What is the difference between marketable and benchmark bonds

There are various categories to invest in such as debt instruments, equity instruments and a portfolio of both. Description: Categories in context to mutual funds can be classified into equity fund, debt fund or hybrid funds with equity funds being classified by size Large Cap S.

When we talk of open-end funds, NAV is crucial. NAV gives the fund's value that an investor w. The units can be purchased and sold even after the initial offering NFO period in case of new funds.

The units are bought and sold at the net asset value NAV declared by the fund. Description: The number of outstanding units goes up or down every time the fund hou.

Apart from these categories, debt funds include various funds investing in short term, medium term and long term bonds. Description: Deb. This fee charged is generally referred to as a 'load'. Exit load is a fee or an amount charged from an investor for exiting or leaving a scheme or the company as an investor.

Description: The aim behind the collection of this commission at the time investors exit the scheme is to discourage them from doi. This exchange takes place at a predetermined time, as specified in the contract.

Description: Swaps are not exchange oriented and are traded over the counter, usually the dealing are oriented through banks. Swaps can be used to hedge risk of various kinds which includes interest rate risk and cur. Within schemes, various mutual funds like equity funds, debt funds and hybrid funds etc invest in different categories based on the scheme's pre-defined investment objective.

The further division of scheme classes is called scheme category. Description: Equity funds are further divided into a variety of. As the name suggests, if an investment is held till its maturity date, the rate of return that it will generate will be Yield to Maturity.

Description: Calculation of YTM is a complex process which takes into account the following key factors: 1. Current Market Price 2. Characteristics include maturity date, credit rating , issue size, and liquidity. A bond that meets the stated criteria is included as a benchmark. In addition, on the rebalance date, which could change the bond index constituents, bonds no longer meeting the index criteria will be removed, and any new bonds that do meet the criteria will be added.

The Treasury, for example, issues and re-issues 5-year bonds, used as a benchmark bond for 5-year bonds, on a frequent basis. As months and years go by, the 5-year bond maturity date reduces to 4. However, in a normal interest rate environment, bond yields go down as the bond approaches maturity. In effect, longer-term bonds have higher yields than shorter-term bonds.

Therefore, a benchmark that approaches maturity will be valued at successively lower yields. To bring the yield back up, the government will issue another 5-year bond. This latest issue will replace the older issue as the benchmark bond for 5-year bonds. Fixed Income Essentials. Your Privacy Rights. To change or withdraw your consent choices for Investopedia. At any time, you can update your settings through the "EU Privacy" link at the bottom of any page.

These choices will be signaled globally to our partners and will not affect browsing data. We and our partners process data to: Actively scan device characteristics for identification. I Accept Show Purposes. Your Money.

Personal Finance. Your Practice. Popular Courses. Bonds Fixed Income Essentials. Interest on these Bonds will be taxable under the Income Tax Act, as applicable according to the relevant tax status of the Bond holders. These Bonds will be exempt from wealth-tax under the Wealth Tax Act, CDD No.

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. Investment in gold has attendant problems in regard to appraising its purity, valuation, warehousing and safe custody, etc. In comparison, investing in G-Secs has the following advantages:. They can be held in book entry, i. They can also be held in physical form.

G-Secs are available in a wide range of maturities from 91 days to as long as 40 years to suit the duration of varied liability structure of various institutions. 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 statutory hold G-Secs as indicated below:.

Such liquid assets shall be in the form of cash, gold or unencumbered investment in approved securities. 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. 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 Subsidiary General Ledger 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. A Gilt Account is a dematerialized account maintained with a scheduled commercial bank or PD. A Notification and a Press Communique giving exact particulars of the securities, viz. RBI places the notification and a Press Release on its website www. 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.

A sample of the auction calendar and the auction notification are given in Annex 3 and 4 , respectively. The Reserve Bank releases a quarterly calendar of T-bill issuances for the upcoming quarter in the last week of the preceding quarter. The Reserve Bank of India announces the issue details of T-bills through a press release on its website every week. The tenor, notified amount and date of issue of the CMBs depend upon the temporary cash requirement of the Government. The tenors of CMBs is generally less than 91 days.

The announcement of their auction is made by Reserve Bank of India through a Press Release on its website. The non-competitive bidding scheme referred to in paragraph number 4. However, these instruments are tradable and qualify for ready forward facility.

First set of CMB was issued on May 12, In terms of Sec. Under Article 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 Program 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. 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 on its website and also issues advertisements in leading English and vernacular newspapers of the respective states.

Currently, SDL auctions are held generally on Tuesdays every week. 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. Investors bid in yield terms up to two decimal places e. 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:. Price Based Auction: A price based auction is conducted when Government of India re-issues securities which have already been issued earlier. Bids are arranged in descending order of price offered 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:. In a Uniform Price auction, all the successful bidders are required to pay for the allotted quantity of securities at the same rate, i. In the example under ii above, if the auction was Uniform Price based, all bidders would get allotment at the cut-off price, i. Competitive bids are made by well-informed institutional investors such as banks, financial institutions, PDs, mutual funds, and insurance companies.

Multiple bidding is also allowed, i. Retail investor, for the purpose of scheme of NCB, is any person, including individuals, firms, companies, corporate bodies, institutions, provident funds, trusts, and any other entity as may be prescribed by RBI. Regional Rural Banks RRBs and Cooperative Banks shall be covered under this Scheme only in the auctions of dated securities in view of their statutory obligations and shall be eligible to submit their non-competitive bids directly.

