Bond MarketBond Market
Bond TerminologyBond Terminology
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BundsBunds Obligations Obligations
Assimilable de Tresor Assimilable de Tresor (OATS)(OATS)
Gilt Edged SecuritiesGilt Edged Securities Buoni del Tesoro Buoni del Tesoro
Poliennali Poliennali Treasury Notes Treasury Notes BondsBonds
Bonds?Bonds?
Yankee BondsYankee Bonds Bulldog BondsBulldog Bonds Euro BondsEuro Bonds Straight Bonds / Plain Vanilla Bonds / Straight Bonds / Plain Vanilla Bonds /
Bullet BondsBullet Bonds Zero Coupon BondsZero Coupon Bonds Deep Discount BondsDeep Discount Bonds
Players in the Debt MarketPlayers in the Debt Market
GovernmentGovernment Private enterprises Private enterprises
Wholesale Debt Segment
WDM Business Growth (www.nseindia.com, 02.08.2011)
YearMarket Capitalisation(crores)
Trading DaysNumber of Trades
Net Traded Value(crores)
Average Daily Value(crores)
Average Trade Size(crores)
2011-2012 3658038 16 1194 39751.8 2484.49 33.292010-2011 3594877 264 21577 599198.57 2269.69 27.772009-2010 3165929 258 25980 625640.07 2424.96 24.082008-2009 2848315 238 16129 335951.52 1411.56 20.832007-2008 2123346 248 16179 282317.02 1138.38 17.452006-2007 1784801 244 19575 219106.47 897.98 11.192005-2006 1567574 271 61891 475523.48 1754.70 7.682004-2005 1461734 293 124308 887293.66 3028.31 7.142003-2004 1215864 294 189518 1316096.24 4476.52 6.942002-2003 864481 297 167778 1068701.54 3598.32 6.372001-2002 756794 289 144851 947191.22 3277.48 6.542000-2001 580835 289 64470 428581.51 1482.98 6.651999-2000 494033 294 46987 304216.24 1034.75 6.471998-1999 411470 289 16092 105469.13 364.95 6.551997-1998 343191 289 16821 111263.28 384.99 6.611996-1997 292772 291 7804 42277.59 145.28 5.421995-1996 207783 291 2991 11867.68 40.78 3.971994-1995 158181 223 1021 6781.15 30.41 6.64
Retail Debt SegmentRetail Debt Segment
RDM Business Growth (www.nseindia.com, 02.08.2011)
Month/Year No of tradesTraded quantity
Traded Value ( lakhs)
2011-2012 0 0 0.00
2010-2011 2 20 0.02
2009-2010 5 50 0.06
2008-2009 0 0 0.00
2007-2008 0 0 0.00
2006-2007 4 12,120 13.69
2005-2006 0 0 0.00
2004-2005 31 122,390 149.27
2003-2004 912 372,820 464.41
Retail Debt SegmentRetail Debt Segment
Sr. No. Sec Type SecurityIssue Name
High Price Low Price High Yield Low Yield
1 GS CG2004 11.24% 105.0000 104.6500 4.8379 4.7845
2 GS CG2004 11.50% 103.2600 102.0650 4.7123 4.4431
3 GS CG2004 11.75% 104.1000 103.5000 4.7203 4.5004
4 GS CG2004 11.95% 104.9200 103.0900 4.7137 4.3949
5 GS CG2004 11.98% 106.8800 104.1700 4.7729 4.4180
6 GS CG2004 12.50% 104.7500 100.6100 4.7932 3.7692
7 GS CG2004 12.59% 105.3700 102.5900 4.6475 4.4522
8 GS CG2005 6.50% 102.9800 101.5000 5.5965 4.5810
9 GS CG2005 9.90% 107.9900 106.2300 4.8042 4.4498
10 GS CG2005 10.20% 108.5800 107.9900 4.6068 4.4734
Source: www.nseindia.com, 02.08.2011
Corporate Debt Segment (02.09.2011) NSE
No. of securities traded 15No. of Trades 25Traded Value (Rs crores) 460.5
Issuer Description LOT
Central Government
Compensation Bond GD
Converted Stock GC
Floating Rate Bond GF
Govt. Loan GS
Partly Paid up Loan GP
Treasury Bill TB
Zero Coupon Bond GZ
Index Bond GI
State Government Development Loan SG
Local Bodies Municipal Taxable Bonds MT
Statutory Corpn. Taxable Bonds TS
Statutory Corpn. Taxfree Bonds SF
Public Sector Unit Promissory Note PD
Taxable Bond PT
Tax-Free Bond PF
Zero Coupon Bond PZ
Cumulative Bond PE
Infrastructure Bond PI
Institutions Floating Rate Bond FB
Non-SLR Bond ID
SLR Bond IB
Zero Coupon Bond IZ
Deep Discount Bond DI
Tax-Free Bond IF
Banks Bonds BB
Certificate of Deposit CD
Floating Rate Bond BF
Zero Coupon Bonds BZ
Corporate Commercial Paper CP
Debentures DB
Promissory Note CN
Deep discount Debentures DC
Securitized Debt SD
Floating Rate Debenture CF
Infrastructure Bond CI
Mutual Funds Unit 64 US
Mutual Funds units MF
Mutual fund cumulative MC
WDM – Trade ParametersWDM – Trade Parameters
Market Lot Rs. 5 Crore
Settlement for value at t + 0
Deals entered up to 13.00 hours
Settlement for value at t + 1*
Deals entered after 13.00 hours
*t+1 will be the default for contracts done in securities, other than Government of India securities.
