.100 face value of holding. If the total
holding was Rs. 1 crore, the total depreciation to be booked would be Rs.31,000/-.

28.3 State GovernmentGovernment and other securities are to be valued by adding a

spread on the Central G-Sec yield of the corresponding residual maturity. Currently, a
spread of 20-25 basis points (0.20%-0.25%) is added while valuing State G-Secs, special
securities (oil bonds, fertilizer bonds, SBI bonds, etc.) whereas for corporate bonds the
spreads given by the FIMMDA need to be added. An illustration of valuation taking a State
GovernmentGovernment bond is given in the Box V below.

Box: V
Valuation of securities
Illustration for valuation of State Government Bonds
Security 9.40% West Bengal SDL 2024
Issue date Jan 1, 2014
Maturity date Jan 1, 2024
Coupon 9.40%
Date of valuation Jan 27, 2014

Procedure
Valuation of the above bond involves the following steps
i.

Find the residual maturity of the bond to be valued.

ii. Find the Central G-Sec yield for the above residual maturity.

39

iii. Add appropriate spread to the above yield to get the yield for the security
iv. Calculate the price of the security using the derived yield above.

Step i.
Since valuation is being done on Jan 27, 2014, we need to find out the number of years
from this date to the maturity date of the security i.e. Jan 1, 2024to get the residual
maturity of the security. This could be done manually by counting the number of years
and months and days. However, an easier method will be to use MS. Excel function
Yearfrac wherein we specify the two dates and basis (please refer to Annex 6 on Excel
functions for details). This gives us the residual maturity of 9.93 years for the security.

Step ii.
To find the Central Government yield for 9.93 years, we derive it by interpolating the
yields between 9.75 years and 10 years, which are given out by FIMMDA. As on Jan 27,
2014, FIMMDA yields for 9.75 and 10 years are 8.83% and 8.84% respectively. The yield
for the 9.93 years is derived by using the following formula.

(8.84-8.83)
8.83 +

(10-9.75) X ---------------------

= 8.84%

(10-9.75)

Here we are finding the yield difference for 0.93 year and adding the same to the yield for
9 years to get the yield for 9.93 years. Also notice that the yield has to be used in decimal
form (e.g., 7.73% is equal to 7.73/100 which is 0.0773)

Step iii.
Having found the Central Government yield for the particular residual maturity, we have to
now load the appropriate spread to get the yield of the security to be valued. Since the
security is State G-Sec, the applicable spread is 25 basis points (0.25%). Hence the yield
would be 8.84%+0.25% = 9.09%.
Note: FIMMDA yields are now available from 3 months to upto 30 years with 3 month
interval i.e. yield is available for 3 month, 6 month, 9 month, 1 yr, 1.25 yr and so on upto
30 year security.

Step iv.
The price of the security can now be calculated using the MS Excel function Price

40

(Please see the details in Annex 6). Here, we specify the valuation date as Jan 27, 2014,
maturity date as Jan 1, 2024, rate as 9.40% which is the coupon, yield as 9.09%,
redemption as 100 which is the face value, frequency of coupon payment as 2 and basis
as 4 (Pl. see example 3 in Annex 6). The price we get in the formula is Rs.101.9843
which is the value of the security.
If the bank is holding Rs.10 crore of this security in its portfolio, the total value would be
10*(101.9843/100) 10.19843 crore.

