Government Securities
Government Securities
Government Securities
Government securities are investment products issued by the both central and state government
of India in the form of bonds, treasury bills, or notes.
They are generally issued for the purpose of refunding maturity securities for advance refunding
of securities that have not yet matured and raising fresh cash resources.
However, they carry minimal risk and are called risk-free gilt-edges instruments. So let's look at
the different types of government securities in India:
1. Treasury Bills
Treasury bills, also called T-bills, are short term government securities with a maturity period of
less than one year issued by the central government of India.
Several financial instruments pay interest to you on your investment; treasury bills do not pay
interest because they are also called zero-coupon securities.
These securities do not pay any interest; instead, they are issued at a discount rate and redeemed
at face value on the date of the maturity.
For example a 91 day T-bill with a face value of Rs. 200 may be issued at Rs. 196, with a
discount of RS. 4 and redeemed at face value of Rs. 200.
However, RBI performs weekly auctions to issue treasury bills.
Cash management bills are similar to treasury bills because they are short term securities issued
when required.
However, one primary difference between both of these is its maturity period. CMBs are issued
for less than 91 days of a maturity period which makes these securities an ultra-short investment
option.
Generally, the government of India use these securities to fulfill temporary cash flow
requirements.
Unlike treasury and cash management bills, government securities are recognized as long-term
market instruments because they provide a wide range of tenure starting from 5 years up to 40
years.
The investors investing in dated government securities are called primary dealers. There are nine
different types of dated government securities issued by the Government of India given below:
I. Capital Indexed Bonds
2. Special Securities
3. 75% Savings (Taxable) Bonds. 2018
4. Bonds with Call/Put Options
5. Floating Rate Bonds
6. Fixed Rate Bonds
7. Special Securities
8. Inflation Indexed Bonds
9. STRIPS
State development loans are dated government securities issued by the State government to meet
their budget requirements.
The issue is auctioned once every two weeks with the help of the Negotiated Dealing System.
SDL support the same repayment method and features a variety of investment tenures. But when
it comes to rates, SDL is a little higher compared to dated government securities.
The major difference between dated government securities and state development loans is that
G-Securities are issued by the central government while SDL is issued by the state government
of India.
TIPS are similar to conventional treasury bonds, but it comes with one major difference. The
same principle is issued during the entire term of the bond in a standard treasury bond.
However, the par value of TIPS will increase gradually to match up with the Consumer Price
Index (CPI) to keep the bond's principle on track with inflation.
If inflation increases during the year, there will be an increase in the security value during that
year. It means you will have a bond that maintains its value throughout life instead of a bond
that's worthless after maturity.
6. Zero-Coupon Bonds
Zero-coupon bonds are generally issued at a discount to face value and redeemed at par. These
bonds were issued on January 19th 1994.
The securities do not carry any coupon or interest rate as the tenure is fixed for the security. In
the end, the security is redeemed at face value on its maturity date.