WDM TransactionWDM TransactionBank Terminology used Meaning
Bank A 11.40/08 for 25crore Bank A is asking Bank B for a 2 way quote on 11.40% maturing 2008 for a total amount of Rs. 25 crore (face value) for settling today.
Bank B 12/18 for 15 crore Bank B has given a price to buy at Rs. 117.12 and to sell at Rs.117.18 and the quote is valid for Rs.15 crore only.
Bank A Any improvement, me to buy
Bank A tells Bank B that he is looking to buy but at a lower price.
Bank B 17 for you Bank B is willing to reduce the price for the buyer to Rs.117.17.
Bank A Done / Close Bank A concludes the deal
Bank B Confirmed (Bank B sells 11.40% 08 15 Crore value today at 117.17 to Bank A)
Bank B confirms the deal specifying security, amount, price, settlement date and counterparty
RDSRDS
The RETDEBT Market facility on the The RETDEBT Market facility on the NEAT (National Exchange for Automated NEAT (National Exchange for Automated Trading) system of Capital Market Trading) system of Capital Market Segment is used for entering transactions Segment is used for entering transactions in RDM session. in RDM session.
Trading in Retail Debt Market is permitted Trading in Retail Debt Market is permitted under under Rolling SettlementRolling Settlement (T + 2) (T + 2)
RDS – Trading ParametersRDS – Trading Parameters
Face Value Rs. 100/-
Permitted Lot Size 10
Tick Size Rs. 0.01
Operating Range +/- 5%
Mkt. Type Indicator D (RETDEBT)
Book Type RD
Valuation of Debt InstrumentsValuation of Debt Instruments
Bond Evaluation MeasuresBond Evaluation Measures
Running yieldRunning yield Simple yield to maturitySimple yield to maturity Yield to maturityYield to maturity Redemption yieldRedemption yield Holding period yieldHolding period yield
Running YieldRunning Yield
Yield r = Coupon / Clean priceYield r = Coupon / Clean price
Simple Yield to MaturitySimple Yield to Maturity
C is the coupon amount, P is the face value of the bond, CP is the clean price, n is the number of years to maturity.
s
C P-CPYTM = +
CP n×CP
Redemption YieldRedemption Yield
In the equation DP is the market exchange price of the debt instrument.
DP is Dirty Price
n is the number of years to maturity.
This equation gives an approximate redemption yield and this could work well for long-term debt instruments having a maturity of more than 15 years.
r
DP-CPC+
nY =DP+CP2
Md is the market price (dirty price) of the debt instrument,
tj is the number of days between the current date and the next coupon payment.
Yr is the redemption yield,
q is the total number of coupon payments before redemption (n X m),
m is the number of times coupon payments are made,
Td is the total number of days between two coupon payments,
RP is the redemption price.
or
j
q-1
d t Td q-1t=0 r r
r
C1 RPmM = × +11 11+ Y 1+ Ym1+ Y m
m
Holding Period YieldHolding Period Yield
Yh is the holding period yield
i1 and i2 are the rates of interest at which the first coupon, second coupon etc. are received P1 is the price for which the debt instrument will be sold by the investor
The above Equation can be restated as:
Comparison of Yield MeasuresComparison of Yield Measures
Yields to Call / PutYields to Call / Put
Yc = yield to maturity expressed in %.
C = coupon amount.
Pc = Call price of the bond.
M = Market price (dirty price) of the bond.
n = the number of years to Call / Put date.
Yields on Index Linked BondsYields on Index Linked Bonds
C is the coupon payment, 'm' is the times the coupon payment is made,
RPI (base) is the base of the index
RPI (C-d) is the index 'd' duration before the coupon payment time.
In case of half-yearly payments it will be 6 months plus the delay time in publication of index and computation of coupon payment.
RPI (M-d) The index 'd' duration earlier to maturity time ‘M’
Two types of yield measures Two types of yield measures
Money / Nominal yield Money / Nominal yield Real yield Real yield
Money / Nominal yieldMoney / Nominal yield
M d = Market price of the bond
m = number of times coupon payments are made
Yri = Nominal yield
P = maturity payment
q = number of coupon payments till maturity.
1 2
0 0 02 ....
11 11 1 1
q
d q
ri riri
RPIRPI RPIC C C Pm m mRPI RPI RPIM
Y Y Ym mm
Real yield Real yield
Yri is the nominal yield and 'i' is the forecasted inflation rate.
The real yield can be restated as:
RPIa = RPI1/(1+i) (1/m)
RPI1 = Index in the first year
'i' is the inflation rate
and 'm' is the number of times it is compounded.
0
...1 11 1
ad q
ry ry
C CP
RPI m mM
RPI Y Ym m
Yield CurvesYield Curves
Ascending Yield Curve Descending Yield Curve
Risk and Debt InstrumentsRisk and Debt Instruments
Default RiskDefault Risk Reinvestment RiskReinvestment Risk Purchasing Power RiskPurchasing Power Risk Price RiskPrice Risk Liquidity riskLiquidity risk
Risk Management in BondsRisk Management in Bonds Bond DurationBond Duration Modified DurationModified Duration ConvexityConvexity
Bond DurationBond Duration
Duration =
∑ (Present value of cash flows * times to cash flows) / ∑ (Present value of cash flows)
Modified DurationModified DurationModified Duration = Macaulay Duration /( 1 + y / m)
y = yield to maturity and m = number of discounting periods in year.
ConvexityConvexity
Convexity = 1/(P x (1+y)^2) ∑ [CFt/(1+y)^t x (t^2 +t)]Convexity = 1/(P x (1+y)^2) ∑ [CFt/(1+y)^t x (t^2 +t)]
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