28.4 In the case of corporate bonds, the procedure of valuation is similar to the illustration
given in Box V above. The only difference is the spread that need to be added to the
corresponding yield on central G-Sec will be higher (instead of the fixed 25 bps for State
G-Secs), as published by the FIMMDA from time to time. FIMMDA gives out the
information on corporate bonds spreads for various ratings of bonds. While valuing a
bond, the appropriate spread has to be added to the corresponding CG yield and the bond
has to be valued using the standard Price formula.
For example, assuming that a AAA rated corporate bond is having same maturity as that
of the State GovernmentGovernment bond in Box V, the applicable yield for valuation will
be 8.83%+ 2.09% (being the spread given by FIMMDA) which is 10.92%. With the same
parameters as in the Box V, the value of the bond works out to Rs.90.9121.
29. What are the risks involved in holding G-Secs? What are the techniques for
mitigating such risks?
G-Secs are generally referred to as risk free instruments as sovereigns generally never
default on their payments. However, as is the case with any financial instrument, there are
risks associated with holding the G-Secs. Hence, it is important to identify and understand
such risks and take appropriate measures for mitigation of the same. The following are the
major risks associated with holding G-Secs:
29.1 Market risk Market risk arises out of adverse movement of prices of the securities
due to changes in interest rates. This will result in booking losses on marking to market or
realizing a loss if the securities are sold at the adverse prices. Small investors, to some
extent, can mitigate market risk by holding the bonds till maturity so that they can realize
the yield at which the securities were actually bought.
29.2 Reinvestment risk Cash flows on a G-Sec includes fixed coupon every half year
and repayment of principal at maturity. These cash flows need to be reinvested whenever

41

they are paid. Hence there is a risk that the investor may not be able to reinvest these
proceeds at profitable rates due to changes in interest rate scenario prevailing at the time
of receipt of cash flows by investors.
29.3 Liquidity risk Liquidity in G-Secs is referred to as the ease with which security can
be bought and sold i.e. availability of buy-sell quotes with narrow spread say 1-2 paise.
Liquidity risk refers to the inability of an investor to liquidate (sell) his holdings due to non
availability of buyers for the security, i.e., no trading activity in that particular security or
circumstances resulting in distressed sale (selling at a much lower price than its holding
cost) causing loss to the seller.. Usually, when a liquid bond of fixed maturity is bought, its
tenor gets reduced due to time decay. For example, a 10 year security will become 8 year
security after 2 years due to which it may become illiquid. The bonds also become illiquid
when there are no frequent reissuances by the issuer (RBI) in those bonds. Bonds are
generally reissued till a sizeable amount becomes outstanding under that bond. However,
issuer and sovereign has to ensure that there is no excess burden on Government at the
time of maturity of the bond as very large amount maturing on a single day may affect the
fiscal position of Government Hence, generally reissuances under any security are
stopped after outstanding under that bond touches a particular limit stipulated by the
Government.. Due to illiquidity, the investor may need to sell at adverse prices in case of
urgent funds requirement. However, in such cases, eligible investors can participate in
market repo and borrow the money against the collateral of such securities.
Risk Mitigation
29.4 Holding securities till maturity could be a strategy through which one could avoid
market risk. Rebalancing the portfolio wherein the securities are sold once they become
short term and new securities of longer tenor are bought could be followed to manage the
portfolio risk. However, rebalancing involves transaction and other costs and hence needs
to be used judiciously. Market risk and reinvestment risk could also be managed through
Asset Liability Management (ALM) by matching the cash flows with liabilities. ALM could
also be undertaken by matching the duration of the cash flows.

Advanced risk management techniques involve use of derivatives like Interest Rate Swaps
(IRS) through which the nature of cash flows could be altered. However, these are
complex instruments requiring advanced level of expertise for proper understanding.
Adequate caution, therefore, need to be observed for undertaking the derivatives
transactions and such transactions should be undertaken only after having complete
understanding of the associated risks and complexities.

42

30. What is Money Market?

30.1 While the G-Secs market generally caters to the investors with a long term
investment horizon, the money market provides investment avenues of short term tenor.
Money market transactions are generally used for funding the transactions in other
markets including G-Secs market and meeting short term liquidity mismatches. By
definition, money market is for a maximum tenor of up to one year. Within the one year,
depending upon the tenors, money market is classified into:
i. Overnight market - The tenor of transactions is one working day.
ii. Notice money market The tenor of the transactions is from 2 days to 14 days.
iii. Term money market The tenor of the transactions is from 15 days to one year.
What are the different money market instruments?
30.2 Money market instruments include call money, repos, T- Bills, Commercial Paper,
Certificate of Deposit and Collateralized Borrowing and Lending Obligations (CBLO).
Call money market
30.3 Call money market is a market for uncollateralized lending and borrowing of funds.
This market is predominantly overnight and is open for participation only to scheduled
commercial banks and the primary dealers.
Repo market
30.4 Repo or ready forward contact is an instrument for borrowing funds by selling
securities with an agreement to repurchase the said securities on a mutually agreed future
date at an agreed price which includes interest for the funds borrowed.
30.5 The reverse of the repo transaction is called reverse repo which is lending of funds
against buying of securities with an agreement to resell the said securities on a mutually
agreed future date at an agreed price which includes interest for the funds lent.