State Governments, eligible provident funds in India, the Nepal Rashtra Bank, Royal Monetary Authority of Bhutan and any Person or Institution, specified by the Bank, with the approval of Government, shall be covered under this scheme only in the auctions of Treasury Bills without any restriction on the maximum amount of bid for these entities and their bids will be outside the notified amount.

Under the Scheme, an investor can make only a single bid in an auction. Allocation of non-competitive bids from retail investors except as specified above will be restricted to a maximum of five percent of the aggregate nominal amount of the issue within the notified amount as specified by the Government of India, or any other percentage determined by Reserve Bank of India.

In the auctions of GoI dated securities, the retail investors can make a single bid for an amount not more than Rupees Two crore face value per security per auction. Such costs may be built into the sale price or recovered separately from the clients.

It may be noted that no other costs, such as funding costs, should be built into the price or recovered from the client. In case the aggregate amount of bids is less than the reserved amount, the shortfall will be taken to competitive portion. The bidding and allotment procedure is similar to that of G-Secs.

RBI has from April 22, started conducting the auction for conversion of Government of India securities on third Monday of every month. The source securities along with notified amount and corresponding destination securities are provided in the press release issued before the auction. The market participants are required to place their bids in e-kuber giving the amount of the source security and the price of the source and destination security expressed up to two decimal places.

The price of the source security quoted must be equal to the FBIL closing price of the source security as on the previous working day.

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, RBI may buy securities from the market, thereby releasing liquidity into the market.

Repurchase buyback of G-Secs is a process whereby the Government of India and State Governments buy back their existing securities, by redeeming them prematurely, 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.

The repurchase by the Government of India is also undertaken for effective cash management by utilising the surplus cash balances. For e. Repurchase of four securities 7.

State Governments can also 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 can also retire their high cost debt pre-maturely in order to fulfill some of the conditions put by international lenders like Asian Development Bank, World Bank etc. Repurchase of seven securities of Government of Maharashtra was done through reverse auction on March 29, 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. NDS-OM if amount is not large. 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 LAF is an important tool of monetary policy and liquidity management. The substitution of collateral security by the market participants during the tenor of the term repo is allowed from April 17, subject to various conditions and guidelines prescribed by RBI from time to time.

Further market value of collateral securities instead of face value will be reckoned for calculating haircut and securities acquired by banks under reverse repo with RBI will be bestowed SLR status.

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 RBI are permitted to re-repo the government securities, including SDLs and Treasury Bills, acquired under reverse repo, subject to various conditions and guidelines prescribed by RBI time to time.

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 cannot 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.

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. 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:.

Only financially strong entities viz. The servicing of securities held in the Gilt Accounts is done electronically, facilitating hassle free trading and maintenance of the securities. This facilitates trading of G-Secs on the stock exchanges. How does the trading in G-Secs take place and what regulations are applicable to prevent abuse? Whether value free transfer of G-Secs is allowed? 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. Other participants can access this system through their custodians i. The custodians place the orders on behalf of their customers. The scheme seeks to facilitate efficient access to retail individual investor to the same G-Sec market being used by the large institutional investor in a seamless manner. 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.

Since notifications of orders executed as well as various queries are available online to the GAH, they are better placed to manage their positions.

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.

Constituents not desirous of availing this facility may do so by opting out in writing. In compliance to this, stock exchanges have launched debt trading G-Secs as also corporate bonds segment which 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:. The directions are applicable to all persons dealing in securities, money market instruments, foreign exchange instruments, derivatives or other instruments of like nature as specified from time to time.

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. Other participants include co-operative banks, regional rural banks, mutual funds, provident and pension funds.

Foreign Portfolio Investors FPIs are allowed to participate in the G-Secs market within the quantitative limits prescribed from time to time. This circular can also be accessed from the RBI website under the Notifications — Master circulars section. 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 at annual intervals, and adherence to the prudential ceilings fixed for transacting through each of the brokers, etc.

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. 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. A disproportionate part of the business should not be transacted with or through one or a few brokers. 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.

Do not use brokers in the settlement process at all, i. Do not routinely make investments in non-SLR securities e.

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 counter-party, which must include all essential details of the contract, should be monitored by the back office.

In case of trades finalized in the OTC market and reported on NDS-OM reported segment, both the buying and selling counter parties report the trade particulars separately on the reporting platform which should match for the trade to be settled. What are the important considerations while undertaking security transactions?

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 — normally 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 years , it would be safer to buy securities which are liquid, that is, securities which trade in relatively larger volumes in the market. The coupon rate of the security is equally important for the investor as it affects the total return from the security. 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 safe to trade directly with a bank or a PD. 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. 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 almost every week, purchases can be considered to coincide with the auctions.

Please see question 14 for details on ascertaining the prices of the G-Secs. 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, commodity and capital markets also affect the price of the G-Secs.

Policy actions by RBI e. This will show a screen containing the details of the latest trades undertaken in the market along with the prices. On 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. The screenshots of the above webpage are given below:. 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.

The securities leg of these trades settles in the CSGL account of the custodian. 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 match i. 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.

The settlement cycle for auctions of all kind of G-Secs i. 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. The securities and funds are settled on a net basis i.

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. During the period under shut, no trading of the security which is under shut is allowed.