IntroductionDebt market deals with those securities which yield fixed income group . The debt market is any market situation where trading debt instruments take place. Examples of debt instruments include mortgages, promissory notes, bonds, and Certificates of Deposit.
A debt market establishes a structured environment where these types of debt can be traded with ease between interested parties.
- It issues fixed income financial instruments of various types and facilitates trading thereafter .
- Reduction in the borrowing cost of the Gov. and enable mobilization of resources at a reasonable cost .
- Provide greater funding avenues to public sector and private sectors projects and reduce the pressure on institutional financing .
- Enhanced mobilization of resources by unlocking illiquid retail investment like gold .
- Assist in the development of a reliable yield curve .
- The debt market often goes by other names, based on the types of debt instruments that are traded .
- In the event that the market deals mainly with the trading of corporate bond issues, the debt market may be known as a bond market .
- If mortgages and notes are the main focus of the trading, the debt market may be known as a credit market .
- When fixed rates are connected with the debt instruments, the market may be known as a fixed income market .
Features of Debt Market –
- It is competitive in nature , as number of participants is large
- Strong and safe market , as gov. securities are traded
- Substantially low transaction cost relative to equity & money market
- Volume of transaction is huge , relative to equity market
- Heterogeneous in nature , as a result of different types of participants
Participants Involved –Prominently Government , Primary dealers , Mutual Fund Firms , Provident Fund Houses , Foreign Institutional Investors , Commercial Banks , Insurance Companies and charitable Institutions are the participants of debt market
Regulatory Bodies –As debt market trade both government and corporate debt instruments , we have following two regulators
- RBI : It regulates and also facilitates the government bonds and other securities on behalf of governments
- SEBI : It regulates corporate bonds , both PSU (Public sector undertaking) and private sector .
Link with money market –
- For a strong debt market the prerequisite is a strong money market
- If debt is long term requirement , then money market serves as short –term requirement
- For liquidity purpose also money market is needed along with debt market
Primary market –Primary market is that market where the debt instruments are issued for the first time . which can be issued as follows -
- Public prospectus : invites public to buy
- Private placement : Invites few selected individuals , as the cost of public issuing is quite a large
- Rights issue : to the already exciting members , but they can refer to their beneficiaries in case of unwillingness to buy
Secondary market –Secondary market is where the debt instruments can be traded . it can take place by the following two ways based on the characteristics of the investors and the structure of the market are :
- Wholesale debt market segment of NSE & Over the counter of BSE : Where the investors are mostly Banks , Financial Institutions , RBI , Primary dealers , Insurance companies , Provident Funds , MFs , Corporates and FIIs .
- Retail debt Market : involves participation by individual investors , small trusts and other legal entities in addition to the wholesale investors classes .
Types of debt Instruments –
- Government Securities –
- It is the Reserve Bank of India that issues Government Securities or G-Secs on behalf of the Government of India.
- These securities have a maturity period of 1 to 30 years. G-Secs offer fixed interest rate, where interests are payable semi-annually.
- For shorter term, there are Treasury Bills or T-Bills, which are issued by the RBI for 91 days, 182 days and 364 days
- Corporate Bonds –
- These bonds come from PSUs and private corporations and are offered for an extensive range of tenures up to 15 years.
- Comparing to Government Securities , corporate bonds carry higher risks, which depend upon the corporation, the industry where the corporation is currently operating, the current market conditions, and the rating of the corporation
- Certificate of Deposit –
- Certificate of Deposits (CDs), which usually offer higher returns than Bank term deposits, are issued in Demat form
- Banks can offer CDs which have maturity between 7 days and 1 year.
- CDs from financial institutions have maturity between 1 and 3 years
- Commercial Papers -
- There are short term securities with maturity of 7 to 365 days.
Structured Debt –
- Structured debt is some type of debt instrument that the lender has created and adapted to fit the needs and circumstances of the borrower .
- A debt package of this type usually includes one or more incentives that encourage the debtor to do business with the lender, rather than seeking to develop a working relationship with other lenders.
- While the overall structure of the debt is adapted to the needs of the borrower, the terms also benefit the lender in the long term.
- The main goal of structured debt is to create a debt situation that provides the debtor with as many benefits as possible, while also keeping the overall debt load as low as possible
- At the same time, the lender receives an equitable return for the structured debt arrangement
Simply understand the types of Debt Instruments by using chart –
|Government Securities||Central Government :
State Government :
|1. Zero Coupon bonds
2. Coupon bearing bonds
3. Treasury bills
4. Floating rate bonds
1. Coupon bearing bond
|Public sectors bonds||Government agencies , statutory bodies , public sector undertakings||1. Debentures
2. Government guaranteed bonds
3. Commercial papers
4. PSU bonds
|Private sector bonds||Corporates :
Financial Institutions :
2. Commercial papers
3. Fixed floating rate
4. Zero coupon bonds
5. Inter-corporate deposits
1. Certificate of debentures
1. Certificate of deposits