G-SEC

BY: PRANESH UPADHYAY. RAJAT AT AGGRAWAL, RICHA DHANUKA, ROHIT GOYAL RAHUL VERMA

Issued by R.B.I on behalf of the govt. For raising a loan for the shortfall in funds for planned or unplanned expenditure of the govt. Tradable security issued by the central government or the state government. Public Debt Office (PDO) of the RBI acts as the registry / depository

returns in the form of coupons (interest) maximum safety as they carry the Sovereigns commitment They can be held in book entry. wide range of maturities from 91 days to 30 years to suit the duration of a bank's liabilities. can be sold easily in the secondary market can also be used as collateral to borrow funds in the repo market. very simple, safe and efficient system of settlement

FORMS OF G-SEC
G-Sec

Central Govt.

State Govt.

Short term

Long term

Long term

T-bills

govt. bond

dated sec

govt. bond

dated sec

1)

2)
3)

4)
5) 6)

7)

Treasury Bills, which are money market instruments. These are short term debt instruments issued by the Government of India. These are presently issued in three tenors, viz., 91 day, 182 day and 364 day. Treasury Bills are zero coupon securities and pay no coupon. They are issued at a discount rate. Redeemed at the face value at maturity. The return is the difference between the maturity value or face value and issue price.

Auction- Wednesday Payments- following Friday. Amount for issuance 91 day and 182 day- rs.500 crore each Issued through auctions conducted by the reserve bank 364 day bill - rs.1000 crore

Minimum investment- rs.25000 and multiple Annual calendar of t-bill issued at last week of march. Issue details announced by way of press release.

longer term securities fixed or floating coupon paid on the face value. payable at fixed time periods(usually halfyearly). The tenor can be up to 30 years. announced week in advance through Press Releases and paid advertisements in major dailies.

The nomenclature are: coupon name of the issuer maturity face value.

Date of Issue Coupon Date of Maturity Coupon Payment Dates

April 16, 2007 7.49% paid on face value April 16, 2017 Half-yearly (October16 and April 16) every year

Minimum Amount of issue/ sale

Rs.10,000

1. FIXED RATE BONDS

2. FLOATING RATE BONDS

3. ZERO COUPON BONDS 4. CAPITAL INDEXED BONDS 5. BONDS WITH CALL/ PUT OPTIONS 6. SPECIAL SECURITIES 7. STRIPS

Issued by state governments Issued through an auction Interest is serviced at half-yearly intervals and the principal is repaid on the maturity date.

 qualify eligible

for SLR.

as collaterals for borrowing through market repo as well as borrowing by eligible entities from the RBI under the Liquidity Adjustment Facility (LAF). 1000 investment

Minimum

auctions conducted by the RBI. Auctions are conducted on the electronic platform called the Public Debt Office Negotiated Dealing System (PDO-NDS). Bodies which maintain funds account (current account) and securities accounts (SGL account)with RBI, are members of this electronic platform. All members of PDO-NDS can place their bids in the auction through this electronic platform.

All non-NDS members can participate through scheduled commercial banks or Primary Dealer through Gilt Account. HALF-YEARLY AUCTION CALENDAR IS ISSUED WHICH CONTAINS INFORMATION ABOUT: 1. the amount of borrowing, 2. the tenor of security 3. auctions time

Notification and a Press Communiqu gives information: securities name, amount, type of issue procedure of auction

AUCTIONS

YEILD BASED

PRICE BASED

Conducted when a new G-sec is issued. Investors bid in yield terms up to two decimal places (ex7.85 %). The cut-off yield is coupon rate for the security. Successful bidders are those who have bid at or below the cut-off yield.

Yield based auction of a new security

Maturity Date: September 8, 2018 Coupon: It is determined in the auction (8.22% ) Auction date: September 5, 2011 Auction settlement date: September 8, 2011* Notified Amount: Rs.1000 crore

* September 7 being holidays, settlement is done on September 8, 2008 under T+1 cycle.

Bid No.

Bid Yield

Amount of bid (Rs. crore)

300 250 200 150 100

Cummulative Price* with amount coupon as (Rs.Crore) 8.22%

300 400 450 500 1000 100.19 100.14 100.13 100.09 100.00

1 2 3 4 5

8.10% 8.12% 8.13% 8.14% 8.22%

6
7

8.24%
8.26%

150
200

1200
1100

99.93
99.87

Used for re-issues securities already issued earlier. Bidders quote in terms of price per Rs.100 of face value of the security (e.g.,Rs.101.02, Rs.99.80, etc., per Rs.100/-). Bids are arranged in descending order Successful bidders are those who have bid at or above the cut-off price.

Price based auction of an existing security 8.24% GS 2018

Maturity Date: April 22, 2018 Coupon: 8.24% Auction date: September 5, 2008 Auction settlement date: September 8, 2008* Notified Amount: Rs.1000 crore

Bid No.

Price of bid

Amount of bid (Rs. crore) 300 250 200 150 100 150

Implicit yield Cummulative amount (Rs.Crore) 8.1912% 8.1987% 8.2002% 8.2062% 8.2077% 8.2136% 300 400 450 500 1000 1200

1 2 3 4 5 6

100.31 100.26 100.25 100.21 100.20 100.16

100.15

200

8.2151%

1100

GOVERNMENT SECURITIES

PHYSICAL FORM

DEMAT FORM

TELEPHONE MARKET NEGOTIATED DEALING SYSTEM

STOCK EXCHANGES

COMMERCIAL BANKS PRIMARY DEALERS INSTITUTIONAL INVESTORS

FOREIGN INSTITUTIONAL INVESTORS

Primary market

GSEC

SECONDAR Y MARKET

Formulate an investment policy. Policy should be approved by their Board of Directors. That defines objectives of the policy, authorities and procedures to carry out deals. Dealings through brokers & preparing panel of brokers and must review it annually. Stick firmly to prudential ceilings(limit) fixed for transaction through each broker.

