Govt. Bonds/Securities

Government Securities/Bonds are securities issued by the Government for raising a public loan or as notified in the official Gazette. They consist of Government Promissory Notes, Bearer Bonds, Stocks or Bonds held in Bond Ledger Account. They may be in the form of Treasury Bills or Dated Government Securities. Government Securities are mostly interest bearing dated securities issued by RBI on behalf of the Government of India. GOI uses these funds to meet its expenditure commitments. These securities are generally fixed maturity and fixed coupon securities carrying semi-annual coupon. Since the date of maturity is specified in the securities, these are known as dated Government Securities, e.g. 8.24% GOI 2018 is a Central Government Security maturing in 2018, which carries a coupon of 8.24% payable half yearly. Features of Government Securities 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 Can be held in Demat form. Rate of interest and tenor of the security is fixed at the time of issuance and is not subject to change (unless intrinsic to the security like FRBs - Floating Rate Bonds). Redeemed at face value on maturity Maturity ranges from of 2-30 years. Securities qualify as SLR (Statutory Liquidity Ratio) investments (unless otherwise stated). The dated Government securities market in India has two segments: Primary Market: The Primary Market consists of the issuers of the securities, viz., Central and Sate Government and buyers include Commercial Banks, Primary Dealers, Financial Institutions, Insurance Companies & Co-operative Banks. RBI also has a scheme of non-competitive bidding for small investors Secondary Market: The Secondary Market includes Commercial banks, Financial Institutions, Insurance Companies, Provident Funds, Trusts, Mutual Funds, Primary Dealers and Reserve Bank of India. Even Corporates and Individuals can invest in Government Securities. The eligibility criteria is specified in the relative Government notification. Auctions: Auctions for government securities are either multiple- price auctions or uniform price auction - either yield based or price based. Yield Based: In this type of auction, RBI announces the issue size or notified amount and the tenor of the paper to be auctioned. The bidders submit bids in term of the yield at which they are ready to buy the security. If the Bid is more than the cut-off yield then its rejected otherwise it is accepted. Price Based: In this type of auction, RBI announces the issue size or notified amount and the tenor of the paper to be auctioned, as well as the coupon rate. The bidders submit bids in terms of the price. This method of auction is normally used in case of reissue of existing Government Securities. Bids at price lower then the cut off price are rejected and bids higher then the cut off price are accepted. Price Based auction leads to a better price discovery then the Yield based auction. Underwriting in Auction: One day prior to the auction, bids are received from the Primary Dealers (PD) indicating the amount they are willing to underwrite and the fee expected. The auction committee of RBI then examines the bid on the basis of the market condition and takes a decision on the amount to be underwritten and the fee to be paid. In case of development, the bids put in by the PD’s are set off against the amount underwritten while deciding the amount of development and in case the auction is fully subscribed, the PD need not subscribe to the issue unless they have bid for it. G-Secs, State Development Loans & T-Bills are regularly sold by RBI through periodic public auctions. Primary Dealer  gives investors an opportunity to buy G-Sec / SDLs / T-Bills at primary market auctions of RBI through its schemes . Investors may also invest in high yielding Government Securities, buy and sell selected liquid scrips in the secondary markets .

US lifts 40-year ban on crude oil exports

US  interest in Gulf countries is over, therefore US withdraw troops from Iraq & Afganistan. Now its main aim is to counter Russia is largest oil & gas exporter to Europe. 

There was a period when prices of Oil was at $100/barrel, at that time also US was not depending on supply from Middle east Gulf nations. US on one hand lifted sanctions on Iran who is also depending on oil exports and rival of Saudi Arebia. 

Entry of US in Oil & Gas market has only one agenda of weakening Russian & Iranian economy.

“The oil market is even more oversupplied than we had expected and we now forecast this surplus to persist in 2016,” Goldman analysts including Damien Courvalin wrote in the report. The global surplus of oil is even bigger than Goldman Sachs Group Inc. thought and that could drive prices as low as $20 a barrel.

This will affect all oil exporting nation mainly Russia & Iran as relations of both are affected due to Sirian conflict, with Turky who is gateway to Europe for their future projects. Russia who have problems with Ukren and Turkey will be more sufferer.

Europe import more than two thirds (69.1 %) of the EU-28’s imports of natural gas and crude oil from Russia, Most of the gas and oil lines routed through Ukren and proposed line from Turkey.

The ultimate gainer of the situation is USA as it will be exporting  to oil and gas hungry Europe.

Bond Market Introduction

In today’s scenario everyone including governments are looking for raising funds for various reasons. Funds can be raised by following

1. Make profit by selling a product for more than it costs to produce. This is the most basic source of funds for any company and hopefully the method that brings in the most money.

2. Borrow money. This can be done privately through bank loans, or it can be done publicly through a debt issue. The drawback of borrowing money is the interest that must be paid to the lender.

3. A company can generate money by selling part of itself in the form of shares to investors, which is known as equity funding. The benefit of this is that investors do not require interest payments like bondholders do. The drawback is that further profits are divided among all shareholders.

In this article we will be focusing on Debt Issue/Bonds.

A bond, also known as a fixed-income security, is a debt instrument created for the purpose of raising capital. They are essentially loan agreements between the bond issuer and an investor, in which the bond issuer is obligated to pay a specified amount of money at specified future dates.

When an investor purchases a bond, they are "loaning" that money the bond issuer, which is usually raising money for some project. When the bond matures, the issuer repays the principal to the investor. In most cases, the investor will receive regular interest payments from the issuer until the bond matures.

Types of Bonds

1. Government bonds

These kinds of bonds are issued and backed by the Governments .In other words, the  government offers investors bonds at a fixed rate. The government also employs an investment banker, whose main responsibility is to serve as a middleman. However, it is difficult for retail individuals to invest directly in these bonds as the minimum investment amount is very high.

2. Corporate bonds

These bonds are offered by corporate houses and are open to everyone. However, these bonds are not as safe as government bonds as the issuing companies are subject to market volatility, industry ups and downs, etc.

3. Zero coupon bonds

Usually, most types of bonds are offered at a fixed interest rate. However, zero coupon bonds do not come with any specific coupon rate or interest rate. They are offered at a discount on the face value, and on maturity, investors get the face value back. The difference between the two is the profit.

4. Junk bonds

These bonds are issued by companies that are financially not very stable. These bonds are considered below the investment grade. Since it is a risky trade for an investor to put money in such bonds, the issuing company usually offers a high rate of return.

5. Tax-saving bonds

By investing in this type of bond, you receive exemption from paying taxes on the interest income as long as you hold the bond or until its period of maturity.

While there are many other types of bonds available in the market, the ones mentioned above are some of the most common ones in India.

Different types of bonds offer investors different options. For example, there are bonds that can be redeemed prior to their specified maturity date, and bonds that can be exchanged for shares of a company. Other bonds have different levels of risk, which can be determined by its credit rating.