Dissertation on Debt securities market in india

A comprehensive comprehensive analysis of debt securities market in India  A Study Report in partial partial fulfilment of the requirements requirements for the award of   Master’s Degree in Business Administration Administration (MBA)

Of  Amity University By Name: Abhishek Soni

(Registration No: A30301913020) Under the Gidan!e of 

Prof. Tanushree Tanushree Sodhani

Assistant "rofessor  (#nterna$ Gide)

Amity Global Business School

rd

%3&2' oramanga$a 3  B$o!' *osr +ain Road' Banga$ore , -.003/

1

A comprehensive comprehensive analysis of debt securities market in India  A Study Report in partial partial fulfilment of the requirements requirements for the award of   Master’s Degree in Business Administration Administration (MBA)

Of  Amity University By Name: Abhishek Soni

(Registration No: A30301913020) Under the Gidan!e of 

Prof. Tanushree Tanushree Sodhani

Assistant "rofessor  (#nterna$ Gide)

Amity Global Business School

rd

%3&2' oramanga$a 3  B$o!' *osr +ain Road' Banga$ore , -.003/

2

A comprehensive comprehensive analysis of debt securities market in India  A Study Report in partial partial fulfilment of the requirements requirements for the award of   Master’s Degree in Business Administration Administration (MBA)

Of  Amity University By Name: Abhishek Soni

(Registration No: A30301913020) Under the Gidan!e of 

Prof. Tanushree Tanushree Sodhani

Assistant "rofessor  (#nterna$ Gide)

Amity Global Business School

rd

%3&2' oramanga$a 3  B$o!' *osr +ain Road' Banga$ore , -.003/

2

Certifcate This This is to cert certi iy y that that dissertation report entitled “A study o A comprehensive anal analys ysis is o debt debt secu securit ritie ies s mark market et in India” submitted by Mr Abhishek  Soni (nrol no A!"!"#$#!"%" In partial ulflment o &raduation re'uirements at Amity lobal )usiness School* under my &uidance+

,ro+ Tanushree Sodhani ,ro+ -a&mani A)S )an&alore .ean* A)S )an&alore

.ate/ 3

,lace/ )an&alore

!"#A$ATI%N

# herey de!$are that the Organiationa$ tdy entit$ed &A comprehensive analysis of debt securities market in India' mitted y me in artia$ f$fi$ment for the a4ard of +aster5s 6egree in Bsiness Administration of Amity University is genine and origina$ 4or 7 resear!h !arried ot y me8

Amity G$oa$ Bsiness !hoo$ Banga$ore8

6ate:

Name Ahishe oni A30301913020

4

A"(N%)#!G!*!NT

Behind every s!!ess' there is a driving for!e that motivates and insires8 # fee$ $essed 4hen # say that # had not one t many sor!es of insiration8 # 4ant to tae this oortnity to than ea!h one of them in this se!tion of the roe!t8 irst and foremost # 4o$d $ie to ay my hm$e gratitde to Prof. N. Na+amani' 4ho has  een a tea!her' mentor and gide to me throghot my se!ond year in !o$$ege8 # 4as fortnate to stdy nder her and got to $earn immense$y8 he e$ieved in me and e;e!ted nothing t the est from me8 he is resonsi$e for the $eve$ of <a$ity in my 4or that # have attained today8 e!ond$y' # 4ant to than Amity University and Amity G$oa$ Bsiness !hoo$ for having given me this oortnity to 4or and gain va$a$e e;erien!e throgh an Organiationa$ tdy in a rivate $imited !omany8 =ery fe4 ed!ationa$ instittions give s!h an oortnity to their stdents' # am g$ad my !o$$ege did8

+y sin!ere and heartfe$t thans go to my faculty +uide Prof. Tanushree Sodhani for her  !onstant gidan!e' sort and en!oragement throghot the roe!t eriod as 4e$$ as to a$$ the resondents 4ho sared their va$a$e time and shared their oinion8

# am a$4ays thanf$ to God for giving me arents 4ho have stood y my side throgh thi!  and thin8 >hey have a$4ays motivated' insired and gided me' sho4n me right from 4rong and insti$$ed in me the o4er of eing rationa$8 # 4o$d not e 4hat # am today if it 4o$dn5t have een for my arents8

At $ast t not $east gratitde goes to a$$ of my friends 4ho dire!t$y or indire!t$y he$ed me to !om$ete this roe!t reort8

5

Name: Abhishek Soni

 

A,-,-/,-0-

ABST$A"T

>he det maret is one of the most !riti!a$ !omonents of the finan!ia$ system of any e!onomy and a!ts as a $everage too$ in a finan!ia$ system8 >he det maret !omrises of  t4o segments: government se!rities maret and !ororate det maret8 #ndian det maret is dominated y government se!rities as !omared to !ororate det se!rities8 #ndian !ororate onds maret is very nderdeve$oed and i$$i<id in !omarison 4ith the Government se!rities maret and most$y deends on high$y safe AAA rated onds for   oth issan!e and trading8 >his aer resents an overvie4 of the !ororate det maret in #ndia8 #t is !on!$ded that #ndian !ororate det maret has sho4n gro4th trend in rimary maret and se!ondary maret as 4e$$8 >here are a $ot of !ha$$enges avai$a$e in the maret 4hi!h are maor osta!$es in the deve$oment of the maret $ie $a! of information among the investors' high stam dty !harges' $a! of innovative det instrments et!8

6

S.No 1 2 3 4 5 6 % 8 & 1 11 12

Table o Content Title Executive Summary Introduction "iterature #evie$ #e'earc( )et(odology and *+,ective o-  'tudy

i'tory Ty/e' o- +ond' in India Trading Procedure *+,ective' o- Inve'tor and i''uer Sen'itivity o- +ond' Pricing Strategy o- +ond' #i'0 Indian +ond mar0et 'tri0ing a c(ord $it( 'ian /eer'

Page No. 8 1!16 1%!1& 2!21 22!26 31!31 32!36 3%!38 3&!4 41!45 46!53 54!61

13

om/ari'on o- +ond o- India and re't o- t(e $orld

14

I''ue' and c(allenge' $it( t(e develo/ment o- +ond mar0et in India

6&!%

15

Im/act o- +ond mar0et in an economy

%1!%3

16 1%

ond mar0et v' Euity mar0et ond' v' lternative inve'tment' Selection o- 7xed income +earing 'ecuritie' mutual -und'

%4!%6 %%!8

18 1& 2 21

ene7t' and ri'0' a''ociated $it( +ond' //lication o- erivative in'trument' on +ond' )acro!economic varia+le' a9ecting in t(e value o- +ond in India

62!68

81!82 83!85 86!8%

88!&3 %

22 23

#ecommendation and onclu'ion i+liogra/(y

&4!&6 &%!&8

!1ecutive summary

8

A 4e$$?deve$oed !aita$ maret !onsists of e<ity and ond maret8 A dee and $i<id ond maret 4ith a signifi!ant ro$e of the !ororate ond maret segment is !onsidered to e imortant for an effi!ient !aita$ maret8 A virant !ororate ond maret ensres that fnds f$o4 to4ards rod!tive investments and maret for!es e;ert !ometitive ressres on $ending to the rivate se!tor8 @hi$e #ndia oasts of a 4or$d?!$ass e<ity maret' its ond maret is sti$$ re$ative$y nderdeve$oed and is dominated y the Government ond maret8 >he share of otstanding Government onds in #ndia 4as 398- er !ent of Gross 6omesti! "rod!t (G6") as of 2010 and !omares favora$y 4ith other Asian !ontries s!h as hina (2&8. er !ent) and oth orea (/&82 er !ent)8 >he share of !ororate ond otstanding in #ndia' ho4ever' 4as on$y 18. er !ent of G6" in 2010 !omared to +a$aysia (2& er !ent) and oth orea (3&8 er !ent) in the !omara$e eriod8 #n this tdy' 4e tra!e the reforms 4hi!h have een t in $a!e in the $ast de!ade and !onse<ent deve$oments of the !ororate ond maret in #ndia8 #t is oserved that thogh there is s!oe for frther imrovements in !ertain areas' s!h as reforming the stam dty' sstantia$ deve$oments have taen $a!e in the !ororate ond maret in #ndia o4ing to measres taen y e!rities C;!hange Board of #ndia (CB#)' Reserve Ban of #ndia (RB#) and the Government of #ndia (Go#) in order to im$ement the re!ommendations of varios !ommittees on !ororate ond maret8 A stdy of the ima!t of the reform ro!ess on the !ororate ond maret sho4s that resor!es moi$ised from the rimary and se!ondary !ororate ond marets have !ontined to in!rease over the years8

&

Introduction

1

Introduction:

6et maret refers to the finan!ia$ maret 4here investors y and se$$ det se!rities' most$y in the form of onds8 >hese marets are imortant sor!e of fnds' ese!ia$$y in a deve$oing deve$oing e!onomy $ie #ndia8 #ndia det maret is one of the $argest in Asia8 Asia8 Die a$$ other  !ontries' det maret in #ndia is a$so !onsidered a sef$ sstitte to aning !hanne$s for  finan!e8 A 4e$$?deve$oed !aita$ maret !onsists of oth the e<ity maret and the det maret8 >he det maret is m!h more o$ar than the e<ity marets in most arts of the 4or$d  t in #ndia' #n dia' e<ity marets are more o$ar o $ar and more deve$oed than the det marets' ese!ia$$y the !ororate det maret remains nderdeve$oed8 >his has een de to the dominan!e of the government se!rities in the det maret and !ororates5 deenden!y on  ans and finan!ia$ instittions5 $oan for their det fnding ne!essities8 >his has ha s not on$y !entra$ied the !redit riss 4ithin the aning system t has a$so do4n!ast the most !omanies from a!!essing det marets8 >he re!ent g$oa$ !redit !risis and the retrning investor interest in e<ity rimary isses have high$ighted the need to deve$o a virant domesti! det !aita$ maret as an a$ternative fnding sor!e8 or a deve$oing e!onomy $ie #ndia' det marets are a !riti!a$ sor!e of fnds8 >he det? maret in #ndia !omrises of t4o segments' name$y' government se!rities maret and !ororate det maret8 >he $ater is frther divided into t4o arts' vi8' "$i! e!tor  Undertaings ("Us) onds and "rivate e!tor Bonds8 >he sie of the !ororate det mare marett is !rren !rrent$y t$y very very sm sma$$ a$$ aot aot 189/ 189/ er!e er!ent nt of the the tota tota$$ det det mare maret8 t8 >h >hee government se!rities maret is the o$dest and has the most otstanding se!rities' trading vo$me and nmer of arti!iants8 >he government isses the fi;ed in!ome instrments' no4n as government se!rities (G?e!)' to finan!e its fis!a$ defi!it 4ith the he$ of the Reserve Ban of #ndia8 >he !ororate det maret (a$so no4n as non?G?se! maret) !onsi !onsists sts of finan finan!ia !ia$$ insti institt ttio ions ns (#s (#s)) on onds' ds'  $i $i!! se!tor se!tor nits nits ("U ("U)) on onds ds and !ororate onds7 deentres8 +aret for government onds has gro4n  over the years de to rising government orro4ings and !ontinos reg$atory reforms8 >he !ororate det maret has a$so e;anded in sie t its deve$oment has not een as remara$e as government onds8 >he most distingishing featre of the det instrments of #ndian det maret is that the retrn is fi;ed8 >his means' retrns are a$most ris?free8 >his fi;ed retrn on the ond is often 11

termed as the E!oon rateE or the Einterest rateE8 >herefore' the yer (of ond) is giving the se$$er a $oan at a fi;ed interest rate' 4hi!h e<a$s to the !oon rate8 >he on >he ond d is negoti negotia$ a$e' e' i8e8 i8e8 the the o4ner o4nershi shi  of the the instr instrm ment ent !an !an e transf transferr erred ed in the se!ondary maret8 >his means that on!e the transfer agents at the an meda$$ion stam the  ond' it is high$y $i<id $i< id on the se!ond maret8 >hs a ond is a form of $oan or #OU: the ho$der of the ond is the $ender (!reditor)' the isser of the ond is the orro4er (detor)' (detor)' and the !oon is the interest8 Bonds rovide rovide the  orro4er 4ith e;terna$ fnds fn ds to finan!e $ong?term $on g?term investments' inves tments' or' in the th e !ase of government govern ment  onds' to finan!e !rrent !rren t e;enditre8 e;enditre 8 ertifi!ates of deosit (6s) or short term !ommer!ia$  aer are !onsidered !onside red to e money maret mar et instrments and not no t onds: the main differen!e differen! e is in the $ength of the term of the instrment8

Indian

ebt

*arket

2

Pillars

of

the

Indian

!conomy

>he 6et +aret $ays a very !riti!a$ ro$e for any gro4ing e!onomy 4hi!h needs to em$oy a $arge amont of !aita$ and resor!es for a!hieving the desired indstria$ and finan!ia$ gro4th8 >he #ndian e!onomy 4hi!h has gro4n at more than &F 8a8 in the $ast de!ade and is on the tae off stage for  do$e digit gro4th 4o$d have to meet its resor!es re<irements from rost and a!tive det maret in #ndia8 >he #ndian det marets 4ith an otstanding isse sie of Government se!rities (entra$ and state) !$ose to Rs8 19'&/'/.& !rores (U6 /2183- i$$ion) and a se!ondary maret trnover of arond Rs8 30 $ah !rores (U6 ./0820 i$$ion) for the year 2009 is the $argest segment of the #ndian finan!ia$ marets8 marets8 or!e Reserve Ban of #ndia (RB#) (RB#) H $earing $earing ororation ororation of #ndia Dimited (#D)I8 (#D)I8 >he Government e!rities maret !a$$ed EG?e!E maret is the o$dest and the $argest !omonent of  the #ndian det maret in terms of maret !aita$iation' otstanding se!rities and trading vo$mes8 >he G?e!s maret $ays a vita$ ro$e in the #ndian e!onomy as it rovides the en!hmar for  determining the $eve$ of interest rates in the !ontry throgh the yie$ds on the government se!rities 4hi!h are referred to as the ris?free rate of retrn in any e!onomy8 Besides G?e! maret' there is an a!tive maret for !ororate det aers in #ndia 4hi!h trade in short term instrments s!h as !ommer!ia$ aers and !ertifi!ate of deosits issed y Bans and $ong term instrments s!h as deentres' onds' ero !oon onds' ste  onds et!8 >he otstanding isse sie of $isted !ororate det aer 4as Rs8 282 $ah !rores in 2009 (U6 /.89- i$$ion)8

*arket structure of Indian "orporate ebt *arket igre  gives a ird5s eye vie4 of the #ndian det maret str!tre8 >he !ororate det maret is divided into t4o arts: rimary !ororate det maret and se!ondary !ororate det maret8

3 Primary "orporate ebt *arket

>his maret refers to the $a!e 4here the fnds are raised throgh different se!rities for  the first time8 #n ta$e 1' it !an e seen the <antitative des!rition of the amont raised from the rimary maret8 >he ta$e sho4s that rimary det maret of #ndia is strong$y dominated y the government det se!rities8 Aro;imate$y &-F area of the maret is 12

!overed y this maret8 A$thogh the amont raised y the !ororates in!reased from Rs -'1.- !rores to Rs8 201'.&. !rores dring the mentioned eriod t its maret !overage remained aro;imate$y the same8 >he !onstitents of rimary maret are issers' instrments' ro!esses' investors' rating agen!ies and reg$ators8 6es!rition of ea!h of them is fo$$o4ing: i3 Issuers: There  are a variety of issers avai$a$e in the rimary maret8 igre 1 dei!ts the detai$ on varios !$asses of issers8 >he issers are road$y !$assified in t4o segments: the $i! se!tor issers and the rivate se!tor issers8 >hey in!$des government agen!ies and state odies' $i! se!tor  ndertaings 4hether they are nions or government  odies' rivate se!tor se!to r !ororates' finan!ia$ finan!ia $ instittions' ans et!8 e t!8

ii) #nstrments: igre 1 rovides names of some of the more o$ar instrments that have een issed8 >i$$ re!ent$y #ndian det maret 4as redominant$y dominated y governm government ent onds8 Over a eriod of time' time' many other instrme instrments nts have een issed8 issed8 >hey in!$de art$y !onverti$e deentres ("6s)' f$$y !onverti$e !onverti$e deentres deentres (6s)' dee dis!ont onds (66Bs)' ero !oon onds (JBs)' onds 4ith 4arrants' f$oating rate notes (RNs) (RNs) 7 onds and se!red remim remim notes ("Ns)8 ("Ns)8 >he !oon rates rates most$y deend on tenre tenre and !redit rating rating of se!rities8 se!rities8 *o4ever' *o4ever' these may not e rigoros$y interre$ated in a$$ !ases8 >he matrities of onds genera$$y vary from one year to ten years8 >he matrity matrity eriod of se!rities' se!rities' y and $arge' $arge' deends on ot$oo on interest interest rates8 #n e;e!tation of fa$$ing interest rates environment' it is oserved that !ororates most$y go to shorter term instrments 4hi$e the oosite is tre in !ase of ossi$e hie in interest rates of se!rities8 igre: 1

tr!tre of det maret in #ndia

13

iii0 ,rocess/ >he ne4 det se!rities are issed either throgh $i! rose!ts' right isses or rivate $a!ement8 #n #ndia' $i! isse and rivate $a!ement rotes are more o$ar8 "rivate $a!ement is the oosite of a $i! isse8 #t does not go for $i! offering for the se!rities t throgh a rivate offering8 #t does not re<ire to e registered 4ith the CB#8 Usa$$y the ans' mta$ fnds' insran!e !omanies and ension fnds se this rote for isse of det se!rities e!ase the !ost of raising fnds throgh this is very $o4 rather than $i! isse8 iv3 Intermediaries: A $arge variety and nmer of intermediaries rovide intermediation servi!es in the #ndian se!rities maret8 >hey invo$ve roers' s roers' !stodians' share transfer  agents' mer!hant aners et!8 Broers and mer!hant aners are t4o maor intermediaries 4ho are re<ired for a roer deve$oment of det maret8 +ost of the roers and mer!hant aners have $a! of ade<ate !aita$ and rofessiona$ no4$edge8 >hey sho$d e fa!i$itated and trained8 v3 Investors: or the deve$oment of ororate 6et +aret' it is ne!essary to have a $arge as 4e$$ as diverse nmer of investors8 >he figre 1 te$$s aot varios investors 4ho have een investing in !ororate det maret8 >hey are individa$s' !ororates' +ta$ fnds' inan!ia$ #nstittions' oreign #nstittiona$ #nvestors' ension fnds' insran!e !omanies' trsts et!8

vi0 1atin& a&encies A !redit rating agen!y is a !omany that assigns !redit rating of  !ertain det instrments issed y the !ororates8 >here are varios !redit rating agen!ies avai$a$e and registered 4ith CB# $ie R##D (19)' #RA (1991)' ARC (1993)' it!h #ndia (199.) and Bri!4ors (200)8 #t is mandatory for every $isted !omany to have its se!rity5s !redit rating from a re!ognied !redit rating agen!y registered 4ith CB# efore going for ne4 isse of the se!rity8 03 Secondary "orporate ebt *arket: e!ondary maret is the maret 4here the e;isting se!rities are reso$d or traded8 An a!tive se!ondary maret is vita$ for trading' !$earing and sett$ement of the se!rities8

:ra/( 1

*ut'tanding or/orate ond' a' /ercentage o- :P

A !omarative ana$ysis of a$$ emerging e!onomies (>a$e 1) !onfirms that most of the emerging e!onomies have a !ororate ond maret8 rther' aart from an $oans' the most o$ar ones in!$de art$y !onverti$e deentres ("6s)' f$$y !onverti$e 14

deentres (6s)' dee dis!ont onds (66Bs)' ero !oon onds (JBs)' onds 4ith 4arrants' f$oating rate notes (RNs) 7 onds and se!red remim notes ("Ns)8 Of these instrments' fi;ed rate onds emerge as the dominant otion 4ith ma;imm vo$me transa!ted8 *o4ever' other se!rities are a$so avai$a$e a$eit the vo$mes are m!h $o4er  (>a$e 3)8

Table : Government and "orporate Bonds as percenta+e of GP ebt as 4 of GP "eo$e5s Re$i! of hina

Government 3381

*arch 0-,

"orporate

Total

1380

*ong ong

3&8

318/

#ndonesia

118/

283

Re$i! of orea +a$aysia "hi$iines

/8& .28/ 3282

&&8/381 /89

ingaore

-381

3&80

>hai$and

-8.

