Debt markets

Debt markets in a nutshell..

• Market in which debt instruments are traded• Debt instruments are fixed income instruments

ie the interest rates are fixed providing a fixed income to the bond holder

• The major issuers of bonds are the central and state governments, municipal corporations and private entities such as corporates,banks etc.

What is a bond..?

• It is a loan • Loan by the investor to the issuer• The issuer is obligated to pay back the

principal amount along with a pre-determined rate of interest on a specific date to the investor.

• A complete risk free instrument.

Debt and equity compared.

• When an investor invests in equity, he becomes the owner of the company to the % of shares he holds.

• Along with ownership he takes on the risk involved with shares of the company.

• In case of debt, investor becomes the creditor to the issuing entity. As creditor he has higher claim to the assets as compared to a shareholder

• the company is obligated to pay him the interest and principal amount

What is Face value (FV) and coupon rate.

• Face value is the amount the investor will get back after the instrument matures.

• Bonds maybe issued at face value or at a discount to the FV.

• If a bond is trading at a value higher than its FV then it is trading at a premium. If it trades lower than FV it is trading at a discount.

• Coupon is the amount investor will receive as interest payments for the debt instrument.

• While most bonds pay interest semi anually, some pay on a monthly, quarterly and yearly basis.

• The interest is calculated and paid on the face value of the instrument irrespective of the price in the market.

• A coupon may either be fixed or floating. In case of fixed rate the interest rate is fixed till maturity while in floating rate, the issuer can adjust the rate based on market conditions.

Debt market and the ecnomy

• Debt markets are vital for the growth of any economy since they offer proper and efficient allocation of resources

• Debt instruments are used to finance developmental activities of the government.

Few important debt instruments..

• Bonds• Debenture• Commercial paper• Certificate of deposit• G-sec

Role of debt instruments in portfolio management

• Any given portfolio is a mixture of equity and debt based on the risk appetite of the investor.

• For an aggressive fund, the debt instruments act as a balancer.. Or rather acts as a hedging source.

• The risk undertook in equity can be balanced to some extent by opting for debt investments.

• As debt instruments provides a guarantee return(8%) the investor can use it to fulfill long term goals as well as use it as a back up for managing the risk involved with shares which along with risk provides high return(15%)