30.6 It can be seen from the definition above that there are two legs to the same
transaction in a repo/ reverse repo. The duration between the two legs is called the repo
period. Predominantly, repos are undertaken on overnight basis, i.e., for one day period.
Settlement of repo transactions happens along with the outright trades in G-Secs.

30.7 The consideration amount in the first leg of the repo transactions is the amount
borrowed by the seller of the security. On this, interest at the agreed repo rate is

43

calculated and paid along with the consideration amount of the second leg of the
transaction when the borrower buys back the security. The overall effect of the repo
transaction would be borrowing of funds backed by the collateral of G-Secs.

30.8 The repo market is regulated by the Reserve Bank of India. All the above mentioned
repo market transactions should be traded/reported on the electronic platform called the
Clearcorp Repo Order Matching System (CROMS)..

30.9 As part of the measures to develop the corporate debt market, RBI has permitted
select entities (scheduled commercial banks excluding RRBs and LABs, PDs, all-India FIs,
NBFCs, mutual funds, housing finance companies, insurance companies) to undertake
repo in corporate debt securities. This is similar to repo in G-Secs except that corporate
debt securities are used as collateral for borrowing funds. Only listed corporate debt
securities that are rated AA or above by the rating agencies are eligible to be used for
repo. Commercial paper, certificate of deposit, non-convertible debentures of original
maturity less than one year are not eligible for the purpose. These transactions take place
in the OTC market and are required to be reported on FIMMDA platform within 15 minutes
of the trade for dissemination of trade information. They are also to be reported on the
clearing house of any of the exchanges for the purpose of clearing and settlement.
Collateralised Borrowing and Lending Obligation (CBLO)
30.10 CBLO is another money market instrument operated by the Clearing Corporation of
India Ltd. (CCIL), for the benefit of the entities who have either no access to the inter-bank
call money market or have restricted access in terms of ceiling on call borrowing and
lending transactions. CBLO is a discounted instrument available in electronic book entry
form for the maturity period ranging from one day to ninety days (up to one year as per
RBI guidelines). In order to enable the market participants to borrow and lend funds, CCIL
provides the Dealing System through Indian Financial Network (INFINET), a closed user
group to the Members of the RBI CBS E-Kuber, who maintain Current account with RBI
and through Internet for other entities who do not maintain Current account with RBI.

30.11 Membership to the CBLO segment is extended to entities who are RBI- NDS
members, viz., Nationalized Banks, Private Banks, Foreign Banks, Co-operative Banks,
Financial Institutions, Insurance Companies, Mutual Funds, Primary Dealers, etc.
Associate Membership to CBLO segment is extended to entities who are not members of
RBI- CBS E-Kuber, viz., Co-operative Banks, Mutual Funds, Insurance companies,
NBFCs, Corporates, Provident/ Pension Funds, etc.

44

30.12 By participating in the CBLO market, CCIL members can borrow or lend funds
against the collateral of eligible securities. Eligible securities are Central G-Secs including
Treasury Bills, and such other securities as specified by CCIL from time to time. Borrowers
in CBLO have to deposit the required amount of eligible securities with the CCIL based on
which CCIL fixes the borrowing limits. CCIL matches the borrowing and lending orders
submitted by the members and notifies them. While the securities held as collateral are in
custody of the CCIL, the beneficial interest of the lender on the securities is recognized
through proper documentation.

Commercial Paper (CP)

30.13 Commercial Paper (CP) is an unsecured money market instrument issued in the
form of a promissory note. Corporates, primary dealers (PDs) and the all-India financial
institutions (FIs) that have been permitted to raise short-term resources under the
umbrella limit fixed by the Reserve Bank of India are eligible to issue CP. CP can be
issued for maturities between a minimum of 7 days and a maximum up to one year from
the date of issue.