1-89

=ietnam

198

08&

#ndia

/981

-8/

/.8 2 .98 2 138 & 12.82 10-83&8 1 908 1 &/8 / 208 -/8 -

Source: Asian 6eve$oment Ban (Asian Bonds On$ine) and RB#

@e no4 fo!s on ana$ying the investors and issers in the !ororate det maret8 >o  rovide a erse!tive to the ana$ysis that fo$$o4s 4e ta$ate moi$iation and trnover in the re!ent ast8 #n 2011?12' the !ororate se!tor raised Rs8 2'&1 i$$ion from the rimary maret' throgh issan!e of onds8 >he government raised Rs8 &'-91 i$$ion' or &28. er  !ent of tota$ det fnds raised from rimary marets8

Table 0: %vervie5 of primary and secondary bond market

15

Issuer

Amount raised rom ,rimary Market (in 1s+ bn0

Turnover in Secondary Market (in 1s+ bn0

%"##2#%

%"#%2#!

%"##2#%

%"#%2#!

or/orateNon!government

2;1%

2;8%1

1;5&2

1;%61

:overnment

5;834

%;5&1

%;683

%3;431

%;851

1;462

%2;2%4

%5;1&1

 Total

Source/ Indian Securitie' )ar0et #evie$ 211!12; NSE

.ebt instruments/ >here are varios tyes of det instrments avai$a$e that one !an find in #ndian det maret8 Government Securities

#t is the Reserve Ban of #ndia that isses Government e!rities or G?e!s on eha$f of the Government of #ndia8 >hese se!rities have a matrity eriod of 1 to 30 years8 G?e!s offer fi;ed interest rate' 4here interests are aya$e semi?anna$$y8 or shorter term' there are >reasry Bi$$s or >?Bi$$s' 4hi!h are issed y the RB# for 91 days' 12 days and 3./ days8 "orporate Bonds

>hese onds !ome from "Us and rivate !ororations and are offered for an e;tensive range of tenres  to 1- years8 >here are a$so some ereta$ onds8 omaring to G?e!s' !ororate onds !arry higher riss' 4hi!h deend on the !ororation' the indstry 4here the !ororation is !rrent$y oerating' the !rrent maret !onditions' and the rating of the !ororation8 *o4ever' these onds a$so give higher retrns than the G?e!s8 "ertificate of eposit

>hese are negotia$e money maret instrments8 ertifi!ate of 6eosits (6s)' 4hi!h sa$$y offer higher retrns than Ban term deosits' are issed in demat form and a$so as a Usan!e "romissory Notes8 >here are severa$ instittions that !an isse 6s8 Bans !an offer 6s 4hi!h have matrity et4een & days and 1 year8 6s from finan!ia$ instittions have matrity et4een 1 and 3 years8 >here are some agen!ies $ie #RA' #>*' ARC' R##D et!8 that offer ratings of 6s8 6s are avai$a$e in the denominations of K 1 Da! and in m$ti$e of that8 "ommercial Papers

>here are short term se!rities 4ith matrity of & to 3.- days8 "s are issed y !ororate entities at a dis!ont to fa!e va$e 16

 Diteratre Revie4

1%

#n any e!onomy' a smooth$y fn!tioning det maret is !onsidered !r!ia$ for deve$oment and stai$ity8 Armor and De$e (2009) ost$ate that e!onomi! str!tre is a determinant of  finan!ia$ str!tre8 in!e #ndia is a redominant$y servi!es ased e!onomy' the finan!ia$ str!tre atomati!a$$y refers e<ity maret $iera$iation over det maret $iera$iation8 #t is evident that there has een m!h de$ieration on the !ororate det s!enario in #ndia  t as the nder$ying theme for most of the ana$ysis has een !ross !ontry e;erien!es in the !ororate det domain' the a$i!ation of these $earnings to the #ndian !onte;t needs to  e !atios$y e;er!ised (@e$$s and !ho?Jie$$' 200)8 >he #nternationa$ aita$ +arets Asso!iation (2013) arges that virant !ororate det marets ring sstantia$ e!onomi! enefits and are imortant for a$$ staeho$ders !on!erned vi8 !omanies' investors' e!onomies and governments8 Good friend (200-) advo!ates the se of !ororate ond marets y more transarent firms' to $o4er their effe!tive interest !osts8 On the !ontrary' Dengnaremit!hai and Ong (200-) !on!ede that there is no !on!$sive eviden!e esta$ishing the seriority of either a  an dominated or a maret dominated finan!ia$ system t state that a 4e$$?diversified e!onomy 4ith a$an!ed distrition a!ross an $ending and !ororate onds is $ess v$nera$e to a finan!ia$ !risis8 rom the erse!tive of a deve$oing e!onomy' the @or$d Ban (2000) oserves that Lthe !ororate ond maret in a !ontry !an sstitte art of the an $oan maret' and is  otentia$$y a$e to re$ieve the stressed aning system in a deve$oing !ontry of  neara$e rden8M 6eve$oment of !ororate det marets needs strong instittiona$ and reg$atory sort8 >he @or$d Ban (2000) se!ifi!a$$y identifies seven ne!essary deve$omenta$ !omonents for the effe!tive fn!tioning of virant ond marets8 Any Lasen!e' defi!ien!y or ineffi!ien!yM of any of these !omonents !an otentia$$y sta$$ the deve$oment ro!ess8 >hese !omonents are (i) a dis!$osre and information system' (ii) a !redit rating system' (iii) effe!tive anrt!y $a4s' (iv) maret intermediaries' (v) instittiona$ investors' (vi) a trading system and !$earing $atform and (vii) a deository system8 engta (199) esta$ishes a dire!t !orre$ation et4een any firm5s dis!$osre ra!ti!es and its effe!tive interest !ost8 Cd4ards et a$ (200&)' 4hi$e a!no4$edging merit in oosing argments rovides ersasive eviden!e of red!ed transa!tion !osts on a$$o4ing 18

 ond ri!e transaren!y8 On the other hand' Besseminder and +a;4e$$ (200) are more seti!a$ and see to a!hieve some midd$e grond8 #t is tre that investors stand to enefit from in!reased transaren!y' de to red!tion in id as sreads58 *o4ever' ond dea$ers e;erien!e red!tions in !omensations therey shifting trading a!tivities to other  se!rities8 rther' dea$ers are averse to !arrying inventory and sharing resear!h 4ith investors8 Dengnaremit!hai and Ong (200-) oine that !ro4ding ot y government onds is one of the otentia$ osta!$es to hea$thy !ororate ond marets8 A high $eve$ of $i! det !ro4ds ot !ororate orro4ing y red!ing the aetite of finan!ia$ instittions8 >his in!reases the !ost of orro4ing for !ororates maing ond marets an nvia$e sor!e of  fnding (A!a and e$asn' 2009)8 On the !ontrary' Raghavan and ar4ano (2012) !on!$de that in !ase of #ndia' n$ie e!onomies $ie orea' the deve$oment of the government ond maret has in fa!t had a ositive effe!t on the !ororate ond maret8 *aansson (1999) !ontends that the asen!e of an ade<ate$y sied !ororate det maret $eads to an oversied aning system in any e!onomy8 #t a$so res$ts in a $arge ortion of  the $ending maret eing e;!essive$y reg$ated' 4ithot eing se!ted to free maret for!es8 !h an ima$an!e is not desira$e' e!ase this e!omes the erfe!t reeding grond for !rony !aita$ism' s$oy $ending y ans and !are$ess investments y !ororates8 Another imortant !hara!teristi! of virant ond marets is the avai$ai$ity of varios instrments to !hoose from8 >he @or$d Ban (2000) !ontends that thogh sma$$ isse sies are most$y resonsi$e for i$$i<idity in !ororate det marets' they !an he$ !ater to the se!ifi! investment needs of investors if they are diverse8 >hs' investment ans sho$d !ontine engineering a 4ide ortfo$io of det instrments' in addition to Lfine?tning the  arameters of individa$ instrments for se!ifi! !$ientsM8 #n the #ndian !onte;t' +itra (2009) fo!ses on the s$y side isses hamering the deve$oment of !ororate det marets in #ndia and $ists the $a! of diversity in instrments as a maor fa!tor8 #nternationa$$y' there are varios tyes of instrments  reva$ent' s!h as ste  onds' ste do4n onds' dee dis!ont onds' reverse f$oater   onds' inde;ed onds' !rren!y onds' et!8 *o4ever' the #ndian ond maret is rimari$y dominated y fi;ed rate !oon onds8 e!ond$y' the average age of the onds issed y #ndian !ororations is on$y - to & years8 hanna and =arotti$ (2012) e$!idate the L"o$iti!a$ e!onomy of BondsM8 A!!ording to them another !riti!a$ isse a!!onting for the differen!es in e<ity maret and det maret $iera$iation 4as the $a4s that needed reforms8 On the e<ity side' management and !ontro$$ing shareho$ders 4ere $arge$y in favor of e<ity reforms and !onse<ent$y a$$o4ed for more room for negotiation and agreement8 On the det side' !hanges 4ere ne!essary to anrt!y $a4s' $aor $a4s and di!ia$ enfor!ement8 At the time of  $iera$iation the ase of o$iti!a$ o4er in #ndia 4as sort of $aor nions and therefore any !hanges to $aor or anrt!y $a4s (a$$o4ing <i! dismissa$ of $aor) 4as not feasi$e8 >his hamered the gro4th of the manfa!tring se!tor' frther ndermining the gro4th of the !ororate ond maret8

1&

#t !an e arged that det marets tyi!a$$y are 4e$$ deve$oed in matre e!onomies $ie the UA' Paan or Germany and the deve$oment of !ororate ond marets 4as re!eded  y that of sto! and government ond marets' 4hi!h in trn 4as re!eded y years of  !aita$ a!!m$ation throgh indstria$ deve$oment (@or$d Ban' 2000)8 Natra$$y' emerging e!onomies $ag ehind in !ororate ond maret deve$oment de to their nas!ent stages of !aita$ a!!m$ation8

Resear!h methodo$ogy 2

>his !hater aims at nderstanding the resear!h methodo$ogy 4hi!h 4i$$ e sed in this resear!h roe!t' esta$ishing a frame4or for !o$$e!tion' ana$ysis and interretation of  rimary and se!ondary data8 tdy on . months maret trends on det se!rities to im$ement te!hni!a$ ana$ysis8 ndamenta$ ana$ysis of the ond maret 4as !ond!ted eeing e!onomy as a  ase8 e!ondary data stdy of the ond marets8 omarative stdy 4as !ond!ted et4een #ndian and g$oa$ maret8 inan!ia$ too$s are sed to assess the va$ation of the onds8

%b6ectives of the study:

18 28 38 /8

>o stdy aot det se!rities in #ndia as 4e$$ as g$oa$ maret8 >o redi!t the n!ertain movement in ri!e in det se!rities8 >o identify' <antify and de!omose off ris asso!iated 4ith the rese!tive onds8 >o stdy ho4 ond maret may affe!t the e!onomi! erforman!e8

21

*istory 22

>o4ards the eighteenth !entry' the orro4ing needs of #ndian "rin!e$y tates 4ere $arge$y met y #ndigenos aners and finan!iers8 >he !on!et of orro4ing from the $i! in #ndia 4as ioneered y the Cast #ndia omany to finan!e its !amaigns in oth #ndia (the Ang$o ren!h 4ars) in the eighteenth !entry8 >he det o4ed y the Government to the $i!' over  time' !ame to e no4n as $i! det8 >he endeavors of the omany to esta$ish government ans to4ards the end of the 1th entry o4ed in no sma$$ measre to the need to raise term and short term finan!ia$ a!!ommodation from ans on more satisfa!tory terms than they 4ere a$e to garner on their o4n8 >he in!entive to set  Government ans (read !entra$ ans)' had a $ot to do 4ith det management8 "$i! 6et' today' is raised to meet the Governments revene defi!its (the differen!e  et4een the in!ome of the government and money sent to rn the government) or to finan!e  $i! 4ors (!aita$ formation)8 Borro4ing for finan!ing rai$4ay !onstr!tion and $i! 4ors s!h irrigation !ana$s 4as first ndertaen in 1.&8 >he irst @or$d @ar sa4 a rise in #ndiaEs "$i! 6et as a res$t of #ndiaEs !ontrition to the British e;!he<er to4ards the !ost of the 4ar8 >he rovin!es of British #ndia 4ere a$$o4ed to f$oat $oans for the first time in 6e!emer' 1920 4hen $o!a$ government orro4ing r$es 4ere issed nder se!tion 30(a) of  the Government of #ndia A!t' 19198 On$y three rovin!es vi8' Bomay' United "rovin!es and "na ti$ised this san!tion efore the introd!tion of rovin!ia$ atonomy8 "$i! 6et 4as managed y the "residen!y Bans' the omtro$$er and Aditor?Genera$ of #ndia ti$$ 1913 and thereafter y the ontro$$er of the rren!y ti$$ 193- 4hen the Reserve Ban !ommen!ed oerations8 #nterest rates varied over time and after the rising of 1-& grada$$y !ame do4n to aot -F and $ater to /F in 1&18 #n 19/' the famos 3 172 F aer 4as !reated 4hi!h !ontined to e in e;isten!e for a$most -0 years8 @hen the Reserve Ban of #ndia too over the management of $i! det from the ontro$$er of the rren!y in 193-' the tota$ fnded det 23

of the entra$ Government amonted to Rs 9-0 !rores of 4hi!h -/F amonted to ster$ing det and /.F ree det and the det of the "rovin!es amonted to Rs 1 !rores8 Broad$y' the hases of $i! det in #ndia !o$d e divided into the fo$$o4ing hases8 7p to 89: 4hen $i! det 4as driven $arge$y y needs of finan!ing !amaigns8 892 /9: 4hen $i! det 4as raised for finan!ing rai$4ays and !ana$s and other s!h  roses8 /2/;-: 4hen $i! det in!reased sstantia$$y essentia$$y ot of the !onsiderations of  /;-2/;9: 4hen e!ase of 4ar time inf$ation' the effort 4as to mo  as m!h as ossi$e of the !rrent 4ar time in!omes /;2/<: reresented the interregnm fo$$o4ing 4ar and artition and the e!onomy 4as nsett$ed8 Government of #ndia fai$ed to a!hieve the estimates for orro4ings for 4hi!h !redit had een taen in the anna$ dgets8 /<2/8<: 4hen orro4ing 4as inf$en!ed y the five year $ans8 /8<2//: 4hen an attemt 4as made to a$ign the interest rates on government se!rities 4ith maret interest rates in the 4ae of the re!ommendations of the haraorti ommittee Reort8 // to date : @hen !omrehensive reforms of the Government e!rities maret 4ere ndertaen and an a!tive det management o$i!y t in $a!e8 Ad *o! >reasry i$$s 4ere ao$ishedQ !ommen!ed the se$$ing of se!rities throgh the a!tion ro!essQ ne4 instrments 4ere introd!ed s!h as ero !oon onds' f$oating rate onds and !aita$ inde;ed ondsQ the e!rities >rading ororation of #ndia 4as esta$ishedQ a system of "rimary 6ea$ers in government se!rities 4as t in $a!eQ the se!trm of matrities 4as roadenedQ the system of 6e$ivery verss ayment 4as instittedQ standard va$ation norms 4ere res!riedQ and endeavors made to ensre transaren!y in oerations throgh maret ro!ess' the dissemination of information and efforts 4ere made to give an imets to the se!ondary maret so as to roaden and deeen the maret to mae it more effi!ient8

As at the end of +ar!h' 2003' it is estimated that the !omined otstanding $iai$ities of the !entre and state governments amonted to Rs 1 tri$$ion 4hi!h 4ored ot to over &- er!ent of the !ontryEs gross domesti! rod!t (G6")8 #n #ndia and the 4or$d over' Government Bonds have' from time to time' have not on$y adoted innovative methods for rasing resor!es ($ega$ised 4agering !ontra!ts $ie the "rie Bonds issed in the 19/0s and $ater  19-0s in #ndia) t have a$so een sed for varios innovative s!hemes s!h as finan!e for  deve$omentQ so!ia$ engineering $ie the ao$ition of the Jamindari systemQ saving the environmentQ or even 4eaning eo$e a4ay from go$d (the go$d onds issed in 1993)8  Norma$$y the sovereign is !onsidered the est ris in the !ontry and sovereign aer sets the  en!hmar for interest rates for the !orresonding matrity of other issing entities8 24

>heoreti!a$$y' others !an orro4 at a rate aove 4hat the Government ays deending on ho4 their ris is er!eived y the marets8 *en!e' a 4e$$ deve$oed Government e!rities maret he$s in the effi!ient a$$o!ation of resor!es8 A !ontry5s det maret to a $arge e;tent deends on the deth of the Government5s Bond +aret8 #t in in this !onte;t that the re!ent initiatives to 4iden and deeen the Government e!rities +aret and to mae it more effi!ient have een taen8

>he det is one of the most !riti!a$ !omonents in the finan!ia$ system of any e!onomy and a!ts as the f$!rm of a modern finan!ia$ system8 >he det maret in most deve$oed !ontries is many times igger than the other finan!ia$ marets in!$ding the e<ity maret8 >he U ond maret is more than 138- tri$$ion in sie 4ith a trnover e;!eeding -00 i$$ion dai$y reresenting the $argest se!rities maret in the 4or$d8 >he sie of the 4or$d ond marets is !$ose to U 318/ tri$$ion 4hi!h is near$y e<iva$ent to the tota$ G6" of a$$ !ontries in the 4or$d8 >he tota$ sie of the #ndian det maret is !rrent$y estimated to e in the range of U 92  i$$ion to U 100 i$$ion8 #ndia5s det maret a!!onts for aro;imate$y 30 er!ent of its G6"8 >he #ndian ond maret measred y the estimated va$e of onds otstanding is ne;t on$y to the Paanese and orean ond marets in Asia8 >he #ndian det maret' in terms of  vo$me' is $arger than the e<ity maret8 #n terms of dai$y sett$ed dea$' the det and the fore; marets maret !rrent$y (2001?02) !ommand a vo$me of Rs 2-'000 !rore against a meager  Rs 1'200 !rore in the e<ity marets (in!$ding e<ity derivatives)8 #n the ost reforms era' a fair$y 4e$$ segmented det maret has emerged !omrising: 18 "rivate !ororate det maret 28 "$i! se!tor ndertaing ond maret and 38 Government se!rities maret 25

