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Dated 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. The Public Debt Office (PDO) of the RBI acts as the registry / depository of Government securities and deals with the issue, interest payment and repayment of principal at maturity. Most of the dated securities are fixed coupon securities. The nomenclature of a typical dated fixed coupon Government security has the following features - coupon, name of the issuer, maturity and face value.
For example; 7.49% GOI 2017 would have the following features:
Date of Issue: April 16, 2007 Date of Maturity: April 16, 2017 Coupon: 7.49% paid on face value Coupon Payment Dates: Half-yearly
(October16 and April 16) every year
Minimum Amount of issue/ sale: Rs.10, 000
Dated securities may be of the following types :
Bonds issued at discount and repaid at face value, the distinction between the issue price and the redemption price represents the return to the investor. No periodic interest payment is made, Zero Coupon Bonds bear no reinvestment risk but they are prone to interest rate risk making their prices extremely volatile. The buyer of zero coupon bonds obtains one and only one payment, at maturity of the bond. On the contrary, coupon bonds make a series of periodic coupon payments to the buyer as well as paying face value at maturity; Zero Coupon Bonds on auction basis was introduced in January 1994 by Government of India.
Floating Rate Bond is an instrument whose periodic interest or dividend rates are indexed to a number of reference indexes such as Treasury security etc. These instruments give a variable rate, a characteristic that allows both issuer and investor to share the risk inherent in changing interest rates, the volatility of interest rates have led to creation of these instruments designed to offer a few protections to the players. Thus, Floating Rate Bonds enable investors to take advantage of movements in interest rates; Floating Rate Bonds were introduced by Government of India on September 29, 1995 linking it to the 364 day Treasury bill rate.
A gilt edged security from an issue that has not been completely subscribed and is released into the market slowly when its market price reaches predetermined levels. Short taps are short dated stocks and long taps are lengthy dated stocks. These Stocks were set up by Government of India on July 29, 1994.
An innovative instrument was (Government stock auctioned on November 15, 1994) for which the payment is made in installments; it is designed for institutions with usual flow of investible resources requiring regular investment outlets. The instrument has attracted good market response and is being traded vigorously.
These bonds were floated on December 29, 1997 on valve basis. The valve was kept open upto 28th January 1998 and an amount of Rs.704.52 crore was mobilized. These bonds are of four year maturity and bear a coupon rate of 6 per cent. The objective of the capital indexed bonds was to give a complete hedge against inflation for the principal amount of the investment.
These are bonds where the principal amount and interest payments are indexed to inflation. The interest rate is usually lower than that of fixed rate bonds with a comparable maturity. Though, as the principal amount grows, the payments increase with inflation. The government of the United Kingdom was the first to issue inflation linked bonds in the 1980s. Treasury Inflation-Protected Securities (TIPS) and I-bonds are examples of inflation linked bonds issued by the U.S. government.
Fixed Rate Bonds have a coupon (interest) that remains constant throughout the life of the bond.
State Governments also raise loans from the market. SDLs are dated securities issued through an auction similar to the auctions conducted for dated securities issued by the Central Government. Interest is serviced at half-yearly intervals and the principal is repaid on the maturity date. Like dated securities issued by the Central Government, SDLs issued by the State Governments qualify for SLR. They are also eligible as collaterals for borrowing through market repo as well as borrowing by eligible entities from the RBI under the Liquidity Adjustment Facility (LAF).The government generates revenue in the form of taxes and revenue from ownership of assets. Besides these, it borrows extensively from banks, financial institutions and the public to finance its expenses in surplus of its revenues.
One of the significant sources of borrowing funds is the government securities market (GSM). The government rises short term and long term funds by issuing securities, these securities do not carry risk and are as good as gold as the government promises the payment of interest and the repayment of principal. They are, so, referred to as gilt-edged securities. The government securities market is the major market in any economic system and therefore, is the benchmark for other markets.