Certificate of Deposit (CD)

30.14 Certificate of Deposit (CD) is a negotiable money market instrument and issued in
dematerialised form or as a Usance Promissory Note, for funds deposited at a bank or
other eligible financial institution for a specified time period. Banks can issue CDs for
maturities from 7 days to one a year whereas eligible FIs can issue for maturities 1 year to
3 years.
31. What are the role and functions of FIMMDA?
31.1 The Fixed Income Money Market and Derivatives Association of India (FIMMDA), an
association of Scheduled Commercial Banks, Public Financial Institutions, Primary
Dealers and Insurance Companies was incorporated as a Company under section 25 of
the Companies Act,1956 on June 3, 1998. FIMMDA is a voluntary market body for the
bond, money and derivatives markets. 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 and other nationalized banks; Private sector
banks such as ICICI Bank, HDFC Bank; Foreign Banks such as Bank of America,
Citibank, Financial institutions such as IDFC, EXIM Bank, NABARD, Insurance

45

Companies like Life Insurance Corporation of India (LIC), ICICI Prudential Life Insurance
Company, Birla Sun Life Insurance Company and all Primary Dealers.

31.2 The FIMMDA represents market participants and aids the development of the bond,
money and derivatives markets. It acts as an interface with the regulators on various
issues that impact the functioning of these markets. It also undertakes developmental
activities, such as, introduction of benchmark rates and new derivatives instruments, etc.
FIMMDA releases rates of various G-Secs that are used by market participants for
valuation purposes. FIMMDA also plays a constructive role in the evolution of best market
practices by its members so that the market as a whole operates transparently as well as
efficiently.
32. What are the various websites that give information on G-Secs?
32.1. RBI financial market watch - https://rbi.org.in/scripts/financialmarketswatch.aspx
This site provides links to information on prices of G-Secs on NDS-OM, money market and
other information on G-Secs like outstanding stock etc.

46

47

32.2. NDS-OM market watch https://www.ccilindia.com/OMHome.aspx

This site provides real-time information on traded as well as quoted prices of G-Secs both
in Order matching and Reporting segment. In addition prices of When Issued (WI)
(whenever trading takes place) segment are also provided.

48

32.3. Reported deals on NDS-OM: https://www.ccilindia.com/OMRPTDeals.aspx

This site provides information on prices of G-Secs in OTC market. One can see
chronological traded price levels and quantity in various securities.

49

32.4 FIMMDA - http://www.fimmda.org/

This site provides host of information on market practices for all the fixed income
securities including G-Secs. Details of various pricing models adopted by FIMMDA are
provided in this site. In addition, the details of daily, monthly and yearly closing prices of
G-Secs, corporate bond spreads etc. are made available by FIMMDA through this site.
Accessing information from this site requires a valid login and password which are
provided by FIMMDA to the eligible entities.

50

Annex 1
Specimen of a G-Sec Stock Certificate

51

Annex 2
List of Primary Dealers
A
1
2
3
4
5

Bank PDs*
Axis Bank Ltd
Bank of America
Bank of Baroda
Canara Bank
Citibank N.A.

Corporation Bank

Deutsche Bank AG

HDFC Bank Ltd

HSBC

10
11
12
13
B

IDBI Bank Ltd

J P Morgan Chase Bank N.A.
Kotak Mahindra Bank Ltd.
Standard Chartered Bank
Stand alone PDs**
Goldman Sachs (India) Capital
Markets Pvt. Ltd.
ICICI Securities Primary
Dealership Limited
Morgan Stanley Primary Dealer
Pvt. Ltd.
Nomura Fixed Income Securities
Pvt. Ltd.

1
2
3
4
5

PNB Gilts Ltd.