>he government se!rities maret a!!onts for more than 90 er!ent of the trnover in the det maret8 #t !onstittes the rin!ia$ segment of the det maret8 >he #ndian det maret has traditiona$$y een a 4ho$esa$e maret 4ith arti!iation restri!ted to fe4 instittiona$ $ayers , main$y ans8 >he ans 4ere the maor arti!iants in the government se!rities maret de to stattory re<irements8 >he trnover in the det maret too 4as <ite $o4 a fe4 hndred !rores ti$$ the ear$y 1990s8 >he det maret 4as fair$y nderdeve$oed de to the administrated interest rate regime and the avai$ai$ity of  investment avenes 4hi!h gave a higher rate of retrn to investors8 #n the ear$y 1990s' the government needed a $arge amont of money for investment in deve$oment and infrastr!tre roe!ts8 >he government rea$ied the need of a virant' effi!ient and hea$thy det maret and ndertoo reform measres8 >he Reserve Ban t in sstantia$ efforts to deve$o the government se!rities maret t its t4o segments' the  rivate !ororate det maret and $i! se!tor ndertaing ond maret' have not yet f$$y deve$oed in terms of vo$me and $i<idity8 #t is det maret 4hi!h !an rovide retrns !ommensrate to the ris' a variety of instrments to mat!h the ris and $i<idity referen!es of investors' greater safety and $o4er vo$ati$ity8 *en!e the det maret has a $ot of otentia$ for gro4th in the ftre8 >he det maret is !riti!a$ to the deve$oment of a deve$oing !ontry $ie #ndia 4hi!h re<ires a $arge amont of !aita$ for a!hieving indstria$ and infrastr!tre gro4th8 Reg$ation of 6et +aret: >he Reserve Ban of #ndia reg$ates the government se!rities maret and money maret 4hi$e the !ororate det maret !omes nder the rvie4 of the e!rities C;!hange and Board of #ndia (CB#)8 #n order to romote an order$y deve$oment of the maret' the government issed a notifi!ation on +ar!h 2' 2000 de$ineating the areas of resonsii$ity et4een the Reserve Ban and CB#8 >he !ontra!ts for sa$e and r!hase of government se!rities' go$d re$ated se!rities' +oney maret se!rities and se!rities derived from these se!rities and ready for4ard !ontra!ts in det se!rities sha$$ e reg$ated y the Reserve Ban8 !h !ontra!ts' if  e;e!ted on the sto! e;!hanges sha$$' ho4ever' e reg$ated y CB# in manner that is !onsistent 4ith the gide$ines issed y the Reserve Ban8

26

2%

A Brief *istory of Bond +aret 6isasters

The 3istory o )onds Bond?$ie finan!ia$ instrments have a $ong history8 6eniens of =eni!e in the 1/th !entry !o$d  r!hase and trade government se!rities 4hi!h aid the o4ner an end$ess annity at a set rate8 #n 1&9/ Britain !onso$idated a$$ of its $ong?term o$igations into a se!rity no4n as L!onso$sM 4hi!h  ay a dividend to the o4ner' a$so 4ithot any e;iration date8 >hese !onso$s are sti$$ traded8 Une;e!ted $osses in these se!rities a$so have a $ong history8 or instan!e' the !onso$s 4ere issed at a time 4hen !rren!y 4as a!ed y go$d' and inf$ation 4as not a !onsideration8 @hen !rren!ies 4ere nsha!$ed from go$d' interest rates egan to rise8 >he ho$ders of these o$d !onso$s' $o!ed into a $o4 rate of retrn' sa4 dramati! erosion in the va$e of their se!rities8 6ring a eriod in the 1920s 4hen Germany sffered hyerinf$ation' the va$e of German?ased onds $ost virta$$y 100F of their  va$e 4ithin a eriod of months8

 T(e )oral e a$are t(at inve'tment climate' c(ange and $(at $ere once great inve'tment' can turn into lia+ilitie'.

,eriods o 1isin& 1ates Can be Multi24ear A5airs* ,roducin& Challen&in& ,eriods or 3olders o 6on& )onds

28

#"2

<

4ear Treasury Constant Maturity 1ate #"0 (.S

1%.5

15.

12.5

1.

%.5

5.

2.5

. 1&6

1&%

1&8

1&&

2

21

22

S(adedarea'indicate=Srece''ion'.>212re'earc(.'tloui'-ed.org?

The Great epression = Bond >olders Triumph >he first U88 >reasry onds' no4n then as LDierty Bonds'M 4ere issed to he$ fnd @or$d @ar #8 Dong?term government onds roved to e a safe haven from the sto! maret !o$$ase in 1929' a year in 4hi!h they retrned 38/F8 1 >his 4as a$so tre for the sse<ent 6eression' 4ith anna$ retrns of 1.8F' ?081F' and 1080F for the years 1932' 1933 and 193/' in the heart of the 6eression8 6esite e!onomi! stress' $ong?term !ororate  onds a$so 4ere so$id investments' 4ith anna$ retrns of 108F' 108/F and 138F for the years 1932?3/8 2 The !isenho5er $ecession = *ultiple2?ear Bond #osses >he years 19--?19-9 4ere not ind to  ond ho$ders8 *o$ders of $ong?term government onds $ost money in for of the five years' 4ith anna$ retrns of ?183F' ?-8.F' &8-F' ?.81F and ?283F8 1 #ntermediate >reasries fared etter' t a$so had $osses for for of the five years8 Over the same eriod' ho$ders of $ong term !ororate onds e;erien!ed $osses of ?.8F in 19-.' ?282F in 19- and ?180F in 19-98 2 Startin& rom #"24ear Treasury rates belo7 !8* a steady rise in interest rates tried the patience o bond holders rom #$992#$9$ Total 1eturns

1&55 1&56 1&5% 1&58 1&5& 1&55!5&

6on&2Term ovt )onds

!1.3< !5.6< %.5< !6.1< !2.3< !8.11<

6on&2Term Corporate )onds

.5< !6.8< 8.%< !2.2< !1.< !1.42<

Intermed iate Treasuri es !.%<

!.4< %.8< !1.3< !.4< 4.81<

>he ro$em for ond investors 4as steadi$y rising rates8 >he yie$d on the 10?Sear >reasry started this eriod e$o4 3F' and died e$o4 3F again in 19-8 On Panary 1' 19-- the yie$d on the 10? Sear 4as 28.1F8 By Panary 1' 19.0 the yie$d had risen to /8&2F' an in!rease of 2811F8 Of !orse this 4as efore the invention of derivatives and the deve$oment of a g$oa$ maret' 4hi!h give modern marets higher otentia$ vo$ati$ity8

2&

3

Types of Bonds in India

Types of bonds in India

18 @i1ed rate bonds: (ave a cou/on t(at remain' con'tant t(roug(out t(e li-e o- 

t(e +ond. 28 @loatin+ rate notes: have a varia$e !oon that is $ined to a referen!e rate of interest8 38 ero coupon bonds:  ay no reg$ar interest8 >hey are issed at a sstantia$ dis!ont to ar  va$e' so that the interest is effe!tive$y ro$$ed  to matrity8 /8 >i+h yield bonds: are onds that are rated e$o4 investment grade y the !redit rating agen!ies8 As these onds are more risy than investment grade onds' investors e;e!t to earn sa higher yie$d8 -8 "onvertible bonds: $et a ondho$der e;!hange a ond to a nmer of shares of the isserEs !ommon sto!8 >hese are no4n as hyrid se!rities' e!ase they !omine e<ity and det featres8 .8 !1chan+eable bonds: a$$o4s for e;!hange to shares of a !ororation other than the isser8 &8 Inflation inde1 bonds: In $(ic( t(e /rinci/al amount and t(e intere't

/ayment' are indexed to in@ation. T(e intere't rate i' normally lo$er t(an -or 7xed rate +ond' $it( a com/ara+le maturity. 8 "overed bonds: are a!ed y !ash f$o4s from mortgages or $i! se!tor assets8 ontrary to asset?a!ed se!rities the assets for s!h onds remain on the issers a$an!e sheet8 98 Perpetual bonds: are a$so often !a$$ed eretities or E"ersE8 >hey have no matrity date8

31

108 Bearer bonds: i' an oAcial certi7cate i''ued $it(out a named (older. In

ot(er $ord'; t(e /er'on $(o (a' t(e /a/er certi7cate can claim t(e value o- t(e +ond. 118 $e+istered bonds: is a ond 4hose o4nershi (and any sse<ent r!haser) is re!orded y the isser' or y a transfer agent8 #t is the a$ternative to a Bearer ond8 #nterest ayments' and the rin!ia$ on matrity' are sent to the registered o4ner8 128 Government bond: al'o called Trea'ury +ond; i' i''ued +y a national

government and i' not ex/o'ed to de-ault ri'0. It i' c(aracteriBed a' t(e 'a-e't +ond; $it( t(e lo$e't intere't rate.

32

Tradin+ Procedure

>o5 are bonds different from stocks Bonds are !onsidered det investments8 On the other hand' a sto! r!hase is !onsidered an e<ity investment e!ase the investor (a$so no4n as the stockholder)  e!omes a art o4ner of the !ororation8

>he issers of sto! or e<ity are tyi!a$$y !omaniesQ issers of det !an e either  !omanies or governments8 @hi$e onds genera$$y don5t rovide an oortnity to share in the rofits of the !ororation' the sto!ho$der is entit$ed to re!eive a ortion of the rofits and may a$so e given voting rights8 Bondho$ders earn interest 4hi$e sto!ho$ders tyi!a$$y re!eive dividends8 Both may e;erien!e !aita$ gains or !aita$ $osses if the ri!e at 4hi!h they se$$ their ho$dings is' rese!tive$y' higher or $o4er than the ri!e at 4hi!h they oght them8

33

oon rates are most often fi1ed  , the rate of interest stays !onstant throghot the $ife of  the ond8 *o4ever' some onds have variable or  floating   !oon rates (interest ayments !hange from eriod to eriod ased on a redetermined s!hed$e or form$a)8 ome onds  ay no interest at a$$ nti$ matrity8 Be!ase ondho$ders are !reditors rather than art o4ners' if a !ororation goes anrt'  ondho$ders have a higher !$aim on assets than sto!ho$ders8 >his rovides added se!rity to the ond investor , t does not !om$ete$y e$iminate ris8 ina$$y' onds a$so trade different$y from sto!s8 Bonds tyi!a$$y trade in the over the?!onter  (O>) maret , for e;am$e' from a roer to a roer at another firm dire!t$y , instead of  on a sto! e;!hange8

>%) % I INC!ST IN B%NS >here are three !ommon 4ays to invest in onds:  %ver2the2counter D%T"3 market: #ndivida$ onds are not oght on a !entra$ e;!hange s!h as the >oronto to! C;!hange (>T) (e;!et in the !ase of !onverti$e deentres)8 #nstead' they are oght or so$d throgh an investment advisor from inventory in the advisor5s roerage firm or in the O> maret8 >he ri!e in!$des any fees for the advisor5s servi!es8 @hen r!hasing a ne4$y issed ond (a ond not revios$y he$d y another investor)' the investment advisor rovides yo 4ith a rose!ts or other dis!$osre do!ments that e;$ain the ond5s terms' featres and asso!iated riss and then ys the ond on yor eha$f in the primary market 8 "revios$y issed onds are traded in the secondary market .

Die sto!s' there are t4o main avenes throgh 4hi!h onds are so$d: the rimary and se!ondary marets8 >he rimary maret is 4here the isser se$$s ne4 onds to the $i! for  the first time8 #n the se!ondary maret' investors y or se$$ onds from other investors 4ith no invo$vement from the issing firm8

Primary mar0et >he rimary maret for onds is simi$ar to the rimary maret for sto!s 4here initia$ $i! offerings (#"Os) o!!r8 #nvestors y onds from an nder4riter' 4ith the nder4riter a!ting as the midd$eman et4een the isser and the $i!8 >he nder4riter then !o$$e!ts the money from ond sa$es and gives it to the isser' after taing a !ommission' or Lnder4riting feeM8 >he investor5s ri!e er ond is sa$$y e<a$ to the fa!e va$e' $s any transa!tion !osts  e8g8 !ommissions from yor roer8 (C;!etions to this r$e in!$de Lero?!oonM onds' 4hi!h are so$d at a dee dis!ont to fa!e va$e8) #t5s imortant to note that 4hen yo y a  ond yo don5t have to 4ait nti$ it rea!hes its matrity date8 As 4ith other forms of  se!rities' yo !an tyi!a$$y y and se$$ them8 *o4ever' the me!hanism for onds is <ite different8 >hat5s 4here the se!ondary ond maret !omes into $ay8

Secondary mar0et

34

#n the se!ondary ond maret' onds are oght and so$d day in and day ot y individa$ investors and instittions8 @hen yo y a ond in the se!ondary maret' yo5re ying it from another investor ($ie$y a $arge instittion) instead of the origina$ isser8 Bying or se$$ing onds in the se!ondary maret in some 4ays is simi$ar to the trading of  e<ities after the #"O8 in!e maret !onditions f$!tate' so do the ri!es of onds8 >he  ond5s !oon (interest aid) !omared to !rrent and e;e!ted ftre interest rates' the !redit rating of the isser' e!onomi! !onditions' the $i<idity of a arti!$ar ond' and other  fa!tors a$$ ima!t the ri!e of a ond in the se!ondary maret8 *o4ever' in the !ase of e<ities' near$y a$$ of the transa!tions in a arti!$ar sto! are !entra$ied8 +eaning' yers and se$$ers !ome together to do siness in one $a!e' either in  erson or throgh agents as 4ith the NSC' or throgh virta$$y !entra$ied e$e!troni! maret$a!es' $ie the NA6AV8 A$thogh some onds are $isted on the NSC and trade in the fashion st des!ried' this is on$y tre for a sma$$ nmer of ond isses8 >he se!ondary maret for near$y a$$ ond isses is hand$ed throgh a hge de!entra$ied net4or of indeendent dea$ers' genera$$y organied y tye of se!rity8 >he ond maret is an over?the?!onter maret (O>)' as oosed to an e;!hange' or even a gro of e;!hanges8 A$thogh yo may se$$ yor ond investments rior to matrity' this is not as easy as it is 4hen se$$ing sto! ho$dings8 @hat5s more' it5s ossi$e to in!r a !aita$ $oss if se$$ing a ond  rior to matrity8 >o give yo some erse!tive' there are thosands of sto! isses that trade near$y !ontinos$y dring reg$ar maret hors8 >he ond maret has mi$$ions of ond isses' 4ith many trading very infre<ent$y' 4hi!h e;$ains 4hy many ond isses are i$$i<id8 0 *utualEinvestment funds: Bond or a$an!ed mta$ fnds are an indire!t method of  investing in onds8 >hese rod!ts !omine rofessiona$ management 4ith e;osre to a  aset of onds that have varying matrity dates and $eve$s of <a$ity8

Die any mta$ fnd' a ond or a$an!ed fnd may a!!ommodate systemati!  r!hase74ithdra4a$ $ans' reinvestment of distritions and $o4 initia$ investment re<irements8 *o4ever' n$ie dire!t ond investments' mta$ fnds do not have a stated matrity date or !oon rate' maing the sie and timing of yor !ash f$o4s n!ertain8 #t may a$so e diffi!$t to determine the <a$ity of the onds he$d in the fnd or the genera$ $eve$ of ris8 +ta$ fnds !harge investors a management fee that in!ororates fees aid ot to advisors8 , !1chan+e2traded funds D!T@s3: C>s are mta$ fnd trsts 4hose nits trade on a sto! e;!hange' s!h as the >T8 ome C>s e;ose yo to an entire ond maret inde;' 4hi$e others try to tra! the erforman!e of a government en!hmar ond8 Ris $eve$s vary deending on the C> se$e!ted8 Be!ase C>s are not a!tive$y managed' they tend to  e !hara!teried y $o4er management fees8

35

Payin+ for your bonds >here are three things to rememer 4hen yo de!ide to y and !ome to ay for yor ond8  @ees: As ho4 fees are !harged on these rod!ts as fees and !ommissions 4i$$ have an

ima!t on yor overa$$ retrn8 0 Accrued interest: >he amont of interest that has a!!m$ated on a ond sin!e the $ast !oon

 ayment is added to the tota$ !ost of a ond transa!tion' t 4i$$ e reaid to yo8 3. C(en you (ave to /ay  T(e 'ettlement date; or t(e date $(en t(e 'eller

mu't deliver t(e +ond and t(e /urc(a'er mu't /ay -or it; can range -rom t(e 'ame day t(e trade i' executed >or trade date? to 'tandard 'ettlement time'; to; in certain ca'e'; ot(er date'. )oney mar0et in'trument' 'uc( a'  T!+ill' 'ettle on t(e 'ame day a' t(e tran'action. )o't ot(er government and cor/orate +ond' 'ettle t(ree +u'ine'' day' a-ter t(e tran'action date.