Segregate dealing and back-up functions. Monitor all transactions. Keep a proper record of the SGL forms. Seek a counterparty for transactions. Give preference for direct deals. Use CSGL/ Gilt Accounts for holding the securities Insist on Delivery versus Payment for all transactions.

Take advantage of the non-competitive bidding facility. If broker is involved, restrict its role as much as possible. Have a list of approved brokers and involve them only. Place a limit of 5% of total transactions Maintain and transact in Government securities only in dematerialized form Open and maintain only one Gilt or dematerialized account.

Open a funds account for securities transactions. Ensure availability of clear funds. Observe prudential limits for investment in permitted non-SLR securities. The Board of Directors to peruse all investment transactions at least once a month.

Do not undertake any purchase/sale transactions with broking firms. Do not use brokers in the settlement process at all. Do not give any authorisation under any circumstances to brokers/intermediaries. Do not undertake Government Securities transaction in physical form with any broker. Do not routinely make investments in nonSLR securities(non-Statutory Liquidity Ratio).

Deal slip

Nature of the deal

Name of the counterparty

Direct or broker

Details of security, amount, price

Contract date and time and settlement date.

If broker, Details of broker

The deal slips should be serially numbered. Verified separately. After deal is concluded deal slip should be immediately passed on to the back office.

Voucher
Is passed after verification of contract. On the basis of voucher the books of account should be independently prepared.

Identify which security to invest in.

Where and Whom to buy from. How to ensure correct pricing.

like other financial instruments, it also keeps fluctuating. Determined by demand and supply of the securities. Specifically influenced by the changes in interest rates in the economy & other macro-economic factors. Developments in other markets(money, foreign exchange) also affect.

Developments in international bond markets also affects prices of Government securities in India. Policy actions by RBI can also affect the prices of government securities.

Return on a security is a combination of two elements.

1. coupon income. 2. The gain / loss on the security.

Price information is crucial to any investor. Information on traded prices of securities is available on RBI website. As the prices are available on the screen they can invest in these securities at the current prices through their custodians.

It acts as a Central Counter Party (CCP) for all transactions in G-sec. All trades undertaken in the OTC market and on the NDS-OM platform are cleared through the CCIL. CCIL also guarantees settlement of all trades in Gsec. Settlement guarantee fund

BUYER CCIL

SELLER

How is the yield of a bond calculated? i) yield to call ii) Current Yield

iii) Yield to Maturity

How is the yield of a Treasury Bill calculated?

Q.Assuming the price of a 91day Treasury bill at issue is Rs.98.20, yield on the same would be?

YIELD= (100-P/P)*(365/D)*100
Wherein; P Purchase price D Days to maturity D = [actual number of days to maturity/365] ANS. Y = (100-98.20)*365*100/98.20*91 = 7.3521%

After say, 41 days, if the same Treasury bill is trading at a price of Rs. 99, the yield would then be
Y = (100-99)*365*100/99*50 = 7.3737%

Note that the remaining maturity of the treasury bill is 50 days (91-41).

period of a bond to break even, Duration is expressed in number of years

Q. Taking a bond having 2 years maturity, and 10% coupon, and current price of Rs.102, the cash flows will be; (Prevailing 2 year yield being 9%)

Time period (years)

Inflows (Rs.Cr) PV at an yield of 9% PV*time

0.5
5 4.78 2.39

1
5 4.58 4.58

1.5
5 4.38 6.57

2
105 88.05 176.10

Total time weighted Present Value = 189.64

Duration in years = 189.64/102 = 1.86 years

the weighted average time The higher the coupon rate of a bond, the shorter the duration. Duration is always less than or equal to the overall life Only a zero coupon bond (a bond with no coupons) will have duration equal to its maturity.

Modified duration refers to the change in value of the security to one percent change in interest rates (Yield). (MD)=Duration/(1+MarketYield/numberof coupons in a year) In the previous example MD = 1.86/(1+0.09/2) = 1.78

PV01 describes the actual change in price of a bond if the yield changes by one basis point It is often used as a price alternative to duration (a time measure). Higher the PV01, the higher would be the volatility (sensitivity of price to change in yield).

From the modified duration in earlier ex. security value will change by 1.78% for a change of 100 basis point (1%) change in the yield. In value terms that is equal to 1.78*(102/100) = Rs.1.81. Hence the PV01 = 1.81/100 = Rs. 0.18, which is 18 paise. Thus, if the yield of a bond with a Modified Duration of 1.78% moves from say 9% to 9.05% (5 basis points), the price of the bond moves from Rs.102 to Rs.101.10 (90 paise i.e., 5x18paise).

change in duration of a bond per unit change in the price of the bond. measure and manage the amount of market risk to which a bonds is exposed.

If interest rates or market yields rise, the price of a bond falls and vise-versa YTM > current yield > coupon yield.

coupon yield > current yield > YTM.

YTM = current yield = coupon yield.

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