SBI DFHI Ltd

Contact No.
(022) 24254430, 24254434
(022) 66323000 extn.3150
(022) 66363636 / 67592705
(022) 26725126, 26725123
(022) 61757187
(022) 22833238/22023304 ,
22832429/22022796/22871054
(022) 71804444
(022) 24904702/4935/
3899,66521372/9892975232
(022) 22681031/34/33
,22623329/22681031/34/38
(022) 66263351
(022) 61573000
(022) 66596022,66596235/6454
(022) 61158891/61158893/22683695
Contact No.
(022) 66241406/66241422/66169316
(022) 22882460/70, 66377421
(022) 61181000
(022) 40374037
Mumbai -(022) 22693315/17
New Delhi (011) 23325751,22693315/17
(022) 22625970/73 ,22610490 ,66364696

STCI Primary Dealer Limited

(022) 30031100 , 66202261 /2200

* Bank PDs are those which take up PD business departmentally as part of the bank itself.
** Stand alone PDs are Non Banking Financial Companies (NBFCs) that exclusively take up PD business.
Update to the list of Primary dealers is available on the RBI website at
https://rbi.org.in/scripts/AboutUsDisplay.aspx?pg=PrimaryDealer.htm

52

Annex 3
Sample of Auction Calendar

53

Annex 4
Sample of Auction notification

54

Annex 5
Specimen of Deal Slip
XYZ Urban Co-operative Bank Ltd
Address
Phone:
E-mail:
Deal slip No.:
Deal Confirmation
We agree to BUY / SELL:
1. OUTRIGHT / REPO
2. Transaction id

3. Transaction date

4. Value date:
5. Reversal date (in case of repo)

6. Time of Transaction:
7. Transaction mode

: Telephone / NDS-OM / Broker

8. Nomenclature of security

9. Last coupon date

10. Principal amount

11. Accrued Interest

12. Agreed price (per Rs.100)

13. Total amount

14. Name of Broker, if any

15. It is agreed to DEBIT / CREDIT our Current account with ___________Bank and
CREDIT / DEBIT out SGL / Gilt Account / Demat account with ________Bank on value
date.
Signed/Authorised Signatory

Signed/Authorised Signatory

55

Annex 6
Important Excel functions for bond related calculations
Function
Syntax
1. Present Value
PV(rate,nper,pmt,fv,type)
This function is used to find the present value of a series of future payments given the
discount rate. This forms the basis for pricing a bond
Rate is the interest rate per period.
Nper is the total number of payment periods in an annuity.
Pmt is the payment made each period and cannot change over the life of the annuity.
Fv is the future value, or a cash balance you want to attain after the last payment is made. If
fv is omitted, it is assumed to be 0 (the future value of a loan, for example, is 0).
Type is the number 0 or 1 and indicates when payments are due.
Set type equal to
If payments are due
0 or omitted
At the end of the period
1
At the beginning of the period
Example: To calculate the present value of Rs.100 after every year for three years at an
interest rate of 9%, the values would be;
Rate 9% or 0.09; Nper 3 (3 years); Pmt 100; Fv 0 as there is no balance left at the
end of three years; Type 0 (at the end of the period)
The answer would be 253.13
2. Future Value
FV(rate,nper,pmt,pv,type)
This function is used to calculate the future value of a series of investments made, given the
interest rate.
Rate is the interest rate per period.
Nper is the total number of payment periods in an annuity.
Pmt is the payment made each period; it cannot change over the life of the annuity.
Typically, pmt contains principal and interest but no other fees or taxes. If pmt is omitted, you
must include the pv argument.
Pv is the present value, or the lump-sum amount that a series of future payments is worth
right now. If pv is omitted, it is assumed to be 0 (zero), and you must include the pmt
argument.
Type is the number 0 or 1 and indicates when payments are due. If type is omitted, it is
assumed to be 0.
Example: To calculate the future value of Rs.100 paid every year for three years at an
interest rate of 9%, the values would be;