@actors that affect bond pricin+ over time #n the se!ondary maret ond ri!es are not set in stone8 >hey !an f$!tate over time for a nmer of reasons8 ome fa!tors affe!ting ri!e in!$de' t aren5t $imited to: •

rrent and estimated ftre interest rates !omared to the !oon

•

redit rating of the isser 

•

C!onomi! !onditions , inf$ation and sto! maret erforman!e

The interest rate environment and the coupon are key >he most imortant fa!tor that inf$en!es a ond5s ri!e is its !oon rate !omared to !rrent or e;e!ted ftre interest rates8 A ond5s !oon may e favora$e or nfavora$e !omared to the interest yo !o$d re!eive on other investments8 Bond ri!es have an inverse re$ationshi to revai$ing interest rates in the e!onomy8 #n other 4ords' as revai$ing interest rates go do4n' a ond5s ri!e in the se!ondary maret 4i$$ sa$$y go 8 As revai$ing interest rates go ' tyi!a$$y a ond5s ri!e 4i$$ go do4n8 a$$ this the see?sa4' or inverse' re$ationshi et4een ond ri!es and interest rates8 *ere5s an e;am$e: if a ond ays a .F !oon and the revai$ing interest rate dros e$o4 .F' that ond ays !omarative$y etter than the a$ternatives8 >herefore it 4i$$ in!rease in va$e' and 4i$$ sa$$y trade higher than its fa!e va$e' or Lat a remimM8 #f the revai$ing interest rate rises aove .F' the ond 4i$$ ay !omarative$y 4orse than the a$ternatives' so its va$e 4i$$ de!rease and it 4i$$ sa$$y trade $o4er than its fa!e va$e' or Lat a dis!ontM8

"redit 5here credit is due: checkin+ a bondFs credit ratin+ Pst as individa$s re!eive !redit ratings ased on their ast orro4ing haits and ai$ity to  ay off dets' onds and their issers are rated y indeendent !omanies ased on the

36

$ie$ihood that issers 4i$$ e a$e to meet their o$igationsthat is' to ay the !oon over  time and retrn the rin!ia$ at matrity8 Of the main ond tyes' !ororate onds invo$ve the most ris' fo$$o4ed y mni!ia$ onds8 >reasry onds' y !ontrast' are !onsidered a virta$$y ris?free investment8 #n fa!t' investors !onsider them so $$et?roof that a$$ other onds are rated 4ith >reasries as a en!hmar8 Bond ratings are ased on the isser5s finan!ia$ stai$ity' and they5re the ey indi!ator of ho4 m!h ris is assmed 4hen ying a arti!$ar ond8 Bonds issed y entities 4ith a high  roai$ity of meeting o$igations are no4n as Linvestment gradeM8 in!e they entai$ re$ative$y $o4 ris' they genera$$y ay a $o4er !oon8 Risier onds are referred to as Lhigh? yie$dM or LnM onds' and sa$$y ay a higher !oon8 >here are three main !omanies that isse ond ratings: +oody5s' tandard H "oor5s' and it!h8 Economic condition'

#nf$ation $ays an imortant ro$e in ond va$es8 Die interest rates' inf$ation is inverse$y  roortiona$ to ond ri!es8 Be!ase higher inf$ation deteriorates the rea$ do$$ars a ond5s !oon rovides' the ond5s !oon e!omes !omarative$y 4orth $ess8 o the higher  inf$ation goes' the ri!e of a ond de!reases8 #f inf$ation gets too high' the !on!ern is it 4i$$ ota!e the rate of interest re!eived from the ond investment8 >o !omat high inf$ation'  ond investors may e for!ed to trn to other investments 4ith more ris s!h as sto!s' sin!e e<ities may rovide the oortnity for higher retrns8 >he ri!e of onds may a$so e affe!ted y other !onditions in the overa$$ maret$a!e8 or  e;am$e' if the sto! maret is erforming oor$y' more eo$e may 4ant to invest in onds' and ri!es in the ond maret 4i$$ tend to rise8 #f the sto! maret is erforming very 4e$$'  eo$e may e $ess in!$ined to invest in a re$ative$y $o4?yie$d investment vehi!$e $ie onds' so ri!es 4i$$ tend to fa$$8

3%

%b6ectives

%b6ectives of investors:

38

>yi!a$$y' onds ay interest semi?anna$$y' 4hi!h means they !an rovide a redi!ta$e in!ome stream8 +any eo$e invest in onds for that e;e!ted interest in!ome and a$so to  reserve their !aita$ investment8 Understanding the ro$e onds $ay in a diversified investment ortfo$io is ese!ia$$y imortant for retirement $anning8 6ring the ast de!ade' the traditiona$ defined?enefit retirement $ans (ensions) have in!reasing$y een re$a!ed y defined !ontrition rograms s!h as /01() $ans or #RAs8 Be!ase these $ans offer  greater individa$ freedom in se$e!ting from a range of investment otions' investors mst e in!reasing$y se$f?re$iant in se!ring their retirement8 @hatever the rosesaving for yor !hi$dren5s !o$$ege ed!ation or a ne4 home' in!reasing retirement in!ome or any of a nmer of other finan!ia$ goa$sinvesting in  onds may he$ yo a!hieve yor oe!tives8 %b6ectives of issuer:

omanies isse onds to finan!e oerations8 +ost !omanies !an orro4 from ans' t vie4 dire!t orro4ing from a an as more restri!tive and e;ensive than se$$ing det on the oen maret throgh a ond isse8 >o raise money' isse onds is one 4ay to do it8 A ond fn!tions $ie a $oan et4een an investor and a !ororation8 >he investor agrees to give the !ororation a se!ifi! amont of  money for a se!ifi! eriod of time in e;!hange for eriodi! interest ayments at designated interva$s8 @hen the $oan rea!hes its matrity date' the investor5s $oan is reaid8 "orporations issue bonds for several reasons:

18 "rovides !ororations 4ith a 4ay to raise !aita$ 4ithot di$ting the !rrent shareho$dersE e<ity8 28 @ith onds' !ororations !an often orro4 at a $o4er interest rate than the rate avai$a$e in ans8 By issing onds dire!t$y to the investors' !ororations !an e$iminate the ans as Wmidd$emenW in the transa!tions8 @ithot the intermediaries' the orro4ing ro!ess e!omes more effi!ient and $ess e;ensive8 38 By issing onds' !ororations !an often orro4 money for a fi;ed rate for a $onger  term than it !o$d at a an8 +ost ans 4i$$ not mae fi;ed rate $oans for $onger than five years e!ase they fear $osing money if their !ost of fnds (raised y se$$ing 6s' savings a!!onts' and the $ie) rises to a higher rate than $ong?term $oans8 +ost !omanies 4ant to orro4 money for $ong terms and so e$e!t to isse onds8 /8 >he ond maret offers a very effi!ient 4ay to orro4 !aita$8 By issing onds' the  orro4er is sared the tas of ndergoing nmeros searate negotiations and transa!tions in order to raise the !aita$ it needs8

3&

Sensitivity

4

#f yo o4n onds or have money in a ond fnd' there is a nmer yo sho$d no48 #t is !a$$ed dration8 A$thogh stated in years' dration is not sim$y a measre of time8 #nstead' dration signa$s ho4 m!h the ri!e of yor ond investment is $ie$y to f$!tate 4hen there is an  or do4n movement in interest rates8 >he higher the dration nmer' the more sensitive yor ond investment 4i$$ e to !hanges in interest rates8 +any fa!tors ima!t ond ri!es' one of 4hi!h is interest rates8 A ma;im of ond investing is that 4hen interest rates rise' ond ri!es fa$$' and vi!e versa8 >his is no4n as interest rate ris8 Bt st as some eo$e5s sin is more sensitive to sn than others' some onds are more sensitive to interest rate !hanges than others8 uration risk  is the name e!onomists give to the ris asso!iated 4ith the sensitivity of a ond5s ri!e to a one er!ent !hange in interest rates8  >he higher a ond5s dration' the greater its sensitivity to interest rates !hanges8 >his means f$!tations in ri!e' 4hether ositive or negative' 4i$$ e more ronon!ed8 #f yo ho$d a  ond to matrity' yo !an e;e!t to re!eive the ar (or fa!e) va$e of the ond 4hen yor  rin!ia$ is reaid' n$ess the !omany goes anrt or other4ise fai$s to ay8 #f yo se$$  efore matrity' the ri!e yo re!eive 4i$$ e affe!ted y the revai$ing interest rates and dration8 @or e1ample a ond fnd 4ith 10?year dration 4i$$ de!rease in va$e y 10 er!ent if interest rates rise one er!ent8 On the other hand' the ond fnd 4i$$ in!rease in va$e y 10  er!ent if interest rates fa$$ one er!ent8 #f a fnd5s dration is t4o years' then a one er!ent rise in interest rates 4i$$ res$t in a t4o er!ent de!$ine in the ond fnd5s va$e8 A t4o  er!ent in!rease in the ond5s fnd va$e 4o$d fo$$o4 if interest rates fa$$ y one er!ent8

41

Pricin+ strate+y of bonds

42

Bonds !an e ri!ed at a remim' dis!ont' or at ar8 #f the ondEs ri!e is higher than its ar  va$e' it 4i$$ se$$ at a remim e!ase its interest rate is higher than !rrent revai$ing rates8 #f the ondEs ri!e is $o4er than its ar va$e' the ond 4i$$ se$$ at a dis!ont e!ase its interest rate is $o4er than !rrent revai$ing interest rates8 @hen yo !a$!$ate the ri!e of a  ond' yo are !a$!$ating the ma;imm ri!e yo 4o$d 4ant to ay for the ond' given the  ondEs !oon rate in !omarison to the average rate most investors are !rrent$y re!eiving in the ond maret8 Re<ired yie$d or re<ired rate of retrn is the interest rate that a se!rity needs to offer in order to en!orage investors to r!hase it8 Usa$$y the re<ired yie$d on a  ond is e<a$ to or greater than the !rrent revai$ing interest rates8 ndamenta$$y' ho4ever' the ri!e of a ond is the sm of the resent va$es of a$$ e;e!ted !oon ayments $s the resent va$e of the ar va$e at matrity8 a$!$ating ond ri!e is sim$e: a$$ 4e are doing is dis!onting the no4n ftre !ash f$o4s8 Rememer that to !a$!$ate resent va$e ("=) ? 4hi!h is ased on the assmtion that ea!h ayment is re? invested at some interest rate on!e it is re!eived??4e have to no4 the interest rate that 4o$d earn s a no4n ftre va$e8 or ond ri!ing' this interest rate is the re<ired yie$d8 1:I; <= TIM :A6> <= M<-4 

+oney has time va$e e!ase of the oortnity to invest it at some interest rate8 tre =a$e

>he ftre va$e of any sm of money invested today is:

 P n X P 0(1Yr )n

4here n X nmer of eriods' P n X ftre va$e n eriods from no4 (in do$$ars)' P  X origina$  rin!ia$ (in do$$ars)' r X interest rate er eriod (in de!ima$ form)' and the e;ression (1Yr )n reresents the ftre va$e of 1 invested today for n eriods at a !omonding rate of r 8

@hen interest is aid more than one time er year' oth the interest rate and the nmer of   eriods sed to !omte the ftre va$e mst e adsted as fo$$o4s:

r X anna$ interest rate 7 nmer of times interest aid er year' and n X nmer of times interest aid er year times nmer of years8

>he higher ftre va$e 4hen interest is aid semianna$$y' as oosed to anna$$y' ref$e!ts 43

the greater oortnity for reinvesting the interest aid8

Present Calue

>he resent va$e is the ftre va$e ro!ess in reverse8 @e have:

 P!  =

 1  (   1 + r )  n

8

or a given ftre va$e at a se!ified time in the ftre' the higher the interest rate (or  dis!ont rate)' the $o4er the resent va$e8 or a given interest rate (dis!ont rate)' the frther  into the ftre that the ftre va$e 4i$$ e re!eived' then the $o4er its resent va$e8

"resent =a$e of a eries of tre =a$es

>o determine the resent va$e of a series of ftre va$es' the resent va$e of ea!h ftre va$e mst first e !omted8 >hen these resent va$es are added together to otain the  resent va$e of the entire series of ftre va$es8 "resent =a$e of an Ordinary Annity

@hen the same do$$ar amont of money is re!eived ea!h eriod or aid ea!h year' the series is referred to as an annity8 @hen the first ayment is re!eived one eriod from no4' the annity is !a$$ed an ordinary annity8 @hen the first ayment is immediate' the annity is !a$$ed an annity de8

>he resent va$e of an ordinary annity is:

1  − 1  ( 1 + r )  P! " A   r 

n

    44

4here A is the amont of the annity (in do$$ars)8

>he term in ra!ets is the resent va$e of an ordinary annity of 1 for n eriods8

P$I"ING A B%N

6etermining the ri!e of any finan!ia$ instrment re<ires an estimate of (i) the e;e!ted !ash f$o4s' and (ii) the aroriate re<ired yie$d8 >he re<ired yie$d ref$e!ts the yie$d for  finan!ia$ instrments 4ith !omara$e ris' or a$ternative investments8

>he !ash f$o4s for a ond that the isser !annot retire rior to its stated matrity date !onsist of eriodi! !oon interest ayments to the matrity date' and the ar (or matrity) va$e at matrity8

#n genera$' the ri!e of a ond !an e !omted sing the fo$$o4ing form$a:

n

 P "

# t 

∑ ( 1 + r ) t"1

$ t 

 M 

( 1$ r )

n

8

4here P X ri!e (in do$$ars)' n X nmer of eriods (nmer of years times 2)' # X semianna$ !oon ayment (in do$$ars)' r X eriodi! interest rate (re<ired anna$ yie$d divided y 2)' M X matrity va$e' and t X time eriod 4hen the ayment is to e re!eived8 omting the =a$e of a Bond: An !1ample:

onsider a 20?year 10F !oon ond 4ith a ar va$e of 1'000 and a re<ired yie$d of 11F8 Given  X 081(1'000) 7 2 X -0' n X 2(20) X /0 and r X 0811 7 2 X 080--' the resent va$e of  the !oon ayments is:

45

1   1 − ( 180--) /0   R-0  080--  

1   1−  ( 1 + r ) n   P " #   r   

 X

1   1 − B8-1332  R-0    080-- 

 X

1 − 0811&/.3  080-- 

R-0 

 X

 X

R-0 [1.80/.131]

 X 028318

R1'000

 M 

( 1 + r )

>he resent va$e of the ar or matrity va$e of 1'000 is: X 11&8/.8

n

( % 80-- )

 X

R1'000

/0

X

B8-1331

>he ri!e of the ond (") X resent va$e !oon ayments Y resent va$e matrity va$e X 02831 Y 11&8/. X 9198&&8

Pricin+ ero2"oupon Bonds

or ero?!oon onds' the investor rea$ies interest as the differen!e et4een the matrity va$e and the r!hase ri!e8 >he e<ation is:

 P

=

 M 

( 1 + r )

n

4here + is the matrity va$e8 >hs' the ri!e of a ero?!oon ond is sim$y the resent va$e of the matrity va$e8

ero2"oupon Bond !1ample

onsider the ri!e of a ero?!oon ond that matres 1- years from no4' if the matrity va$e is 1'000 and the re<ired yie$d is 98/F8 Given + X 1'000' r X 0809/ 7 2 X 080/&' and  P

n X 2(1-) X 30' 4e have:

=

R1'000

 M 

( 1 + r )

n

( 180/& )

 X

R1'000

30

X

3899.//

X 2-28128

46

Price2?ield $elationship

A fndamenta$ roerty of a ond is that its ri!e !hanges in the oosite dire!tion from the !hange in the re<ired yie$d8 >he reason is that the ri!e of the ond is the resent va$e of  the !ash f$o4s8

$isk  DIdentification Huantification >ed+in+ tool $isk mana+ement and numerical e1ample based on research.3

4%

$isk identification: Ris identifi!ation is the ro!ess of determining riss that !o$d  otentia$$y revent the rogram' enterrise' or investment from a!hieving its oe!tives8 #t in!$des do!menting and !ommni!ating the !on!ern8

o$$o4ing ris are asso!iated 4ith ond: 18 Interest rate risk : #nterest rates and ond ri!es !arry an inverse re$ationshiQ as interest rates fa$$' the ri!e of onds trading in the maret$a!e genera$$y rises8 onverse$y' 4hen interest rates rise' the ri!e of onds tends to fa$$8 >his haens  e!ase 4hen interest rates are on the de!$ine' investors try to !atre or $o! in the highest rates they !an for as $ong as they !an8 28 $einvestment risk:  Another danger that ond investors fa!e is reinvestment ris' 4hi!h is the ris of having to reinvest ro!eeds at a $o4er rate than the fnds 4ere  revios$y earning8 One of the main 4ays this ris resents itse$f is 4hen interest rates fa$$ over time and !a$$a$e onds are e;er!ised y the issers8

38 Inflation risk: @hen an investor ys a ond' he or she essentia$$y !ommits to re!eiving a rate of retrn' either fi;ed or varia$e' for the dration of the ond or at $east as $ong as it is he$d8 Bt 4hat haens if the !ost of $iving and inf$ation in!rease dramati!a$$y' and at a faster rate than in!ome investmentZ @hen that haens' investors 4i$$ see their r!hasing o4er erode and may a!ta$$y a!hieve a negative rate of retrn (again fa!toring in inf$ation)8"t another 4ay' sose that an investor  earns a rate of retrn of 3F on a ond8 #f inf$ation gro4s to /F after the ond  r!hase' the investorEs tre rate of retrn (e!ase of the de!rease in r!hasing  o4er) is ?1F8

/8 "reditE default risk: this is orro4ed money that mst e reaid y the !omany over time 4ith interest8 +any investors donEt rea$ie that !ororate onds arenEt garanteed y the f$$ faith and !redit of the U88 government' t instead deend on the !ororationEs ai$ity to reay that det8 #nvestors mst !onsider the ossii$ity of  defa$t and fa!tor this ris into their investment de!ision8 As one means of ana$ying the ossii$ity of defa$t' some ana$ysts and investors 4i$$ determine a !omanyEs !overage ratio efore initiating an investment8 >hey 4i$$ ana$ye the !ororationEs in!ome and !ash f$o4 statements' determine its oerating in!ome and !ash f$o4' and then 4eigh that against its det servi!e e;ense8 >he theory is the greater the !overage (or oerating in!ome and !ash f$o4) in roortion to the det servi!e e;enses' the safer the investment8

48

-8 $atin+ do5n+rades: A !omanyEs ai$ity to oerate and reay its det (and individa$ det) isses is fre<ent$y eva$ated y maor ratings instittions s!h as tandard H "oorEs or +oodyEs8 Ratings range from EAAAE for high !redit <a$ity investments to E6E for onds in defa$t8 >he de!isions made and dgments assed y these agen!ies !arry a $ot of 4eight 4ith investors8 #f a !omanyEs !redit rating is $o4 or its ai$ity to oerate and reay is <estioned' ans and $ending instittions 4i$$ tae noti!e and may !harge the !omany a higher interest rate for ftre $oans8 >his !an have an adverse ima!t on the !omanyEs ai$ity to satisfy its dets 4ith !rrent  ondho$ders and 4i$$ hrt e;isting ondho$ders 4ho might have een $ooing to n$oad their ositions8 .8 #iuidity risk: >here is a ris that an investor might not e a$e to se$$ his or her  !ororate onds <i!$y de to a thin maret  4ith fe4 yers and se$$ers for the  ond8Do4 interest in a arti!$ar ond isse !an $ead to sstantia$ ri!e vo$ati$ity and  ossi$y have an adverse ima!t on a ondho$derEs tota$ retrn $isk uantification: Ris <antifi!ation invo$ves eva$ating riss and ris intera!tions to assess the range of ossi$e roe!t ot!omes8 #t is rimari$y !on!erned 4ith determining 4hi!h ris events 4arrant resonse8 #t is !om$i!ated y a nmer of fa!tors in!$ding' t not $imited to: [ Oortnities and threats !an intera!t in nanti!iated 4ays (e8g8' s!hed$e de$ays may for!e !onsideration of a ne4 strategy that red!es overa$$ roe!t dration)8 [ A sing$e ris event !an !ase m$ti$e effe!ts' as 4hen $ate de$ivery of a ey !omonent  rod!es !ost overrns' s!hed$e de$ays' ena$ty ayments' and a $o4er?<a$ity rod!t8 [ Oortnities for one staeho$der (red!ed !ost) may e threats to another (red!ed rofits)8 [ >he mathemati!a$ te!hni<es sed !an !reate a fa$se imression of re!ision and re$iai$ity8 Inputs to risk uantification:

taeho$der ris to$eran!e or!es of ris  "otentia$ ris events ost estimates A!tivity dration estimates Tools and Techniues for risk uantification:

C;e!ted monetary va$e tatisti!a$ sms tim$ation 6e!ision trees C;ert dgment %utputs from risk uantification:

