The top Indian stock exchanges, BSE and NSE, offer trading in debt instruments for retail investors. The Retail trading in Debt Market was started in January 2003. All investors who have equity broking account can trade in the Retail Debt Market. The debt instruments available for trading are government securities (G-Secs or Gilts). Government securities are issued by government and have no default risk (sovereign bonds). Government issues these securities through auction to major players like banks and other financial institutions. After that trading on these securities occur in secondary market. Government pays coupons (equivalent to annual interest) on these securities to its holder. G-secs are characterized by the coupon rate (usually expressed annually) and maturity (the time after which the securities can be redeemed). The returns from a G-Sec are the coupon payment every six months (half the annual coupon rate) and the face value payment at the maturity.
G-sec are a cost-effective way of raising long term money for government and it is a long term secure investment for investors. It has the lowest risk and the coupons provide regular stream of money. Unlike fixed deposits an investor can liquidate these securities in the secondary market depending on liquidity requirements. It has the lowest risk and the coupons provide regular stream of money. Unlike fixed deposits an investor can liquidate these securities in the secondary market depending on liquidity requirements.
There is tax benefit associated with the G-sec investment. Apart from having no tax deduction at source, G-sec offer tax rebate of Rs 3000 under Sec 80L of IT act.
About government securities
Face value = Rs. 100
Minimum size = 10 units
Credit Risk = NIL
Coupon rate = total interest paid by the government to the G-Sec holder.
This coupon amount in paid in two equal instalments (half of coupon rate every six months)
Maturity = the date till which the G-sec is issued for. At maturity government pays back the amount equal to the face value of the security.
Accrued Interest rates
Since government securities pay interest at fixed interval of 6 months, anyone buying G-sec from secondary market is entitled to the partial interest payment depending on when he buys the security. For example, if an investor buys G-sec which has its coupon due after next 4 months, he/she will have to pay to the seller the interest for 2 months in addition to the market price. This is also called the interest accrued. In NSE and BSE trading systems, the accrued interest is added to the price of the G-sec while entering the quote on the system.
Dirty Price and Clean Price
The price of G-sec without the accrued interest is known as Clean price while Dirty price includes the accrued interest.
Dirty Price = Clean Price + Accrued Interest
Valuation of G-Secs
The price of G-sec is relatively easier to obtain than the price of an equity. The cash flow in the case of G-Sec are known with certainty. The only debatable factor is the discount rate at which these cash flows will be factored since they will be available at a future period. Knowing it, one can easily discount the cash flow streams with their respective discount rates to bring down their present value. The discount rate is all that creates some uncertainity and involves different parties trading actively to make profit.
Working reversely since the price of a market traded G-Sec is available one can find the effective discount rate which the market is assuming. This rate is termed as yield-to-maturity.
Premium and Discount
The face value of a G-Sec is Rs 100 but it can trade anything above or below 100. When it is trading above 100 it is said to be trading at premium and on the other side when it is trading below 100 it is said to be trading at discount.
Generally the premium and the discount for a G-Sec depends on its coupon rate and prevailing discount rate. A G-Sec having coupon rate more than the current discount rate is likely to trade above Rs 100 and hence at premium to its face value.
For more information, please visit:
BSE
NSE
G-sec are a cost-effective way of raising long term money for government and it is a long term secure investment for investors. It has the lowest risk and the coupons provide regular stream of money. Unlike fixed deposits an investor can liquidate these securities in the secondary market depending on liquidity requirements. It has the lowest risk and the coupons provide regular stream of money. Unlike fixed deposits an investor can liquidate these securities in the secondary market depending on liquidity requirements.
There is tax benefit associated with the G-sec investment. Apart from having no tax deduction at source, G-sec offer tax rebate of Rs 3000 under Sec 80L of IT act.
About government securities
Face value = Rs. 100
Minimum size = 10 units
Credit Risk = NIL
Coupon rate = total interest paid by the government to the G-Sec holder.
This coupon amount in paid in two equal instalments (half of coupon rate every six months)
Maturity = the date till which the G-sec is issued for. At maturity government pays back the amount equal to the face value of the security.
Accrued Interest rates
Since government securities pay interest at fixed interval of 6 months, anyone buying G-sec from secondary market is entitled to the partial interest payment depending on when he buys the security. For example, if an investor buys G-sec which has its coupon due after next 4 months, he/she will have to pay to the seller the interest for 2 months in addition to the market price. This is also called the interest accrued. In NSE and BSE trading systems, the accrued interest is added to the price of the G-sec while entering the quote on the system.
Dirty Price and Clean Price
The price of G-sec without the accrued interest is known as Clean price while Dirty price includes the accrued interest.
Dirty Price = Clean Price + Accrued Interest
Valuation of G-Secs
The price of G-sec is relatively easier to obtain than the price of an equity. The cash flow in the case of G-Sec are known with certainty. The only debatable factor is the discount rate at which these cash flows will be factored since they will be available at a future period. Knowing it, one can easily discount the cash flow streams with their respective discount rates to bring down their present value. The discount rate is all that creates some uncertainity and involves different parties trading actively to make profit.
Working reversely since the price of a market traded G-Sec is available one can find the effective discount rate which the market is assuming. This rate is termed as yield-to-maturity.
Premium and Discount
The face value of a G-Sec is Rs 100 but it can trade anything above or below 100. When it is trading above 100 it is said to be trading at premium and on the other side when it is trading below 100 it is said to be trading at discount.
Generally the premium and the discount for a G-Sec depends on its coupon rate and prevailing discount rate. A G-Sec having coupon rate more than the current discount rate is likely to trade above Rs 100 and hence at premium to its face value.
For more information, please visit:
BSE
NSE
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