Govt sec markts

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Contents

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Topics Slide No.

GS Market Definition, Need, Features &Major Participants

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Classifications Of 4 Main MarketSecurities

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Money Market Security 8-9

Capital Market Security 10-13

Derivative Market Security 14-16

Indirect Invest. Market Security 17-19

Non-Marketable Security 20-22

Dated Security Bonds 23-25

Why GS?? & Conclusion!! 26

• A tradable instrument issued by the Central Government or the State Governments

• Acknowledges the Government’s debt obligation

• May be short term or long term

• Issued by the Reserve Bank of India on behalf of the government to finance any deficit and public sector development programs

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Definition

Government needs enormous amount of money to perform the following main functions:

Creation and maintenance of physical infrastructure

They are issued in order to finance the fiscal deficit and managing the temporary cash mismatches of the Government.

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Need of GS

• Issued at face value

• No default risk as the securities carry sovereign guarantee

• Ample liquidity as the investor can sell the security in the secondary market

• Interest payment on a half yearly basis on face value

• No tax deducted at source

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Features of GS

The Government securities market consists of securities issued by the State government and the Central government.

Government securities include Central Government securities, Treasury bills and State Development Loans.

All entities registered in India like banks, financial institutions, Primary Dealers, firms, companies, corporate bodies, partnership firms, institutions, mutual funds, Foreign Institutional Investors, State Governments, Provident Funds, trusts, research organizations, Nepal Rashtra bank and even individuals are eligible to purchase Government Securities. 

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Major Participants

Classification of Markets

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Money Market Security

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o Stocks, bonds or any other types of securities which can be traded easily in organized financial markets or between two investors with the help of brokers, are known as marketable securities.

o Feature: It is easier to trade them and they can

be converted into cash whenever required

by the investor

Classification

The common stocks in which we trade in the open market are classic examples of a capital market security. In such securities, the maturity period is greater than one year and for some securities (for example, stocks), there is no defined maturity period.

Capital Market Security

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Classification

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Fixed Income Securities: These are investments that promise guaranteed income on the amount invested, though at a lower rate of return.

Bonds: They are a form of fixed-income securities, and payments are made as per the time and depending on the conditions mentioned in the deal.

Treasury Notes and Bonds: These securities offer higher interests, and they also repay the principal on maturity. The terms of treasury notes are usually between 1 to 10 years

while for the treasury bonds, it is between 10-30 years.

Municipal Bonds: These are tax-exempted investments and hence, one of the most sought after bonds issued by the government.

Corporate Bonds: These are almost similar to the treasury bonds with the major difference that they are issued by corporate entities, so the risk of default is higher.

Stocks: Stocks are divided into two types: Preferred stocks : Suppose if a company shuts down or goes broke, common

stock shareholders are the last investors to get compensated. Dividend, if it is distributed at all, first goes to creditors, bondholders, and preferred shareholders.

Common stocks: The general trading we see in stock markets is done in common stocks.

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These class of marketable securities represent those investments values of which are dependent on the performance of several other securities. That means, their values are derived from the value of other investment instruments and hence, the name derivatives.

Derivative Market Security

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Classification Of Capital Market

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Options: It is an interesting security that provides the holder the right, but not obligation to buy or sell securities at some fixed point of time in the future.

The buying is typically known as 'a call option' while selling is popular as 'a put option'. In case, the holder doesn't carry the transaction within the specified time constraints, the deal expires.

Very speculative and hence only ideal for sophisticated investors.

Futures: Futures securities are just like options, but with a major difference that in future securities, the buyer is obligated to fulfill the terms of contract unlike the options.

The futures market is extremely liquid, risky and very complex.

Rights and Warrants: Similar to options and futures, are rights and warrants that grant the shareholders some rights of ownership and profit from the company's performance.

Rights and warrants are issued by the companies for raising money.Rights are generally for short-term and expire within a week, while

warrants may be traded for one to a few years. 15

Investments in securities that are made by purchasing shares of an investment company, are known as indirect investments. Just like any other company, even an investment company tries to diversify its portfolio and generate funds for its business purposes. 