Oortnities to rse' threats to resond to8 Oortnities to ignore' threats to a!!et8

4&

Standard deviation: tandard deviation (\) is the s<are root of the varian!e' or (.8&33)172 X 28.0F8 tandard deviation is e;ressed in the same nits as the data' 4hi!h maes it easier to interret8 #t is the most fre<ent$y sed measre of disersion8

 p−¿ b´ p b¿

¿ ¿ ¿ ¿

2

86 X

∑¿ ¿

√ ¿

 p −¿ b´ p b¿

¿  p−¿ m´ p Beta X

m¿

¿ ¿n ¿ ∑¿ ¿

Beta is the sensitivity of se!rities retrn 4ith rese!t to maret movement8

Beta !an e treated as maret ris or systemati! ris or determined art of ris8

 pr  pr 2

∆ pr

5

 pr 1

a ∆m 0

m1

m2

m

>RX

 P R = Rf + B ( R m− Rf  )

o' ]X

∆ pr ∆m

>ota$ ortfo$io retrn !onsisted 4ith t4o arts: •

•

Atonomos retrn' 4hi!h is not deendent 7re$ated 4ith the maret movement' !an  e reresented 4ith ris free retrn ( Rf  )  i8e8 the retrn of >?i$$s' 10 years G se!t8  ond8 >he other art of the retrn !an e termed as maret remim i8e8 (maret retrn? ris free rate of retrn) or  ( Rm − Rf  ) 8

#n the aove grah' 4hen maret retrn is m 1  !orresond in retrn of ortfo$io in  pr 1 and 4hen maret retrn is

m 2  the ortfo$io retrn is pr 2 8

−¿ m

2

4hi!h is ositive and

∆ m  X

!hange of retrn 4i$$ e

m¿

¿

∆ pr 2  X

r 2−¿  p r 1  p¿

¿

1

 4hi!h is a$so ositive8 No4' the ratio of the

∆ pr

∆ m  X]X eta' i8e8 the sensitivity of the retrn of the ortfo$io

4ith rese!t to maret movement8

51

>ed+e funds:  A hedge fnd is a fnd that !an tae oth $ong and short ositions' se aritrage' y and se$$ nderva$ed se!rities' trade otions or onds' and invest in a$most any oortnity in any maret 4here it foresees imressive gains at red!ed ris8 *edge fnd strategies vary enormos$y ?? many hedge against do4ntrns in the marets ?? ese!ia$$y imortant today 4ith vo$ati$ity and anti!iation of !orre!tions in overheated sto! marets8 >he rimary aim of most hedge fnds is to red!e vo$ati$ity and ris 4hi$e attemting to  reserve !aita$ and de$iver ositive retrns nder a$$ maret !onditions8 *utual funds: A mta$ fnd is a tye of rofessiona$$y managed investment fnd that oo$s money from many investors to r!hase se!rities8 Types of mutual fund: • • • •

Oen ended fnds $ose ended fnds C;!hange traded fnds Unit investment trsts

$isk mana+ement: >he ro!ess of identifi!ation' ana$ysis and either a!!etan!e or  mitigation of n!ertainty in investment de!ision?maing8 Cssentia$$y' ris management o!!rs anytime an investor or fnd manager ana$yes and attemts to <antify the otentia$ for  $osses in an investment and then taes the aroriate a!tion (or ina!tion) given their  investment oe!tives and ris to$eran!e8 #nade<ate ris management !an res$t in severe !onse<en!es for !omanies as 4e$$ as individa$s8 or e;am$e' the re!ession that egan in 200 4as $arge$y !ased y the $oose !redit ris management of finan!ia$ firms8 Ris  management y:

Ris transfer8 Ris sharing8 Ris de!omosition8 Ris retention8

Numerical e1ample:

T $td8 #sse 1000' 12F onds ^ 100 rs ea!h interest aya$e er semester8 >he ond is redeema$e after 3 years at a remim of 20F8 #f the !rrent maret ri!e of the ond is assred to e 1208 @hat 4i$$ e the:? 18 S>+8 28 Ris' if interest rate !hange y ±  200 8 38 #ntrinsi! va$e of the ond at !rrent interest rate8 /8 6ration of the ond8 -8 Re$ationshi 4ith time to ri!e of the ond8 52

.8 Sie$d !rve motion 4ith time eriod8

Intrinsic value o the bond 0

=¿ C × PVIFA ( r , n ) + F PVIF ( r , n )  p ¿

 p0=intrinsic price c = couponinterest 

[

( 1+ r )n−1  PVIFA ( r ,n ) = ( 1 +r )n ×r  PVIFA r ,n =

1

( 1 +r )

n

]

D /re'ent value intere't -actor annuity

= present value interest factor at r , n years .

 F = RedeemablePrice , so

 p0=

12 2

[

[

(+ ) (+ ) 1

1

0.09

3 ×2

2

0.09 2

6

3×2

×

0.09

]

2

]

+ 120 ×

1

(+ ) 1

( 1.045 ) −1 1 +120 ×  p =6 ( 1.045 ) × 0.045 ( 1.045 ) 0

6

0.09

6

2

6

 p0=123.094 (¿)

' t(e current mar0et /rice i' le'' t(an t(e intrin'ic value o- t(e +ond; t(e +ond i' under!valued 'o you can /urc(a'e.

 4TM2 yield to maturity (at market price o rs #%"0 ? @r

53

 pm= maret price =C × PVIFA

=

120

12 2

× PVIFA

(

r 2

( ) r

2

)

( )

, 2 n + F PVIF 

r

2

, 2n

( )

, 3 × 2 + 120 PVIF 

r

2

,6

 R!" , let r =20  is 93.868 let r =10 is 120

So T) i' 1< )ond risk 

ond ri'0 ¿

¿

− # ×∆ $%&  1 + $%& 

−2.6647 × ( ±) 200 Bp ( 1 + 0.1 )

¿ ± 4.845 .uration

uration >'em? >a?

a'( @o$ >+?

1 2 3 4 5 6    #uration=

i'counted ca'( a × c @o$ >c? 6 5.%142 5.%142 1.884 6 5.4421 2 6 5.183 15.54& 1&.%44 6 4.&362 8 23.5% 6 4.%15 5 564.13 126 &4.23 8 63&.53 Total 12 %%

∑ ( a ×c ) ∑ (c )

54

¿

639.5357 120

¿ 5.3294 ¿ 2.6647  years. 1elationship 7ith time to price o the bond

Intrin'ic /rice o- t(e +ond at (ig(er maturity /eriod

 p0=

12 2

[

 ( + ) − 0.09

1

10

2

1

10

( 1.045 ) × 0.045

]

+ 120 ×

1

( 1.045 )

2n

D 124.%4%6 Falue o- t(e +ond and maturity /eriod i' /o'itively co!related  pm=120

[ ] (+)− (+ ) r

1

120=

12 2

2n

1

2

r

1

2

2n

×

r

+120 ×

2

1

(+) 1

r

2n

2

rD &< #S D 124.%4%6 rD 15< #S D &&.4 9

+ ( 15−9 ) ×

 ( 124.74766 −120 ) ( 124.7476 − 99.40 )

D 1.123< )aturity and T) i' /o'itively related  T) D

f  ( m)

d ( $%& ) >0 d ( m)

55

d ( $%& ) 2

d ( & 

2

)

<0

i.e. increa'ing at a decrea'ing rate

56

Indian Bond *arket: Strikin+ a "hord 5ith Asian Peers

>he Asian !ororate Bond +aret started deve$oing rather $ate' after the Asian finan!ia$ !risis in 1998 "rior to this' Asian ond marets 4ere modest$y deve$oed and dominated so$e$y y government issan!es8 >he a!e of deve$oment a!!e$erated ost the finan!ia$ !risis in 200 ese!ia$$y in e!onomies $ie oth orea' ingaore and +a$aysia 4ho have e;tensive$y deve$oed their ond marets in re!ent years8 >he #ndian ond maret 4ith arti!$ar referen!e to the !ororate ond maret is often toted to e nder deve$oed 4hen vie4ed in $ine 4ith the ond marets a!ross the g$oe8 >here are demand and s$y side isses8 >here are fe4 issers in the maret 4hi!h trans$ate into a $o4er s$y for f$oating det 4ith a referen!e for an $oans' reg$atory isses on dis!$osres and other re$ated !osts' stam dty varying a!ross states and so on8 On the demand side traditiona$$y high tattory Di<idity Ratio (DR) that  ans are re<ired to !om$y 4ith' reg$atory asymmetry in treatment of $oans and  onds' need to mar the ortfo$io to maret et!8 ee the demand for !ororate onds mted8 rther the asen!e of a 4e$$?deve$oed se!ondary maret inhiits retai$  arti!iants as e;it is not easy8

Given the aove' the aims of this to t into erse!tive !ertain ey ase!ts of the #ndian  ond maret in the !onte;t of ond marets in other Asian !ontries8 Asian e!onomies in!$ded in the stdy are hina' Paan' #ndonesia' *ong ong' oth orea' +a$aysia' 5%

ingaore' >hai$and' "hi$iines and =ietnam8 @hi$e Paan is a different maret' it has een in!$ded in this !omarative stdy to rovide ossi$e en!hmars8 ive ase!ts of the ond maret are !overed in this' !overing A8 Aggregate ond marets

! ! !

>he sie and e;anse of the ond maret' >he finan!ing rofi$e of the e!onomy >rnover in the se!ondary maret

B8 Government ond maret

! !

oreign ho$ding in domesti! ond maret >he investor rofi$e of the government ond maret8

A. A++re+ate bond markets

. SiJe and e1panse of the bond market

#ndia rans forth in sie among its Asian eers 4ith a tota$ ond maret of U 12  i$$ion as of +ar!h 201/ 4ith a strong resen!e of Government onds of  -.9 n (308/F in terms of G6") and a re$ative$y sma$$er !ororate ond maret of  2/28- n (13F in terms of G6")8ororate onds in a$$ a!!ont for on$y 30F of tota$ otstanding onds in #ndia8 #nteresting$y' for a$most a$$ the !ontries' the ond maret is dominated y the government se!tor8 >his is intitive sin!e a deve$oed government  ond maret is often !onsidered to e a re? re<isite for the deve$oment of the !ororate ond maret 4here interest rate en!hmars of Ge!s are sed to re!on the sreads8 >he ta$e and e;hiit e$o4 give an overvie4 of the sie of ond marets in Asian !ontries8

•

•

•

>he $argest among the sam$e is Paan 4ith 9'990 i$$ion 4hi!h is not a srrise sin!e it has an e;tensive ond maret ana$ogos to those of 4estern deve$oed !ontries8 *o4ever' the Paanese ond maret is dominated y government onds (92F of tota$)8 >he !ororate ond maret is minis!$e in !omarison (&. n) and is on$y 1&F in terms of G6" (government onds in !omarison are 203F of  G6")8 hina stands ahead of #ndia as it has the se!ond $argest ond maret 4ith net otstanding det of /'&2/ n 4hi!h is -083F of G6"' higher than #ndia y &F8 >he hinese ond maret a$so fo$$o4s the !onvention of government domination as !ororates a!!ont to on$y 3-F of the tota$ ond maret8 oth orea is third 4ith a sie of 1'./1 n8 *o4ever' it is an e;!etion in the sam$e as it has a $arger !ororate ond maret re$ative to the government ond maret8 ororate onds a!!ont for arond .1F of otstanding onds in the !ontry and 4as 12-F of the G6" of the !ontry sggesting the ond maret is e;tensive$y deve$oed for the sie of the e!onomy8 58

•

+a$aysia' >hai$and and ingaore' the medim sied e!onomies 4ithin this Asian gro have a ond maret 4orth  312 n'  2&- n and  2/2 n rese!tive$y8 *ong ong and #ndonesia have a m!h sma$$er ond maret at  19- n and  10 n8 =ietnam is the sma$$est in the sam$e 4ith a ond maret sie of  29 n on$y8 Table #/ SiBe o the )ond Market (in >S. )illions0 Dhibit #/ )ond Markets in Asian Countries as 8 o .,

Countrie s

(ina ong Gong Indone'ia  Ha/an Sout( Gorea )alay'ia P(ili//ine' Singa/ore  T(ailand Fietnam India



Tot al )on d Mark  et

3;%2. 6 18. 5 8&. % &;23. 4 626. 1 182. 4 8%. 3 14&. 6 213. % 28. 1 56&. 

1;651. % 86. 2 1%. & %86. 6 1;14. & 12&. % 13. 3 &2. 1 61. 5 .%

4;%2 4 1&5

242. 5

812

18 &;&&  1;64 1 312

25

22 23

2 15 8

14

1 5

5 

33 18

61

:overnment ond 43 )ar0et a' < o- :P43 3 or/orate 1% ond )ar0et a' < o- :P 13  Total ond )ar0et a' < o- :P

N G I

HP

G# ) P S: T FN IN

11 242 2%5 2&

%+ .omestic =inancin& ,rofle

 T(i' 'ection give' an overvie$ o- t(e 7nancing /ro7le in t(e'e countrie'. Excluding t(e government 'ector; t(ere are t(ree 'ource' o- 7nance $(ic( i' re/re'ented +y out'tanding +an0 credit; +ond' and euity. =/on com/ari'on; it i' evident t(at 'ome countrie' /rimarily rely on dome'tic credit and 'ome loo0 to euity a' t(e im/ortant 'ource o- dome'tic 7nancing. o$ever; cor/orate +ond' do not emerge a' t(e /re-erred 'ource -or 7nancing -or any o- t(e countrie' in t(e 'am/le.

5&

 T(e ta+le +elo$ de/ict' t(e nature o- dome'tic 7nancing in India and it' 'ian /eer'. •

• • • •

ome'tic credit >i.e. credit di'+ur'ed +y +an0'? i' t(e /rimary 'ource -or 7nancing in (ina >%3.&%3.&in term' o- out'tanding i''uance'? relative to ot(er countrie'; t(ey /lay a larger role in 'ati'-ying t(e 7nance need' com/ared $it( ot(er countrie' in t(e 'am/le. Table %/ .omestic =inancin& ,rofle (8 share o total0 Country (ina ong Gong Indone'ia Sout( Gorea )alay'ia Singa/ore  T(ailand India

)ank Credit Corporate )onds %3.& 8. 1%.5 2.5 41.& 2.4 %3.& 8. 4.1 12.4 26.2 8. 51.1 6.3 %1.5 18.4

'uity 18.1 8. 55.% 18.1 4%.5 65.8 42.6 1.1

Source: ASIAN BONDS ONLINE, RBI, ACE Equity 

!+ Turnover in the Secondary Market  T(e turnover ratio i' t(e value o- +ond' traded in t(e 'econdary mar0et to t(e total out'tanding +ond'. It i' indicative o- t(e liuidity in t(e +ond' mar0et a' it ca/ture' t(e extent o- trading in t(e 'econdary mar0et relative to t(e amount o- +ond' out'tanding. ence; (ig(er t(e turnover ratio; more active i' t(e 'econdary mar0et.

 T(e ta+le +elo$ give' an overvie$ o- t(e turnover ratio' in t(e government +ond'; cor/orate +ond' and t(e aggregate +ond' in t(e 'ian countrie'. 6

•  Ha/an (a' t(e (ig(e't turnover ratio o- 4.56 $it( government

•

+ond' (aving a multi/le o- 4.&. T(e turnover in t(e cor/orate +ond mar0et i' relatively lo$er at .3. India i' 'econd $it( a (ealt(y turnover in t(e +ond mar0et at 3.46. T(ere i' a 'trong 'econdary government 'ecuritie' turnover o- 4.%. IndiaJ' /o'ition in term' o- turnover i' mirrored in t(e cor/orate +ond' mar0et a' $ell $it( a turnover ratio o- .6%; $(ic( i' 'till (ig(er t(an t(at o- Ha/an.

(ina lead' in t(e cor/orate 'egment $it( a multi/le o- 1.6. In -act; (ina (a' a turnover ratio o- a+ove 1 in +ot( t(e 'egment'. •  T(ailand i' t(ird $it( a total turnover o- 2.5; $it( a 3.1 turnover in government +ond' and cor/orate +ond' turnover +eing .26. • C(ile Sout( Gorea (a' a larger cor/orate de+t mar0et 'iBe relative to :Sec'; t(e turnover ratio i' (ig(er -or gilt' at 3.%3 com/ared $it( .54 -or cor/orate +ond'. •

Table !/ Tradin& volume in the Secondary Market relative to bonds outstandin& Countries

overnment)onds

(ina Indone'ia  Ha/an Sout( Gorea Singa/ore  T(ailand India

1.8 .&% 4.&2 3.%3 1.%% 3.& 4.66

Corporate )onds

1.55 .48 .31 .54 n.a. .26 .66

All bonds

1.24 .8& 4.56 1.%6 1.1 2.46 3.46

Source: ASIAN BONDS ONLINE, RBI n.a.: Not available

 T(e a+ove analy'i' indicate' t(at de'/ite (aving a large +ond mar0et; countrie' li0e (ina and Sout( Gorea (ave a relatively /a''ive 'econdary mar0et a' o//o'ed to India $(ic( 'tand' -ourt( in term' o- t(e 'iBe o- +ond mar0et; +ut i' 'econd $it( re'/ect t(e turnover in +ond mar0et a' a $(ole and al'o in t(e individual government and cor/orate +ond mar0et'. :overnment Securitie' 1. oreign olding in :overnment ond'

61

ontries fo$$o4 varying o$i!ies for foreign investments in government onds ranging from hina 4hi!h adots a very stri!t o$i!y on this front to #ndonesia and >hai$and 4here oreign #nstittiona$ #nvestments (##s) in government se!rities are en!oraged 4ith favora$e o$i!ies for foreign investors8

•  Non?resident investors do not re<ire any arova$s or registration for investing in government issan!es in #ndonesia8 Given the easy a!!ess' it is not srrising that ##s in government onds are the highest in #ndonesia at 328-F8 +a$aysia is se!ond at 298/F8 >he government and reg$atory odies in #ndonesia and +a$aysia roa!tive$y 4or to4ards imroving the maret in terms of $i<idity and ena$ing etter a!!ess to a$$ investors8 • >hai$and 4hi!h has a government ond maret a$most 173rd the sie of the #ndian government ond maret' in effe!t has a !ontrition of 1&8/F y ##s in government onds8 imi$ar to #ndonesia' the !ontry a$$o4s dire!t and ortfo$io investments in the government se!rities 4ith no restri!tions8 >he e;hiit e$o4 /rovide' a 'na/'(ot o- t(e II' (olding in

government +ond' in 'ome o- t(e countrie'.

Dhibit %/ =orei&n holdin& in 6ocal overnment )onds (8 o total0

8

35 3 25 2 15 1 5 

32.5

1%.4 8.3

• •

&.2 1.4

I Source: ASIAN BONDS ONLINE, RBI

2&.4

HP

G#

)

T

IN

* As o Dece!ber "#

%$oreign ho$ding in #ndian government onds is very $o4 at 183F 4hen !omared 4ith the aove mentioned !ontries8 #n hina' on$y <a$ified investors from an o$d rogram !a$$ed the Va$ified #nstittiona$ #nvestor "rogram and a more re!ent Renmini Va$ified 62

#nstittiona$ #nvestor "rogram are ermitted to invest in the domesti! se!rities of the !ontry 4ith a very time !onsming ro!ess for the same 4hi!h frther  a!ts as a deterrent for foreign investors from investing in the government onds8

%+ Investor ,rofle o overnment Securities >his se!tion ana$yses the investor ho$ding in government onds in some of the !ontries in!$ded in the stdy8 >he investors of government onds are road$y !$assified as the entra$ Ban' Government' ans' !ontra!ta$ saving instittions (s!h as insran!e !omanies' ension fnds et!8)' ##s and others8

>he ta$e e$o4 !atres the investor rofi$e in government se!rities for se$e!t Asian !ontries8 Table E/ Investor ,rofle in overnment )onds (as 8 o Total0 Country

(ina Indone'ia  Ha/an Sout( Gorea )alay'ia  T(ailand India

Central )ank

overnmen t (Sub0

! 4. 5 18. 6 2. 5 . 6 6. % 16. 