56

Rate 9% or 0.09; Nper 3 (3 years); Pmt 100; Pv 0 as there is no lumpsum payment at

the beginning; Type 1 (at the beginning of the period)The answer would be 357.31
3. Coupon days
COUPDAYBS(settlement,maturity,frequency,basis)
This function is used to workout the number of days from the beginning to the end of the
coupon period that contains the settlement date.
Settlement is the security's settlement date. The security settlement date is the date after the
issue date when the security is traded to the buyer.
Maturity is the security's maturity date. The maturity date is the date when the security
expires.
Frequency is the number of coupon payments per year. For annual payments, frequency =
1; for semiannual, frequency = 2; for quarterly, frequency = 4.
Basis is the type of day count basis to use. Appropriate code for the day count convention
has to be provided as shown below;
Basis
Day count basis Basis Day count basis
0 or omitted US (NASD) 30/360 3
Actual/365
1
Actual/actual
4
European 30/360
2
Actual/360
Example: In the case of security maturing on February 2, 2019, and settlement date May 27,
2009, the values in the formula would be;
Maturity 2/2/2019; settlement 27/5/2009; frequency 2 (half yearly coupon) and basis 4
(day count convention 30/360)
The result would be 180 (number of coupon days in the coupon period)
4. Yearfrac
YEARFRAC(start_date,end_date,basis) (to find residual maturity)
This function is used to find the residual maturity of a security in years.
Start_date
End_date

is a date that represents the start date.

is a date that represents the end date (maturity date).

Basis is the type of day count basis to use (0=US system 30/360, 2=Actual/actual,
3=Actual/365, 4=European style 30/360( (thus 0 or 4 throws same value).
Example: For a security maturing on February 6, 2019, the residual maturity in number of
years as on May 27, 2009 can be calculated as;
Start date May 27, 2009; End date Feb 2, 2019, basis 4
The result would be 9.68 years
5. PRICE
PRICE(settlement,maturity,rate,yld,redemption,frequency,basis)
This function is used to find the price of security that pays periodic interest.
Settlement is the security's settlement date. The security settlement date is the dateon which
the security and funds are exchanged.
Maturity is the security's maturity date. The maturity date is the date when the security

57

expires.
Rate is the security's annual coupon rate.
Yld is the security's annual yield.
Redemption is the security's redemption value per Rs.100 face value.
Frequency is the number of coupon payments per year. For annual payments, frequency =
1; for semiannual, frequency = 2; for quarterly, frequency = 4.
Basis is the type of day count basis to use.
Example: 6.05%2019 security maturing on February 2, 2019. It is yielding 6.68% in
secondary market on June 1, 2009. Settlement date is June 2, 2009. Values in the price
formula would be;
Settlement 2/6/2009; maturity 2/2/2019; rate 6.05%; Yield 6.68%; Redemption 100
(face value); frequency 2 (half yearly coupon); basis 4. The result would be 95.55
6. YIELD
YIELD(settlement,maturity,rate,pr,redemption,frequency,basis)
This function is used to find the Yield to Maturity of a security given the price of the security..
Settlement is the security's settlement date. The security settlement date is the date on
which the security and funds are exchanged. Maturity is the security's maturity date. The
maturity date is the date when the security expires.
Rate is the security's annual coupon rate.
Pr is the security's price per Rs.100 face value.
Redemption is the security's redemption value per Rs.100 face value.
Frequency is the number of coupon payments per year. For annual payments, frequency = 1;
for semiannual, frequency = 2; for quarterly, frequency = 4.
Basis is the type of day count basis to use.
Taking the same example as above, and price at 95.55, the result for the yield would be
6.68%.
7. DURATION
DURATION(settlement,maturity,coupon,yld,frequency,basis)
This function is used to find the Duration of a security in number of years.
Settlement is the security's settlement date. The security settlement date is the date on
which the security and funds are exchanged. Maturity is the security's maturity date. The
maturity date is the date when the security expires.
Coupon is the security's annual coupon rate.
Yld is the security's annual yield.
Frequency is the number of coupon payments per year. For annual payments, frequency =

58

1; for semiannual, frequency = 2; for quarterly, frequency = 4.