Indirect Investment Market Security

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Classification

Unit Trusts Investment Trusts Hedge Funds

Indirect Investment Market Security

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Unit Trusts: Also known as open-ended investments, the value of a unit trust depends on the number of units issued and the price of each unit. The success of a unit trust depends on the expertise and experience of the fund managers handling it.

Investment Trusts: One of the most popular investment instruments are the mutual funds. Investment trusts, like mutual funds, also known as open-end investment companies sell shares of the companies even after the Initial Public Offering (IPO) gets over.

Another type of marketable securities are in the form of closed-end investments. These are the companies under trusts that don't sell the shares after the IPO of a company gets over.

Hedge Funds: Hedge fund is a general, non-legal term used to describe private, unregistered investment pools that traditionally have been limited to sophisticated, wealthy investors.

Hedge funds are not mutual funds and, as such, are not subject to the numerous regulations that apply to mutual funds for the protection of investors - including regulations requiring a certain degree of liquidity.

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Non-Marketable Securities

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o Securities that are difficult to trade in a normal financial market are generally called non-marketable securities.

o It is difficult to get a potential buyer for non-marketable securities and hence, some of the financial instruments that comprise non-marketable securities are traded in private transactions.

o Although these securities can't be traded easily, they from a significant portion of an investor's portfolio.

o These securities are traded between investors and large financial institutions like commercial banks, so it is a risk-free and safe investment. 

Classification

Savings AccountThey are a form of non-marketable securities that earn an interest over a period. The interest rates and maturity period depends on the banks. For the account to function, investor needs to maintain some minimum balance as per the directives of the bank. It is a safe and simple form of investment although, the returns are not very high.

Government Savings BondsThose government bonds that can't be traded in the open market, constitute a part of government savings bonds. These government debt instruments are traded amongst investors and financial institutions (banks) indirectly. These bonds earn interest only when they are redeemed.

Non-negotiable Certificates of Deposits (CDs)CDs are promissory notes (the bearer is promised some return on investment with interest) that are issued by commercial banks.

CDs have a maturity period of one month to five years and any withdrawal prior to maturity attracts penalty.

Money Market Deposit Accounts (MMDAs)MMDA securities have very high interest rates along with some restrictions as:

An investor is allowed a limited number of transactions every month It is also mandatory to maintain a minimum balance that is normally

higher than that in normal savings account.21

Dated Security BondsDated Government securities are longer term

securities and carry a fixed or floating coupon (interest rate) paid on the face value, payable at fixed time periods (usually half -yearly).

The tenor of dated securities can be up to 30 years

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ClassificationDated Security

Bonds

Fixed Rate

Bonds

Floating Rate

Bonds

Zero Coupon Bonds

Capital

Indexed

Bonds

Bonds with

Call/Put options

o Fixed Rate Bonds These are bonds on which the coupon rate is fixed for the entire life of the bond

o Floating Rate Bonds Floating Rate bonds are securities which do not have a fixed coupon

rate and the coupon is reset at pre-announced intervals based on a specified

methodology.

o Zero Coupon Bonds Zero coupon bonds are bonds with no coupon payments. Like

Treasury Bills, they are issued at a discount to face value

o Capital Indexed Bonds These are bonds, the principal of which is linked to an accepted

index of inflation with a view to protect the holder from inflation

o Bonds with Call/Put options Bonds can also be issued with features of option wherein the issuer

can have the option to buy back (call option) or the investor might have the

option to sell the bond (put option) to the issuer during the currency of the bond

Why Government Securities???• It Constitutes the principal segment of the debt market

• Acts as a benchmark for pricing corporate papers of varying maturities

• Helpful in implementing the fiscal policy of the government

• Provide the highest type of collateral for borrowing against their pledge

• Have the highest degree of security of capital and the return on each security depending on the coupon rate and period of maturity

• Switches between the short dated and long dated securities take place on the basis of difference in redemption yields.

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