)anks

Contractual Savin&s

=IIs


! !

%%.1 33.%

5.4 1%.

! 32.5

1%.5 12.3

8.5

33.4

22.&

8.3

8.3

2.2

1%.&

2&.

&.2

21.2

1.4

2%.&

4.%

2&.4

!

1.2

11.&

5.2

1%.4

12.6

!

38.2

26.6

1.4

16.3

Source: ASIAN BONDS ONLINE, RBI

•

•

entral an0 (old' t(e maximum government 'ecuritie' in Ha/an at 18.6< -ollo$ed +y India at 16<. Peer countrie' li0e T(ailand and Indone'ia contain a 'igni7cantly lo$er entral an0 (olding o- government 'ecuritie'. It i' even lo$er in Gorea >2.5.6
a' $ell around 33< o- total government 'ecuritie' are (eld +y +an0'. T(ailand and Sout( Gorea (ave le''er (olding' o- :Sec' +y +an0' at 11.&< and 1%.&< re'/ectively. • ontractual 'aving in'titution' 'uc( a' in'urance com/anie'; /en'ion -und' and 'tate and local government retirement -und' are anot(er 'et o- im/ortant inve'tor' in t(e government 'ecuritie' mar0et. Cit(in t(e 'am/le in t(e 'tudy; maximum inve'tment in :Sec' +y contractual 'aving in'titution' i' in  T(ailand at 5.2< -ollo$ed +y )alay'ia at 4.%<. India i' -ourt( at a 'u+'tantial 26.6<. o$ever in (ina t(e'e in'titution' (old only 5.4< o- t(e total government 'ecuritie'. • ' in t(e earlier 'ection; II' in government +ond' are t(e (ig(e't in Indone'ia and )alay'ia. T(ailand 'tand' t(ird at 1%.4<. In India; II' inve't only 1.4< in government +ond'; +eing t(e lea't in t(e 'am/le. • Su+!:overnment (old' a 'iBea+le /ro/ortion o- 'ecuritie' only in Sout( Gorea at 2.2<.

Gey Ta0ea$ay' -or India •

 T(e Indian +ond mar0et i' rea'ona+ly large in 'ia. o$ever; li0e mo't ot(er countrie' it i' dominated +y government 'ecuritie'. :oing a(ead; attention '(ould +e tran'7xed u/on +ringing a+out -urt(er gro$t( and diver'i7cation in t(e cor/orate +ond mar0et 'ince it i' currently lagging in term' o- value o- out'tanding +ond' relative to /eer countrie'. o #elative to 'iBe o- :P t(e overall +ond mar0et 'iBe need' to +e im/roved a' t(e ratio o- 43< i' lo$ $(ic( i' mainly due to t(e /re-erence -or +an0 7nance.

 critical /o'itive i' t(att(e turnover in t(e Indian +ond mar0et i' 'econd only to Ha/an. o$ever; t(i' i' /rimarily o$ing to t(e active 'econdary mar0et -or government +ond' in t(e country.  T(e 'econdary cor/orate +ond mar0et $(ile +eing com/aratively /a''ive i' 'till t(e 'econd mo't active $it(in 'ian countrie'. ence; $(ile over all t(e 'econdary mar0et trading a//ear' (ealt(y; t(e 'ame -or cor/orate +ond' can +e made more vi+rant. • oreign inve'tment' in Indian government 'ecuritie' are -ar and a$ay com/ared to ot(er 'ian emerging economie' o- Indone'ia and )alay'ia; $(ic( are 'maller mar0et' in com/ari'on. T(i' can +e 'tudied -urt(er and 'u+'euently li+eraliBed cautiou'ly $it( a vie$ to ma0e t(i' mar0et more liuid. •

64

om/ari'on o- +ond o-  India and re't o- t(e $orld

65

Introduction

A 4e$$?deve$oed !ororate ond maret sorts e!onomi! deve$oment8 #t rovides an a$ternative sor!e of finan!e and s$ements the aning system to meet the re<irements of  the !ororate se!tor to raise fnds for $ong?term investment8 #t is e$ieved that this segment a!ts as a sta$e sor!e of finan!e 4hen the e<ity maret is vo$ati$e' and a$so ena$es firms to tai$or their asset and $iai$ity rofi$es to red!e the ris of matrity8 #t a$so he$s in the diversifi!ation of riss in the system8 #n vie4 of hge investment re<irement for  infrastr!tre se!tor' the resen!e of a 4e$$?deve$oed !ororate ond maret assmes signifi!an!e in #ndia8 @ith the de!$ining ro$e of deve$oment finan!e instittions (6#s)' a deve$oed and rost !ororate ond maret e!omes a$$ the more imortant8 ororate ond maret is $ie$y to e more enefi!ia$ for siness having $onger term !ash f$o4s' 4here investors may e 4ary of riss asso!iated 4ith e<ity and $ong?term finan!ing from ans may not e easi$y avai$a$e8 C;erts arge that #ndia5s high gro4th !an e sstained y imroving infrastr!tre and e;anding the manfa!tring ase' and a deve$oed !ororate ond maret !an mae oth the tass easier8 rthermore' #ndia is in need of U1 tri$$ion in the !rrent five year $an for finan!ing its infrastr!tre8 >he Ban  dominated finan!ia$ system is n$ie$y to finan!e s!h a high amontQ in this !onte;t' re!orse to the !ororate ond maret !an e he$f$ (+heree 2013)8 #n #ndia' 4hi$e the  ans sti$$ !ommand a sia$e resen!e in the e!onomy' !ororate se!tor is taing re!orse to the overseas marets for raising e<ity' det and $oans8 An nderdeve$oed !ororate ond maret !an aet this trend' therey in!reasing the e;terna$ se!tor v$nerai$ity8 ortnate$y' the resen!e of a ig rivate se!tor' dereg$ated interest rates' 4e$$ deve$oed government se!rities maret' high$y deve$oed !$earing and sett$ement system' !redi$e rating agen!ies' and sorting reg$atory str!tre ode 4e$$ for the deve$oment of the !ororate ond maret in #ndia8ororate ond enhan!es the ris oo$ing and ris sharing oortnities for  investors and orro4ers8 "ross country e1perience

A !ross !ontry ana$ysis sho4s that the domesti! det se!rities otstanding is very high (as a  roortion of G6") in !ase of the UA' #ta$y' Paan and orea (more than 100 er !ent)8 >he re$ative sie has in!reased in re!ent years in a$most a$$ the deve$oed !ontries 4hi!h have fa!ed the !risis8 *o4ever' the sie of domesti! det maret is $o4 in #ndia and hina8 6esite the !risis' 4hen a$$ !ontries 4ent for fis!a$ stim$s and monetary easing' the ratio has 66

remained most$y sta$e in #ndia and hina8 >he sie of otstanding !ororate se!rities (y #s and !ororate issers) to G6" is high in the UA' oth orea and #ta$y8 >his is very $o4 for #ndia8 Among the deve$oed !ontries' the U is having a very $o4 ratio8 *o4ever' in !ase of hina' this has in!reased from a $o4 of 13 er !ent in 200- to 2- er !ent y 20118

Table 1: Relative Size of Outstanding Domestic Debt Securities to GDP (In per cent)

 4ear2end

25 26 2% 28 2& 21 211

>S 16 4 16 1 16 6 1% 2 18 3 1% 8 1% 5

Chin a

ermany

Indi a

Ital  Fapa y n

South Gorea

4

%

35

121

183

1

44

%%

36

136

1&3

13

48

%&

4

142

23

13

4&

%1

34

141

228

&3

51

85

48

151

22&

128

51

%&

43

145

25

1&

46

%

33

14

255

13

> G  4 4 5  4 8 4 6 % 1 % 3 % 2

6%

1 3 25 2 15 1 5 

=S

(ina

:ermany

25

26

India

2%

Italy

28

2&

Ha/an 21

Sout( Gorea

=G  

211

Table 1a:Size of outstanding securities of Fis and corporate Issuers relative to GDP (In per cent)

 4ear2end

25 26 2% 28 2&

>S 11 6 11 4 11 & 11 % 11 

Chin a

ermany

Indi a

Ital  Fapa y n

South Gorea

13

31

1

4%

3&

55

15

35

2

54

38

58

16

3%

4

5&

3&

58

18

34

3

63

4

56

22

38

6

58

3%

%%

> G  1 4 1 6 1 6 1 5 1 6

68

21

&6

24

2%

6

52

38

63

211

8&

25

22

5

51

3%

58

1 4 1 1

1a 14 12 1 8 6 4 2 

=S

(ina 25

:ermany 26

India

2%

Italy

28

2&

Ha/an 21

Sout( Gorea

=G  

211

Table 1b: Size of outstanding debt secrities of corporate issuers relative to GDP (In per cent)

 4ear2end

25 26

> Chin S a 2 1 2 2 3

ermany

4 5

Indi a

.5 .6

Ital  Fapa y n

13 15

15 15

South Gorea

3 2%

> G 

1 . 6&

2% 28 2& 21 211

1 2 1 2  2 2 2 2 2 2

3

6

.&

15

1%

22

4

8

.6

18

16

23

%

1

1.5

21

16

3%

&

11

1.5

18

16

38

&

&

1.1

16

16

3%

& . 8 . 6 1 . & . 8

1+ 4 35 3 25 2 15 1 5 

=S

(ina 25

:ermany 26

India 2%

28

Italy 2&

Ha/an

Sout( Gorea

21

211

=G  

>he share of #s and !ororates in the tota$ otstanding domesti! det se!rities is very high in !ontries $ie the UA and oth orea (more than ha$f of the tota$ domesti! det se!rities)8 #t is $o4 in !ase of Paan and U8 >he share is de!$ining in U' Germany' Paan and U' 4hi!h !o$d e

%

attrited to the fis!a$ and monetary stim$s ndertaen y these !ontries in the aftermath of the g$oa$ finan!ia$ !risis (>a$e 2 and 2a)8 #n !ase of hina and #ndia' this share is in!reasing !onsistent$y8 C;!$ding #s' the share of !ororates in the tota$ otstanding domesti! det se!rities is very $o4 (e;!et in !ase of oth orea)8 #t has een in!reasing !onsistent$y in !ase of hina8 Table : S!are of FIs and corporates in t!e outstanding domestic debt securities (In per cent)

 4ear2end

ec!5 ec!6 ec!% ec!8 ec!& ec!1 ec!11

> Chin Indi S a ermany a % 1 32 45 4 % 1 34 46 6 % 2 33 4% & 6 8 36 4% & 6  43 45 12 5 4 46 34 14 5 1 55 31 14

Ital  Fapa y n

South Gorea

3&

21

55

4

2

56

42

1&

5%

45

18

61

38

16

6

35

15

5%

3%

14

5%

> G  3 2 3 3 3 4 3 2 2 3 2  1 5

2 8 % 6 5 4 3 2 1 

=S

(ina ec!5

:ermany

ec!6

India

ec!%

ec!8

Italy ec!&

Ha/an Sout( Gorea ec!1

=G  

ec!11

1

%1

Table a: S!are of corporates in t!e outstanding domestic debt securities (In per cent)

 4ear2end

ec!5 ec!6 ec!% ec!8 ec!& ec!1 ec!11

> Chin Indi S a ermany a 1 3 4 6 1 1 3 6 6 2 1 2 6 % 2 1 2 8 12 2 1 2 14 12 3 1 2 1% 14 4 1 2 2 13 4

Ital  Fapa y n

South Gorea

> G 

11

8

3

2

11

8

26

2

11

8

21

2

13

%

25

1

14

%

2&

1

12

%

34

1

11

6

36

1

2a 4 35 3 25 2 15 1 5 

=S

(ina ec!5

:ermany

ec!6

India

ec!%

ec!8

Italy ec!&

Ha/an

Sout( Gorea

ec!1

=G  

ec!11

%2

Issues and "hallen+es 5ith the development of bond market in India. >he nderdeve$oment of #ndia5s !ororate ond maret has some histori!a$ erse!tive8 >he  ig !omanies' at the time of oening  of the e!onomy' sa4 more enefits from the sto!  maret $iera$isation than from the ond maret $iera$isation (Armor and De$e 2009' ingh 2011' hanna and =arotti$ 2012)8 >he i$t  of det in the 19&0s and the 190s 4as in the !ons!iosness of the o$i!y maers8 >hs' the deve$oment of the ond maret did not attra!t the attention of the o$i!y maers8 @ith the oening of the e!onomy' there 4as high inf$o4 of  ##s and G6Rs' and it strengthened the rima!y of e<ity maret (=irmani 2001' =irmani 200.' hanna and =arotti$ 2012' Ah$4a$ia 1999)8 rthermore' the e<ity maret $iera$isation measres 4ere in the hands of the reg$ators t the measres re<ired for  deve$oment of !ororate ond maret 4ere in the hands of $egis$atres (Armor and De$e 2009' hanna and =arotti$ 2012)8 At resent' there is minis!$e arti!iation of retai$ investors in !ororate ond maret' thogh they are !oming grada$$y8 ##s !an y !ororate onds' t on$y  to a $imit8 >hogh there are instan!es of onds se$$ing $ie hot !aes in $i! issan!es' they are fe4 in nmer8 #nfrastr!tre onds generated $ot of interest 4ith the a$$o4an!e of Rs820'000 ta; ded!tions8 imi$ar$y' !ororate onds of some finan!ia$ entities 4ith high standing and rost distrition !hanne$ a$so sa4 hge ss!rition in $i! issan!es8 >hese ositive e;erien!es indi!ate that right$y ri!ed onds a$ong 4ith an in!entivised distrition !hanne$ !an generate the interest of the retai$ investors8 Re!ent$y' the Reserve Ban of #ndia has advised ans that at the time of issing sordinated det for raising >ier?## !aita$' to !onsider the otion of raising s!h fnds throgh $i! isse to retai$ investors8 A sim$ified and $o4 stam dty str!tre is an ingredient for i$ding  of a virant !ororate ond maret8 #n #ndia' no4?a?days the se!ondary maret transa!tions in !ororate  onds throgh demat transfers do not re<ire stam dties8 Neverthe$ess' stam dty is sti$$ a$i!a$e in !ase of issan!e' re?issan!e and transfer (if he$d in hysi!a$ form) of !ororate  onds' and it is higher in !omarison 4ith internationa$ standards8 #t is a$so not niform a!ross the states8 >he >a; 6ed!tion at or!e (>6) o$i!y is not niform for a$$ investors in !ororate  onds8 #n 2009' the Union Bdget annon!ed that !ororate det instrments issed in demat form and $isted on re!ognised sto! e;!hanges are e;emt from >68 *o4ever' >6 is sti$$ a$i!a$e in !ertain !ases8 Be!ase of >6 on interest ayments' ##s sed to se$$ the ond  efore the !oon ayment date and then rer!hase it after the !oon ayment' a ra!ti!e no4n as !oon 4ashing5 in maret ar$an!e8 %3

#n genera$' ond finan!ing is e;e!ted to e easier to otain than finan!ing from ans (+ishin 200.)8 *o4ever' #ndian ans genera$$y find it !onvenient to give $oans to !ororates instead of investing in their onds8 >he rovisioning norms in rese!t for $oans are easier to adot than adoting the mar?to?maret norms in !ase of investment in !ororate  onds8 imi$ar$y' the !ororates a$so refer to go for an $oans than raising fnds from the  ond maret8 ororate onds are sa$$y rated efore they !ome to the maret (4hether the ond is  $i!$y issed or rivate$y $a!ed)8 >he $i<idity in the maret for !ororate onds is se4ed to4ards higher investment grade onds' and there is ra!ti!a$$y no vo$me in $o4er grades8 Any isser trying to raise det in the maret 4ith an isse that has rating of non?investment grade fa!es ro$em8 >he $a! of $i<idity has een a ig !ha$$enge for the ne4 entrants in raising fnds8 A$$ these have !reated a vi!ios !ir!$e in the deve$oment of the !ororate ond maret8 #ndian !ororate ond maret a$so sees high nmer of isses every year8 #n one sing$e year' there 4ere more than t4o thosand rimary isses' indi!ating the arriva$ of more than t4o thosands ne4 !ororate onds in the maret8 >his hge nmer maes it very diffi!$t for  any !ororate ond to remain $i<id8 >he so$tion to this ro$em $ies in romoting reissan!e of the same onds8 >he asen!e of maret maers is a$so another hindran!e for the deve$oment of !ororate det maret in #ndia8 #n Government se!rities maret' ans and "6s $ay a ig ro$e as maret maer 4ith reasona$e s!!ess (han 2012)8 *o4ever' ho$ding high amont of sto!  of !ororate ond is e;treme$y risy8 #n !ororate ond maret in #ndia' the deentre trstees (6>s) are not very effe!tive8 6>s on$y !ome to the i!tre at the time of issan!e of onds to ensre that the roerty !harged 4ith the onds is avai$a$e and ade<ate' free from en!mran!eQ then again at the time of  matrity 4hen the roerty e!omes free8 >he !reation of the oo$ of assets !harged 4ith the  onds is not fast in #ndia8 >he ro$e of 6>s !an e enhan!ed y giving them the o4er of  enfor!ement of !ontra!ts8 >here 4as asen!e of order?mat!hing $atform for !ororate onds' $ie the N6?O+  $atform in G?se! maret8 >he $atforms avai$a$e in the e;!hanges 4ere st eing sed for  reorting of O> trades in the se!ondary maret8 >he !reation of a ne4 $atform that meets the !hanged e;e!tation of the maret arti!iants 4as fe$t ("rasanna 2012)8>he ne4  $atform ringing additiona$ $i<idity is not !ertain' t it is $ie$y to generate ositive e;terna$ities $ie any other infrastr!tre' and he$ in maing the se!ondary maret of  !ororate onds more transarent and rost8 >he reg$atory rdentia$ norms for the arti!iants in #ndia5s !ororate ond maret a$so aear restri!tive8 >he ans' +s and insran!e !omanies fa!e $imits on the investment amont and on the rating stats of the !ororate onds to mae investment8 #n #ndia' !ororate onds are deemed risy as the $ega$ frame4or for re!overing the investment is too $engthy8 A$so' enfor!ement of !ontra!ts is very oor8 @or$d Ban' in its re!ent 6oing Bsiness Reort' has $a!ed #ndia at 1/ ot of the 1- !ontries as er the enfor!ement of the !ontra!t arameter8 #t may e high$ighted that the time taen to reso$ve a

%4

diste is 1/20 days on an average in #ndia' 4hereas it is 3.0 days in !ase of *ong ong8 >his de$ay is a deterrent for any finan!ia$ entity trying to invest in the !ororate ond8 Overa$$' a m$titde of fa!tors ranging from higher !osts' ro!edra$ hass$es' to $ong $ega$ remedies are osta!$es in the gro4th of !ororate ond maret in #ndia8 >he need of the hor  is to ring reform in a$$ the aove ase!ts and a$$o4 the !ororate ond maret to tae off8

