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What is the Debt Market?
The Debt market is the market where fixed income securities of different types and facilities are issued and traded. Therefore, credit markets are markets for fixed income securities issued by central and state governments, municipal corporations, government bodies, and commercial institutions like financial institutions, banks, public sector units, public limited companies, and structured finance instruments.
The debt market in India consists mainly of two categories - government securities or G-sek market which includes central government and state government securities and corporate bond market.
To finance its fiscal deficit, the Government seeks fixed income instruments and borrows money by issuing G-seks containing sovereign securities issued by the Reserve Bank of India (RBI) on behalf of the Government of India. The corporate bond market (also known as the non-GSEC market) consists of Financial Institutions (FI) bonds, Public Sector Units (PSU) bonds, and corporate bonds/debentures.
Issuance of bonds increases the debt burden of the bond issuer as the contract interest payment should be paid to the bondholders. In the debt market, the bondholders do not acquire ownership in the business or make no claim for the future profits of the borrower. The sole obligation of the borrower is to repay the loan with interest.
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Advantages of investing in Government Securities (G-Secs)
Zero default risk of G-sec. Provide one of the best reasons for investing in G-secs so that it receives the largest amount of security possible. Other advantages of investing in G-secs are:
- Create safety and lower volatility as compared to other financial instruments.
- Changes possible in the structure of devices such as index-linked bonds, STRIPS
- High returns available in case of borrowing against G-SECs.
- Have No TDS on interest payments
- Tax exemption for interest earned on G-secs. up to 3000 /- over and above the limit of Rs. 12000 under Section 80L. (as amended in the latest Budget).
- Will Get Greater diversification opportunities
- Adequate trading opportunities with worldwide expected sustained volatility in interest rates
Pricing of a bond
Pricing of a bond is essentially the determination of yield on that loan instrument and the resultant absolute value. From an investor's point of view, it is important to understand how the yield (the same price) is fixed in the debt market. The yield of a bond in the markets is determined by the forces of demand and supply, as is the case in any market. In addition, the yield of a bond in the market also depends on many other factors and will fluctuate according to the changes:
- Macroeconomic conditions, both domestic and relevant global ones.
- General currency market position including currency supply situation in the economy.
- Risk or risk on the situation. Interest rates prevailing in the market and rates of new issues.
- Future Interest Rate Expectations.
- Inflation is expected based on both domestic prices and global commodity prices like crude etc.
- The credit quality of the issuer.
Top stock market broker in India suggest that bonds are considered less risky investments for at least two reasons. First, bond market returns are less volatile than the returns of the stock market. Secondly, should the company run into trouble, the bondholders are paid first before other expenses are paid.