Basis is the type of day count basis to use.
Example: 6.05%2019 security maturing on February 2, 2019. It is yielding 6.68% in
secondary market on June 1, 2009. Settlement date is June 2, 2009. Values in the Duration
formula would be;
Settlement 2/6/2009; maturity 2/2/2019; Coupon 6.05%; Yield 6.68%; frequency 2
(half yearly coupon); basis 4.
The result will be 7.25 years.
8. Modified Duration MDURATION(settlement,maturity,coupon,yld,frequency,basis)
This function is used to calculate the Modified Duration of a security.
Settlement is the security's settlement date. The security settlement date is the date on
which the security and funds are exchanged. Maturity is the security's maturity date. The
maturity date is the date when the security expires.
Coupon is the security's annual coupon rate.
Yld is the security's annual yield.
Frequency is the number of coupon payments per year. For annual payments, frequency =
1; for semiannual, frequency = 2; for quarterly, frequency = 4.
Basis is the type of day count basis to use.
Taking the same example given above for Duration and feeding the values in the excel
function, the formula result will be 7.01

59

Annex 7
Glossary of Important Terms And Commonly Used Market Terminology
Accrued Interest
The accrued interest on a bond is the amount of interest accumulated on a bond since the
last coupon payment. The interest has been earned, but because coupons are paid only
on coupon dates, the investor has not gained the money yet. In India day count
convention for G-Secs is 30/360.
Bid Price/ Yield
The price/yield being offered by a potential buyer for a security.
Big Figure
When the price is quoted as Rs.102.35, the portion other than decimals (102) is called the
big figure.
Competitive Bid
Competitive bid refers to the bid for the stock at the price stated by a bidder in an auction.
Coupon
The rate of interest paid on a debt security as calculated on the basis of the
securitys face value.
Coupon Frequency
Coupon payments are made at regular intervals throughout the life of a debt security and
may be quarterly, semi-annual (twice a year) or annual payments.
Discount
When the price of a security is below the par value, it is said to be trading at discount. The
value of the discount is the difference between the FV and the Price. For example, if a
security is trading at Rs.99, the discount is Rs.1.
Duration(Macaulay Duration)
Duration of a bond is the number of years taken to recover the initial investment of a bond.
It is calculated as the weighted average number of years to receive the cash flow wherein
the present value of respective cash flows are multiplied with the time to that respective
cash flows. The total of such values is divided by the price of the security to arrive at the
duration. Refer to Box IV under question 27.
Face Value
Face value is the amount that is to be paid to an investor at the maturity date of the
security. Debt securities can be issued at varying face values, however in India they
typically have a face value of Rs.100. The face value is also known as the repayment
amount. This amount is also referred as redemption value, principal value (or simply
principal), maturity value or par value.

60

Floating-Rate Bond
Bonds whose coupon rate is re-set at predefined intervals and is based on a pre-specified
market based interest rate.
Gilt/ G-Secs
G-Secs are also known as gilts or gilt edged securities. G-Sec means a security created
and issued by the Government for the purpose of raising a public loan or for any other
purpose as may be notified by the Government in the Official Gazette and having one of
the forms mentioned in The G-Secs Act, 2006.
Market Lot
Market lot refers to the standard value of the trades that happen in the market. The
standard market lot size in the G-Secs market is Rs. 5 crore in face value terms.
Maturity Date
The date when the principal (face value) is paid back. The final coupon and the face value
of a debt security is repaid to the investor on the maturity date. The time to maturity can
vary from short term (1 year) to long term (30 years).
Non-Competitive Bid
NCB means the bidder would be able to participate in the auctions of dated G-Secs
without having to quote the yield or price in the bid. The allotment to the non-competitive
segment will be at the weighted average rate that will emerge in the auction on the basis
of competitive bidding. It is an allocating facility wherein a part of total securities are
allocated to bidders at a weighted average price of successful competitive bid. (Please
also see paragraph no.4.3 under the question no.4).
Odd Lot
Transactions of any value other than the standard market lot size of Rs. 5 crore are
referred to as odd lot. Generally the value is less than the Rs. 5 crore with a minimum of
Rs.10,000/-. Odd lot transactions are generally done by the retail and small participants in
the market.
Par value
Par value is nothing but the face value of the security which is Rs. 100 for G-Secs. When
the price of a security is equal to face value, the security is said to be trading at par.
Premium
When the price of a security is above the par value, the security is said to be trading at
premium. The value of the premium is the difference between the price and the face value.
For example, if a security is trading at Rs.102, the premium is Rs.2.