Impact o bond market in an economy %5

A 4e$$?deve$oed !ororate ond maret sorts e!onomi! deve$oment8 #t rovides an a$ternative sor!e of finan!e and s$ements the aning system to meet the re<irements of  the !ororate se!tor to raise fnds for $ong?term investment8 #t is e$ieved that this segment a!ts as a sta$e sor!e of finan!e 4hen the e<ity maret is vo$ati$e' and a$so ena$es firms to tai$or their asset and $iai$ity rofi$es to red!e the ris of matrity8 #t a$so he$s in the diversifi!ation of riss in the system8 #n vie4 of hge investment re<irement for  infrastr!tre se!tor' the resen!e of a 4e$$?deve$oed ond maret assmes signifi!an!e in #ndia8 @ith the de!$ining ro$e of deve$oment finan!e instittions (6#s)' a deve$oed and rost ond maret e!omes a$$ the more imortant8 inan!ia$ marets he$ to effi!ient$y dire!t the f$o4 of savings and investment in the e!onomy in 4ays that fa!i$itate the a!!m$ation of !aita$ and the rod!tion of goods and servi!es8 >he !omination of 4e$$? deve$oed finan!ia$ marets and instittions' as 4e$$ as a diverse array of finan!ia$ rod!ts and instrments' sits the needs of orro4ers and $enders and therefore the overa$$ e!onomy8 inan!ia$ marets (s!h as those that trade sto!s or onds)' instrments (from an 6s to ftres and derivatives)' and instittions (from ans to insran!e !omanies to mta$ fnds and ension fnds) rovide oortnities for investors to se!ia$ie in arti!$ar marets or  servi!es' diversify riss' or oth8 As noted y 6emirg_`?nt and Devine' together finan!ia$ marets and finan!ia$ instittions !ontrite to e!onomi! gro4thQ the re$ative mi; of the t4o does not aear to e an imortant fa!tor in gro4th8 Bond maret is $ie$y to e more enefi!ia$ for siness having $onger term !ash f$o4s' 4here investors may e 4ary of riss asso!iated 4ith e<ity and $ong?term finan!ing from  ans may not e easi$y avai$a$e 8C;erts arge that #ndia5s high gro4th !an e sstained y imroving infrastr!tre and e;anding the manfa!tring ase' and a deve$oed ond maret !an mae oth the tass easier8 rthermore' #ndia is in need of U1 tri$$ion in the !rrent five year $an for finan!ing its infrastr!tre8 >he Ban dominated finan!ia$ system is n$ie$y to finan!e s!h a high amontQ in this !onte;t' re!orse to the ond maret !an e he$f$8 Bond enhan!es the ris oo$ing and ris sharing oortnities for investors and  orro4ers8 Bonds affe!t the e!onomy y determining interest rates8 >his affe!ts the amont of $i<idity8 >his determines ho4 easy or diffi!$t it is to y things on !redit' tae ot $oans for !ars' %6

hoses or ed!ation' and e;and sinesses8 #n other 4ords' onds affe!t everything in the e!onomy8 >reasry >reasry onds ima!t the e!onomy y roviding e;tra sending money for the government government and !onsmers8 >his is e!ase treasry onds are essentia$$y a $oan to the government that is sa$$y sa$$y r!hase r!hased d y domesti! domesti! !onsme !onsmers8 rs8 *o4e *o4ever ver'' for a varie variety ty of reason reasons' s' foreig foreign n governments have een r!hasing a $arger er!entage of >reasry onds' in effe!t roviding the the U88 U88 gov gover ernm nment ent 4ith 4ith a $oan8 $oan8 >h >his is a$$o4 a$$o4ss the the gov gover ernm nment ent to send send mo more' re' 4hi! 4hi!h h stim$ates the e!onomy8 >reasry onds a$so he$ the !onsmer8 @hen there is a great demand for onds' it $o4ers the interest rate e!ase the government doesn5t have to offer as m!h to attra!t yers8 Do4er  interest rates on onds means $o4er interest rates on mortgages8 mortgages8 >his a$$o4s homeo4ners to afford more e;ensive homes8 +ost imortant' onds affe!t mortgage interest rates8 Bond investors !an !hoose among a$$ the different tyes of onds' as 4e$$ as mortgages so$d on the se!ondary maret8 >hey are !onstant$y !omaring the ris vs re4ard offered y interest rates8 Bonds o4erf$ re$ationshi to the e!onomy means yo !an a$so se them for fore!asting8 >hatEs e!ase ond yie$ds te$$ yo 4hat investors thin the e!onomy 4i$$ do8 Norma$$y' Norma$$y' the yie$ds on $ong?term notes are higher' e!ase investors re<ire more retrn in e;!hange for  tying  their money for a $onger time8 #n this !ase' the yie$d !rve s$oes  4hen $ooed at from $eft to right8 An inverted yie$d !rve te$$s yo that the e!onomy is aot to go into re!ession8 >hatEs 4hen the yie$ds on short?dration short?dration >reasry >reasry i$$s' $ie the one?month' si;?month or one?year notes' are higher than the yie$ds on $ong?term ones $ie 10?year or 30?year >reasry onds8

%%

)ond market vHs e'uity market %8

India Government Bond -? //;20-< //;20 -< >he #ndia Government Bond 10S in!reased to &8&. er!ent in +ar!h from &8&2 er!ent in erary of 201-8 >he #ndia Government Bond 10S averaged 9819 from 199/ nti$ 201-' rea!hing an a$$?time high of 1/8&. in Ari$ of 199. and a re!ord $o4 of /89. in O!toer of 20038

A!ta$

"revios &8&.

*ighest &8&2

Do4est 1/8&.

/89.

re<en!y 6ai$y

%&

Genera$$y' a government ond is issed y a nationa$ government and is denominated in the !ontryKs o4n !rren!y8 Bonds issed y nationa$ governments in foreign !rren!ies are norma$$y referred to as sovereign onds8 >he yie$d re<ired y investors to $oan fnds to governments ref$e!ts inf$ation e;e!tations and the $ie$ihood that the det 4i$$ e reaid8

By taing into !onsideration the movement of S>+ and BC ense; (as $aid do4n aforesaid) it is very !$ear that the yie$d !rve is de!reasing 4hi$e ense; is !onsidera$y in!reasing8 Grada$$y $o4er S>+ indi!ates higher maret ri!e of det se!rities and !onse<ent$y high retrn to the ho$ders8 #t is a good time to invest into ond maret' aart from the aove 8

de!reasing mode of interest rate y RB# (reo rate has a$ready een de!reased t4i!e) !an e a good sign in ond8

81

Bonds v7s A$ternative investments

Alternative Investment Characterstics &ypes of  'nestments

 Ris*Return +eatures

,iquidity

rea$ estate

residen!esQ !ommer!ia$ rea$ estateQ ra4 $and8

Darge idiosyn!rati! ris !omonentQ  rovides good diversifi!ation8

Do48

"rivate e<ity

"referred shares of sto!Q ventre !aita$Q yot fnds8

tart? and midd$emaret rivate !omanies have more ris and $o4er retrns than investments in esta$ished !omanies via yot fnds8

Do48

82

4e$$?esta$ished Byot fnds  rivate firms and !ororate sin?offs8

Dess ris than ventre !aita$ fndsQ good diversifi!ation8

Do48

#nfrastr!tr  e fnds

"$i! infrastr!tre assets8

Do4 ris' $o4 retrnQ good diversifi!ation8

Do48

Do4 !orre$ation 4ith sto!s7onds8

!ommodities

Agri!$tra$  rod!tsQ !rde oi$Q meta$s8

managed ftres

tend to trade on$y in derivatives maret8 "rivate !ommodity  oo$sQ $i!$y traded !ommodity ftres fnds8

ris is et4een that of e<ities and  onds8 Negative and $o4 !orre$ations 4ith e<ities and $o4?to?moderate !orre$ations 4ith onds8

Do4er for  rivate fnds than for $i!$y traded !ommodity ftres fnds8

distressed se!rities

may e art of hedge fnd !$ass or rivate e<ity !$ass8 #nvestments !an e in det and7or e<ity8

deends on si$$?ased strategies8 !an earn higher retrns de to $ega$ !om$i!ations and the fa!t that some investors !annot invest in them8

hedge fnd str!tre more $i<idQ rivate e<ity str!tre $ess $i<id8

"ositive !orre$ation 4ith inf$ation8

air$y $i<id8

Rea$ Cstate Rea$ estate is an asset !$ass as 4e$$ as an a$ternative investment8 *igh ris?adsted  erforman!e is ossi$e e!ase of the $o4 $i<idity' $arge $ot sies' immoi$ity' high transa!tions !osts' and $o4 information transaren!y that sa$$y means the se$$er no4s more than the yer8 Rea$ estate tyi!a$$y rea!ts to ma!roe!onomi! !hanges different$y than sto!s and onds' and ea!h investment has a $arge idiosyn!rati! (nsystemati!) ris !omonent8 Be!ase of oth of  these !hara!teristi!s' rea$ estate has rovided diversifi!ation8

Private !uity "rivate e<ity is $ess of a diversifier and more a $ong?term retrn enhan!er8 "rivate e<ity investments (oth ventre !aita$ and yot fnds) are sa$$y i$$i<id' re<ire a $ong?term !ommitment' and have a high $eve$ of ris 4ith the otentia$ for !om$ete $oss8 #n addition' there is often a minority dis!ont asso!iated 4ith the investment8 Be!ase of these isses' investors re<ire a high e;e!ted interna$ rate of retrn8 =entre !aita$ investments have $o4er transaren!y than yot fnds' 4hi!h !an a!ta$$y add to the otentia$ for $arge  rofits8 "rivate e<ity retrns tyi!a$$y move 4ith sto! maret retrns8 omted !orre$ations are often ositive and $o4' t some attrite the $o4 !orre$ation to the infre<ent$y dated (i8e8' Lsta$eM) ri!es of the rivate e<ity8

Commodities ommodities !hief$y offer diversifi!ation to a ortfo$io of sto!s and onds8 orre$ations of  !ommodity indi!es 4ith sto!s and onds have een $o4 and even s$ight$y negative8 @ith the e;!etion of the agri!$tra$ sgros' !ommodity indi!es have a strong ositive !orre$ation

83

4ith inf$ation8 >hat is a enefit to the investor e!ase they rovide a hedge against inf$ation' 4hi$e sto!s and onds are hrt y inf$ation8 >he retrns on !ommodities have genera$$y een $o4er than sto!s and onds over the eriod 1990,200/' oth on an aso$te asis and a ris?adsted asis8

3ed&e =unds *edge fnds generated higher aso$te and ris?adsted retrns than sto!s and onds over  the eriod 1990,200/8 >he hedge nd !omosite #nde; (h!#) retrn' standard deviation' and hare ratio 4ere 138/.F' -8&1F' and 18.1' rese!tive$y8 *edge fnds raned et4een  onds and sto!s in the more re!ent eriod of 2000,200/' 4here the !orresonding nmers 4ere .8/F' /83F' and 08.8 or the more re!ent eriod' the mean retrn and hare ratio is higher than the measres for sto!s' t they are oth $o4er than the measres for onds8 As 4as the !ase for most of the revios a$ternative investments' a /07/0720 sto!7ond7 h!# ortfo$io had a higher retrn and $o4er standard deviation than the -07-0 sto!7 ond  ortfo$io over oth the 1990,200/ and 2000,200/ eriods8 *edge fnds vary 4ide$y' ho4ever' so the enefits of investing in one of any given sty$e 4i$$ differ8 igre  rovides a reresentative $ist of the est and 4orst erforming fnds 4ith their !orre$ations 4ith the H" -00 and the Dehman government7!ororate Bond #nde;8 >he $ast t4o ro4s in igre  !omment on ea!h inde;5s retrn and ho4 4e$$ it added diversifi!ation over the eriod 1990,200/8

=i&ure/ 3ed&e =und Strate&y IndeD ,erormance =rom #$$"%""E

Short Sellin g

 MSCI  Worl d

return

K .61<

%.8<

Standard deviation

1&.3& <

14.62 <

 Measure (annualized)

 Fixed Income  Arbitrag e

 Equit    !edg e

"lob  !FC al  I  Macr  (com#o site) o

%.62<

15.& <

16.&8 <

13.46 <

3.61<

&.34<

8.38 <

5.%1 <

S(ar/e ratio

K.25

.1&

.&2

1.24

1.51

1.61

correlation $ SLP 5

K.%6

.86

.6

.64

.26

.5&

correlation $ +ond'

K.1

.&

K.6

.1

.34

.1%

Per-ormance

Poor

moder ate

moderat e

good

good

:ood

diver'i7cation

good

Poor

good

modera te

good

)oder ate

84

Mana&ed =utures )anaged -uture' are u'ually con'idered a category o- (edge -und' and are u'ually com/ared to 'toc0' and +ond'; +ut t(eir record (a' +een 'imilar to t(at o- (edge -und'. over t(e /eriod 1&&K24; t(e dollar!$eig(ted index o-  'e/arately managed account' (ad a return; 'tandard deviation; and S(ar/e ratio eual to 1.85<; &.&6<; and .66; re'/ectively; $(ic( i' a+out t(e 'ame a' 'toc0' +ut $it( a +etter S(ar/e ratio. T(ey al'o (ad a (ig(er return t(an +ond' $it( a lo$er S(ar/e ratio.  T(e ctM al'o ran0ed +et$een +ond' and 'toc0' -rom 2K24. T(e corre'/onding num+er' $ere %.8&<; 8.66<; and .6. T(e return $a' certainly (ig(er t(an t(e K2.3< return -or 'toc0' and 'lig(tly le'' t(an t(e 8.< return -or +ond'.

.istressed Securities i'tre''ed 'ecurity return' (ave (ad a relatively (ig( average return +ut a large negative '0e$; 'o t(e com/ari'on' u'ing average' and S(ar/e ratio' can +e mi'leading. T(ey can /rovide (ig( return' +ecau'e many inve'tor' cannot (old di'tre''ed!de+t 'ecuritie'; and -e$ analy't' cover t(e mar0et. a'ed on com/ari'on' o- t(e average return and S(ar/e ratio; t(e (r di'tre''ed Securitie' Index out/er-ormed +ot( 'toc0' and +ond'; +ot( on an a+'olute and on a ri'0! ad,u'ted +a'i'. T(e return' are o-ten event!driven; 'o t(ey are uncorrelated $it( t(e overall 'toc0 mar0et.

85

Selection o fDed income bearin& securities mutual unds

NP ;/ari+u' lexi de+t

6 )ont('

&.6<

 (ig( intere't

6 )ont('

1

#eliance dynamic

6 )ont('

&.%

"LT (it -und

6 )ont('

11.5

6 )ont('

13

SI magnum gilt +aret retrn &8/9F

>?i$$s 823F X Rf 

 Name

Rate F

>?i$$s

( =" . #

2

( Rm'− R m )

( Rm'− ( R m'− Rf  )

Ran  

( m'

BN"

98.0

823

( 9.60 −7.49 )

2

2811

183&

 

/

1.37 2.11

=0.6492

-

86

2

*6 

10800

823

( 10−7.49 )

Re$i

98&

823

( 9.70 −7.49 )

DH>

118-0

823

( 11.50 −7.49 )

B#

13800

823

( 13−7.49 )

2

2

2

28-1

18&&

 

1.77 2.51

/

= 0.7051

3

2821

18/&

 

1.47 2.21

/

= 0.6651

/

/801

382&

 

3.27 4.01

/

=0.8154

2

-8-1

/8&&

 

4.77 5.51

/

=5.51

1

-ote/ The data are based on # March %"#9

8%

Benefits and risks associated 5ith bonds

@hi$e onds traditiona$$y earn $o4er retrns than sto!s' that does not mean there isnEt a  $a!e in yor ortfo$io for onds8 >he most !ommon reason for investors to r!hase onds are e$o4: •

iversification: Bonds tend to e $ess vo$ati$e than sto!s and !an therefore stai$ie the va$e of yor ortfo$io dring times 4hen the sto! maret strgg$es8 *aving a !omination of oth tyes of investments over the $ong term !an often rovide !omara$e retrns 4ith $ess ris than a ortfo$io devoted to on$y one tye of  investment8 Stability: #f investors no4 they 4i$$ need a!!ess to $arge sms of money in the near  ftre?for e;am$e' to ay for !o$$ege' a home' et!8?then it does not mae sense to  $a!e that money in a high$y vo$ati$e investment $ie sto!s8 Be!ase the maority of  the retrn on onds !omes from the interest ayments (the !oon ayments)'

88

f$!tations in the ri!e of a ond 4i$$ have $itt$e ima!t on the va$e of the investment8 "onsistent income: Un$ie sto! dividends' !oon ayments are !onsistent$y distrited at reg$ar interva$s8 #ndivida$s seeing this !onsistent in!ome might find  onds a etter a$ternative than the dividend ayments some sto!s offer8 Income predictability: #f yor oe!tive is to maintain a se!ifi!' steady $eve$ of  in!ome from yor ortfo$io' high <a$ity onds !an rovide a series of redi!ta$e !ash f$o4s 4ith minima$ ris to yor invested !aita$ (the rin!ia$)8 "hoice: A 4ide range of ond issers 4ith a variety of !oon rates and matrity dates are avai$a$e for yo to !hoose from8 >his a$$o4s yo to find the ond(s) 4ith !ash f$o4s that mat!h yor in!ome needs 4hi$e !om$ementing yor other ortfo$io ho$dings8 Ta1es: "ayments from some onds are e;emt from federa$ ta;es8 or individa$s in high ta; ra!ets' these investments are often an e;!e$$ent vehi!$e for their ortfo$io8 >a;?saving infrastr!tre onds are a good otion in the fi;ed in!ome !ategory8 >hese are issed y infrastr!tre !omanies aroved y the government and they offer a de!ent rate of interest $s ta; enefits8 #nvestment  to Rs 20'000 in these onds is e$igi$e for in!ome ta; ded!tion nder e!tion 0  of the #n!ome?>a; A!t8 >his is over and aove the Rs 1'00'000 ded!tion avai$a$e nder e!tion 08 >hese are $ong?term se!red onds 4hi!h matre in 10?1- years8 ## Dtd and " re!ent$y !$osed their infra ond isses8 A fe4 others' s!h as D#' #nfrastr!tre 6eve$oment inan!e omany' DH> #nfrastr!tre and #ndia #nfrastr!tre inan!e omany' are getting ready to $an!h their isses8

Bonds are often !a$$ed Wfi;ed in!omeW investments' t donEt $et that term foo$ yo8 Bonds are not ris$ess investments8 @hi$e they are sa$$y !onsidered m!h safer than sto!s' onds !an sti$$ $ose va$e 4hi$e yo ho$d them8 *ere is a rief $oo at some of t he riss asso!iated 4ith onds: •

•

Interest rate risk   ? Bond ri!es are inverse$y re$ated to interest rates' so if interest rates in!rease' the ri!e of the ond 4i$$ de!rease8 >he interest rate on a ond is set at the time it is issed8 Genera$$y' the !oon 4i$$ ref$e!t interest rates at the time of  issan!e8 *o4ever' if interest rates in!rease' eo$e 4i$$ e n4i$$ing to r!hase the  onds in the se!ondary maret at the ear$ier rate8 or e;am$e' if the !oon is set at .F and interest rates in the maret are at &F' the interest rate on the ond is 4e$$  e$o4 4hat yo !o$d get from a different investment8 >herefore' the ri!e of the  ond 4i$$ de!rease so that the !aita$ are!iation 4i$$ mae  for the differen!e in interest rates8 (or this reason' it !an e risy to y $ong?term onds dring eriods of $o4 interest rates8) "redit $isk   , A$so no4n as defa$t ris8 Pst as individa$s o!!asiona$$y defa$t on their $oans or mortgages' some organiations that isse onds o!!asiona$$y defa$t on their o$igations8 #f this is the !ase' the remaining va$e of yor investment !an e $ost8 Bonds issed y the federa$ government' for the most art' are immne from defa$t (if the government needed money it !o$d st rint more)8 Bonds issed y !ororations are more $ie$y to e defa$ted on ? !omanies often go anrt8 +ni!ia$ities o!!asiona$$y defa$t as 4e$$' a$thogh it is m!h $ess !ommon8 >he

8&

good ne4s is that yo are !omensated for taing on the higher riss asso!iated 4ith !ororate onds and mni!ia$ onds8 >he yie$d on !ororate onds is higher than that of mni!ia$ onds' 4hi!h is higher than that of treasry onds8 +oreover' there is a rating system that ena$es yo to no4 the amont of ris ea!h !$ass of ond entai$s8 •

•

"all $isk ? ome onds !an e !a$$ed y the !omany that issed them8 >hat means the onds have to e redeemed y the ond ho$der' sa$$y so that the isser !an isse ne4 onds at a $o4er interest rate8 >his for!es yo to reinvest the rin!ia$ sooner  than e;e!ted' sa$$y at a $o4er interest rate8 >his se!t 4i$$ e frther dis!ssed in $ater se!tions8 Inflation $isk  ? @ith fe4 e;!etions' the interest rate on yor ond is set 4hen it is issed' as is the rin!ia$ that 4i$$ e retrned at matrity8 #f there is signifi!ant inf$ation over the time yo he$d the ond' the rea$ va$e (4hat yo !an r!hase 4ith the in!ome) of yor investment 4i$$ sffer8 Term to maturity: As onds aroa!h matrity' their maret va$e aroa!hes their  fa!e va$e8 #n genera$' the $onger the term to matrity and the $o4er the !oon rate' the more sensitive a ond is to any !hanges in rate8 @hen interest rates in!rease'  onds 4ith distant matrity dates and $o4 !oon rates e;erien!e the greatest fa$$ in  ri!e8 Special features: +any onds have se!ia$ featres that may have a signifi!ant ima!t on their ri!e' ris and the retrns yo may earn8 >hey !an e !a$$ed (reaid) ear$y or they !an e !onverted' for e;am$e' into shares of the issing !omany8 Bonds !an a$so e e;tended (reayment deferred from the origina$ term to a $ater  date) or other se!ia$ rovisions !an a$y8

&

Application o  derivatives instruments on bonds

>ed+in+ tools: erivatives: A derivative is an instrment 4hose va$e is derived from the va$e of one or  more nder$ying' 4hi!h !an e !ommodities' re!ios meta$s' !rren!y' onds' sto!s' sto!s indi!es' et!8 or most !ommon e;am$es of derivative instrments are or4ards' tres' Otions and 4as8

&1

@or5ard: A for4ard !ontra!t is a !stomied !ontra!t et4een t4o arties' 4here sett$ement taes $a!e on a se!ifi! date in ftre at a ri!e agreed today8 >he main featres of for4ard !ontra!ts are •

•

>hey are i$atera$ !ontra!ts and hen!e e;osed to !onter?arty ris8 Ca!h !ontra!t is !stom designed' and hen!e is ni<e in terms of !ontra!t sie' e;iration date and the asset tye and <a$ity8

•

>he !ontra!t ri!e is genera$$y not avai$a$e in $i! domain8

•

>he !ontra!t has to e sett$ed y de$ivery of the asset on e;iration date8

•

#n !ase the arty 4ishes to reverse the !ontra!t' it has to !om$sori$y go to the same !onter arty' 4hi!h eing in a monoo$y sitation !an !ommand the ri!e it 4ants8

@utures: tres are e;!hange?traded !ontra!ts to se$$ or y finan!ia$ instrments or  hysi!a$ !ommodities for a ftre de$ivery at an agreed ri!e8 >here is an agreement to y or  se$$ a se!ified <antity of finan!ia$ instrment !ommodity in a designated ftre month at a  ri!e agreed on y the yer and se$$er8 >o mae trading ossi$e' BC se!ifies !ertain standardied featres of the !ontra!t8 S5aps: 4as are rivate agreements et4een t4o arties to e;!hange !ash f$o4s in the ftre a!!ording to a rearranged form$a8 >hey !an e regarded as ortfo$ios of for4ard !ontra!ts8 >he t4o !ommon$y sed s4as are interest rate s4as and !rren!y s4as8

#nterest rate s4as: >hese invo$ve s4aing on$y the interest re$ated !ash f$o4s et4een the  arties in the same !rren!y8 rren!y s4as: >hese entai$ s4aing oth rin!ia$ and interest et4een the arties' 4ith the !ash f$o4s in one dire!tion eing in a different !rren!y than those in the oosite dire!tion8 %ptions: Otions are of t4o tyes ? !a$$s and ts8 a$$s give the yer the right t not the o$igation to y a given <antity of the nder$ying asset' at a given ri!e on or efore a given ftre date8 "ts give the yer the right' t not the o$igation to se$$ a given <antity of the nder$ying asset at a given ri!e on or efore a given date8

6erivative instrments are 4ide$y a$i!a$e to de!omose the ris asso!iated 4ith investments in onds in that !onte;t a$$ the derivative instrments $ie !a$$ otion' t otion' e;oti! otion' ftre' s4as and for4ard a$so8 >he ri!e of the rese!tive derivative instrments 4i$$ e a$4ays ased on the nder$ying assets8

&2

Macro2economic variables a5ectin& in the value o bond in India (Interest rates* inJation rate* per capita income* eDport and imports* leadin&* la&&in& and concurrent indicators* 7orld beta* .emand and supply* political a5airs* social and economic a5airs0

Interest rate risk:  Intere't rate ri'0 i' t(e ri'0 o- c(ange' in a +ond' /rice due to c(ange' in /revailing intere't rate'. (ange' in '(ort!term ver'u' long!term intere't rate' can a9ect variou' +ond'.

&3

1elationship bet7een bonds and interest rates

C(en you +uy a +ond; eit(er directly or t(roug( a mutual -und; youre lending money to t(e +ond' i''uer; $(o /romi'e' to /ay you +ac0 t(e /rinci/al >or /ar value? $(en t(e loan i' due >on t(e +ond' maturity date?. In t(e meantime; t(e i''uer al'o /romi'e' to /ay you /eriodic intere't /ayment' to com/en'ate you -or t(e u'e o- your money. T(e rate at $(ic( t(e i''uer /ay' you K t(e +ond' 'tated intere't rate  or cou/on rate K i' generally 7xed at i''uance.

An Inverse $elationship

@hen ne4 onds are issed' they tyi!a$$y !arry !oon rates at or !$ose to the revai$ing maret interest rate8 #nterest rates and ond ri!es have 4hatEs !a$$ed an Winverse re$ationshiW  , meaning' 4hen one goes ' the other goes do4n8 >he <estion is: ho4 does the revai$ing maret interest rate affe!t the va$e of a ond yo a$ready o4n or a ond yo 4ant to y from or se$$ to someone e$seZ >he ans4er $ies in the !on!et of Woortnity !ost8W #nvestors !onstant$y !omare the retrns on their !rrent investments to 4hat they !o$d get e$se4here in the maret8 As maret interest rates !hange' a ondEs !oon rate , 4hi!h' rememer' is fi;ed , e!omes more or $ess attra!tive to investors' 4ho are therefore 4i$$ing to ay more or $ess for the ond itse$f8 DetEs $oo at an e;am$e8 ose the AB omany offers a ne4 isse of onds !arrying a &F !oon8 >his means it 4o$d ay yo &0 a year in interest8 After eva$ating yor investment a$ternatives' yo de!ide this is a good dea$' so yo r!hase a ond at its ar va$e' 1'00081

;hat i rates &o upK

&4

No$ let' 'u//o'e t(at later t(at year; intere't rate' in general go u/. I- ne$ +ond' co'ting M1; are /aying an 8< cou/on >M8 a year in intere't?; +uyer' $ill +e reluctant to /ay you -ace value >M1;? -or your %<  +ond. In order to 'ell; youd (ave to o9er your +ond at a lo$er /rice K a di'count K t(at $ould ena+le it to generate a//roximately 8< to t(e ne$ o$ner. In t(i' ca'e; t(at $ould mean a /rice o- a+out M8%5. )hat if $ates @all

imi$ar$y' if rates droed to e$o4 yor origina$ !oon rate of &F' yor ond 4o$d e 4orth more than 1'0008 #t 4o$d e ri!ed at a remim' sin!e it 4o$d e !arrying a higher interest rate than 4hat 4as !rrent$y avai$a$e on the maret8 1 Of !orse' many other fa!tors go into determining the attra!tiveness of a arti!$ar ond: the $ength of  time nti$ the ond matres' 4hether or not its interest is ta;a$e' the !redit4orthiness of its isser' the $ie$ihood that the isser 4i$$ ay off det ear$y' and more8 Bt the imortant thing to rememer is that !hange' e it maor or minor' o!!rs in maret interest rates virta$$y every siness day8 >he movement of ond ri!es and ond yie$ds is sim$y a rea!tion to that !hange8

Inflation rate: Inflation: #nf$ation is a sstained rise in overa$$ ri!e $eve$s8 +oderate inf$ation is asso!iated 4ith e!onomi! gro4th' 4hi$e high inf$ation !an signa$ an overheated e!onomy8

As an e!onomy gro4s' sinesses and !onsmers send more money on goods and servi!es8 #n the gro4th stage of an e!onomi! !y!$e' demand tyi!a$$y otstris the s$y of goods' and rod!ers !an raise their ri!es8 As a res$t' the rate of inf$ation in!reases8 #f e!onomi! gro4th a!!e$erates very raid$y' demand gro4s even faster and rod!ers raise ri!es !ontina$$y8 An 4ard ri!e sira$' sometimes !a$$ed Lrna4ay inf$ationM or Lhyerinf$ation'M !an res$t8

>o5 does inflation affect investment returns

#nf$ation oses a Lstea$thM threat to investors e!ase it !his a4ay at rea$ savings and investment retrns8 +ost investors aim to in!rease their $ong?term r!hasing o4er8 &5

#nf$ation ts this goa$ at ris e!ase investment retrns mst first ee  4ith the rate of  inf$ation in order to in!rease rea$ r!hasing o4er8 or e;am$e' an investment that retrns 2F efore inf$ation in an environment of 3F inf$ation 4i$$ a!ta$$y rod!e a negative retrn (1F) 4hen adsted for inf$ation8 #f investors do not rote!t their ortfo$ios' inf$ation !an e harmf$ to fi;ed in!ome retrns' in  arti!$ar8 +any investors y fi;ed in!ome se!rities e!ase they 4ant a sta$e in!ome stream' 4hi!h !omes in the form of interest' or !oon' ayments8 *o4ever' e!ase the rate of interest' or !oon' on most fi;ed in!ome se!rities remains the same nti$ matrity' the  r!hasing o4er of the interest ayments de!$ines as inf$ation rises8 #n m!h the same 4ay' rising inf$ation erodes the va$e of the rin!ia$ on fi;ed in!ome se!rities8 ose an investor ys a five?year ond 4ith a rin!ia$ va$e of 1008 #f the rate of inf$ation is 3F anna$$y' the va$e of the rin!ia$ adsted for inf$ation 4i$$ sin to aot . over the five?year term of the ond8 Be!ase of inf$ation5s ima!t' the interest rate on a fi;ed in!ome se!rity !an e e;ressed in t4o 4ays8 •

•

>he nomina$' or stated' interest rate is the rate of interest on a ond 4ithot any adstment for inf$ation8 >he nomina$ interest rate ref$e!ts t4o fa!tors: the rate of  interest that 4o$d revai$ if inf$ation 4ere ero (the rea$ rate of interest' e$o4)' and the e;e!ted rate of inf$ation' 4hi!h sho4s that investors demand to e !omensated for the $oss of retrn de to inf$ation8 +ost e!onomists e$ieve that nomina$ interest rates ref$e!t the maret5s e;e!tations for inf$ation: Rising nomina$ interest rates indi!ate that inf$ation is e;e!ted to !$im' 4hi$e fa$$ing rates indi!ate that inf$ation is e;e!ted to dro8 >he rea$ interest rate on an asset is the nomina$ rate mins the rate of inf$ation8 Be!ase it taes inf$ation into a!!ont' the rea$ interest rate is more indi!ative of the gro4th in the investor5s r!hasing o4er8 #f a ond has a nomina$ interest rate of -F and inf$ation is 2F' the rea$ interest rate is 3F8

#nf$ation !an adverse$y affe!t fi;ed in!ome investments in another 4ay8 @hen inf$ation rises' interest rates a$so tend to rise either de to maret e;e!tations of higher inf$ation or e!ase the edera$ Reserve has raised interest rates in an attemt to fight inf$ation8 @hen interest rates rise' ond ri!es fa$$8 >hs' inf$ation may $ead to a fa$$ in ond ri!es' otentia$$y red!ing tota$ retrns on onds8

&6

Per capita income:

$ =C + I + ) + ( * − & )= )#P

 I 

i  I =f  ( i ) i = Rateof interest   I = Investment 

6e!rease in interest rate $eads to in!rease in investment' a$so 4ith de!rease in interest rate the va$e of the ond 4i$$ in!rease8 #n!rease in er !aita in!ome' is a ositive sign to invest in  ond e!ase disosa$e in!ome 4i$$ in!rease at a given $eve$ of ta; rates8 *igher demand for   onds $eads higher maret ri!e at a !ertain $eve$ of s$y8 Aart from the aove' in!rease in  er !aita in!ome may effe!ts ositive$y in the investment in rimary and se!ondary marets as 4e$$ as investment in onds

"redit ratin+: redit rating agen!ies assign !redit ratings to ond issers and to se!ifi!  onds8 A !redit rating !an rovide information aot an isser5s ai$ity to mae interest  ayments and reay the rin!ia$ on a ond8 #n genera$' the higher the !redit rating' the more $ie$y and isser is to meet its ayment o$igations , at $east in the oinion of the rating agen!y8 #f the isser5s !redit rating goes ' the ri!e of its onds 4i$$ rise8 #f the rating goes do4n' it 4i$$ drive their ond ri!es $o4er8 !1port and import: (T?+) in net foreign trade' higher e;ort' higher G6"' $o4er imorts higher G6"8 o therefore *igher G6" $eads to higher in!ome i8e s!oe for more investment8 )orld beta: Beta is a sensitivity of se!rities retrn 4ith rese!t t the maret movements8 *igher g$oa$ eta is a form of higher maret ris 4ith demands for higher e;e!ted retrn8 o g$oa$ eta and e;e!ted retrn from investment in ond' are ositive$y re$ated8

&%

#eadin+ la++in+ and concurrent:

 +I 

 a--in-

 eadin-

Concurrent 

t 1

t 2

t 

t 2 > t 1 t 2 is 2 × t 1  +I =f  ( t ) t is independent variable +I ( economic indication ) is dependent variable. t =time

emand and 'u//ly >he avai$ai$ity of onds and the demand for them a$so affe!ts the ri!e of onds8 As demand in!reases' ri!es rise' a$$ other fa!tors remaining the same8 A$so' as the s$y of onds de!$ines' for 

&8

e;am$e' ri!es genera$$y a$so rise8 #n oth !ases' if yo are ho$ding onds' their yie$d to matrity 4i$$ in!rease8 imi$ar$y' 4hen demand fa$$s or s$y in!reases' ri!es fa$$ and yie$d to matrity de!$ines8

$ecommendation and "onclusion

&&

$ecommendations for Sustainable Gro5th of "orporate Bond *arket in India +easres taen so far have rod!ed the imets needed to deve$o the ond maret in #ndia t the indi!ators are sggesting that the maret is yet to deve$o to its  otentia$ in rese!t to needs of ma!ro?e!onomy8 >he sie of the #ndian rivate !ororate ond maret as a er !ent of G6" (i8e8 - F) is sti$$ $o4er than the average for Cmerging Cast Asia and for Paan at 1&82 and 198 er !ent rese!tive$y8 #ndeed there are some otentia$ riss asso!iated 4ith this maret' s!h as' asen!e of rost  anrt!y frame4or' inade<ate $i<idity' thin investor ase' refinan!ing ris' $a!  of imroved maret fa!i$ities and standardiation8 ome of the isses and !ha$$enges 4hi!h need attention for the deve$oment of !ororate ond maret in #ndia are as fo$$o4s:

•

>aing measres to imrove $i<idity' s!h as' !onso$idation of arti!$ar$y the rivate$y $a!ed onds' et!Q

•

etting  a ertinent frame4or for maret maing in !ororate ondsQ

•

reating too$s for managing !redit' maret and $i<idity riss (e8g8 6' #nterest Rate tres (#R)' Reo in !ororate onds' et!8)

•

#ntrod!ing a sita$e instittiona$ me!hanism for !redit enhan!ement for  ena$ing +Cs and other !ororate 4ith $o4er !redit rating to a!!ess the !ororate ond maretQ

•

6eve$oing an even yie$d !rve for the government se!rities maret for  effi!ient ri!ing of the !ororate ondsQ

•

Cnhan!ing transaren!y y setting  a !entra$ised dataase for tra!ing rating migration' isse sie' et!8Q

•

Am$ifying the s!oe of investment y rovident7ension7gratity fnds and insran!e !omanies in !ororate ondsQ

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Cn!oraging foreign investor arti!iation y in!reasing foreign investor  $imits' roviding ta; in!entives and easing reg$ations8 1

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Cn!oraging instittiona$ investor arti!iation y easing restri!tions on ho$ding investments grade se!rities and revaming the !ash !redit system and tattory $i<idity re<irements of ans8

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tandardied oening of the !ororate ond maret for the foreign investorsQ

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6eve$oing a safe and sond maret infrastr!treQ

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Csta$ishing a sond anrt!y r$eQ

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Rationa$iation of stam dty a!ross statesQ

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6eve$oing the se!ritiation maret nder the ne4 reg$atory frame4orQ

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Dast$y' e;tensive arti!iation of retai$ investors in the maret throgh sto!  e;!hanges and mta$ fnds8

"onclusion

>he #ndian det maret is dominated y government det maret8 >he tota$ vo$me had een en$arged in oth maret? government se!rities maret and !ororate det maret8 >he !ororate det maret has een in!reased in tota$ <antity t in !ase of maret !overage it has een insignifi!ant as !omared to government se!rities8 or the deve$oment of  finan!ia$ system of any e!onomy' the deve$oment of det maret is vita$ ese!ia$$y the !ororate det maret8 >here are a $ot of !ha$$enges avai$a$e in the maret 4hi!h is maor  osta!$es in the deve$oment of the maret $ie $a! of information among the investors' high stam dty !harges' $a! of innovative det instrments et!8 >he government sho$d fo!s more and more to deve$o this maret so that it !an attra!t more investors and it !an otima$$y moi$ied and ti$ied the $i! fnds for the deve$oment of finan!ia$ system8 And then' or !ontry may have more strong finan!ia$ system as !omared to other  deve$oed !ontries8

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)iblio&raphy

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