61

Price
The price quoted is for per Rs. 100 of face value. The price of any financial instrument is
equal to the present value of all the future cash flows. The price one pays for a debt
security is based on a number of factors. Newly-issued debt securities usually sell at, or
close to, their face value. In the secondary market, where already-issued debt securities
are bought and sold between investors, the price one pays for a bond is based on a host
of variables, including market interest rates, accrued interest, supply and demand, credit
quality, maturity date, state of issuance, market events and the size of the transaction.
Primary Dealers
In order to accomplish the objective of meeting the Government borrowing needs as
cheaply and efficiently as possible, a group of highly qualified financial firms/ banks are
appointed to play the role of specialist intermediaries in the G-Sec market between the
issuer on the one hand and the market on the other. Such entities are generally called
Primary dealers or market makers. In return of a set of obligations, such as making
continuous bids and offer price in the marketable G-Secs or submitting reasonable bids in
the auctions, these firms receive a set of privileges in the primary/ secondary market.
Real Time Gross Settlement (RTGS) system
RTGS system is a funds transfer mechanism for transfer of money from one bank to
another on a real time and on gross basis. This is the fastest possible money transfer
system through the banking channel. Settlement in real time means payment transaction
is not subjected to any waiting period. The transactions are settled as soon as they are
processed. Gross settlement means the transaction is settled on one to one basis
without bunching with any other transaction. Considering that money transfer takes place
in the books of the Reserve Bank of India, the payment is taken as final and irrevocable.
Repo Rate
Repo rate is the return earned on a repo transaction expressed as an annual interest rate.
Repo/Reverse Repo
Repo means an instrument for borrowing funds by selling securities of the Central
Government or a StateGovernment or of such securities of a local authority as may be
specified in this behalf by the Central Government or foreign securities, with an agreement
to repurchase the said securities on a mutually agreed future date at an agreed price
which includes interest for the fund borrowed.
Reverse Repo means an instrument for lending funds by purchasing securities of the
Central Government or a State Government or of such securities of a local authority as
may be specified in this behalf by the Central Government or foreign securities, with an
agreement to resell the said securities on a mutually agreed future date at an agreed price
which includes interest for the fund lent.
Residual Maturity
The remaining period until maturity date of a security is its residual maturity. For example,
a security issued for an original term to maturity of 10 years, after 2 years, will have a
residual maturity of 8 years.

62

Secondary Market
The market in which outstanding securities are traded. This market is different from the
primary or initial market when securities are sold for the first time. Secondary market
refers to the buying and selling that goes on after the initial public sale of the security.
Tap Sale
Under Tap sale, a certain amount of securities is created and made available for sale,
generally with a minimum price, and is sold to the market as bids are made. These
securities may be sold over a period of day or even weeks; and authorities may retain the
flexibility to increase the (minimum) price if demand proves to be strong or to cut it if
demand weakens. Tap and continuous sale are very similar, except that with Tap sale the
debt manager tends to take a more pro-active role in determining the availability and
indicative price for tap sales. Continuous sale are essentially at the initiative of the market.
Treasury Bills
Debt obligations of the Government that have maturities of one year or less is normally
called Treasury Bills or T-Bills. Treasury Bills are short-term obligations of the Treasury/
Government. They are instruments issued at a discount to the face value and form an
integral part of the money market.
Underwriting
The arrangement by which investment bankers undertake to acquire any unsubscribed
portion of a primary issuance of a security.
Weighted Average Price/ Yield
It is the weighted average mean of the price/ yield where weight being the amount used at
that price/ yield. The allotment to the non-competitive segment will be at the weighted
average price/yield that will emerge in the auction on the basis of competitive bidding.
Yield
The annual percentage rate of return earned on a security. Yield is a function of a
securitys purchase price and coupon interest rate. Yield fluctuates according to numerous
factors including global markets and the economy.
Yield to Maturity (YTM)
Yield to maturity is the total return one would expect to receive if the security is being
held until maturity. Yield to maturity is essentially the discount rate at which the
present value of future payments (investment income and return of principal) equals the
price of the security.
Yield Curve
The graphical relationship between yield and maturity among bonds of different maturities
and the same credit quality. This line shows the term structure of interest rates. It also
enables investors to compare debt securities with different maturities and coupons.

63