The debt market in India consists of mainly two categories—the government securities (g-secs) markets comprising central government and state government securities, and the corporate bond market. The g-secs are the most dominant category of debt markets and form a major part of the market in terms of outstanding issues, market capitalization, and trading value.
In order to finance its fiscal deficit, the government floats fixed income instruments and borrows money by issuing g-secs that are sovereign securities issued by the Reserve Bank of India (RBI) on behalf of the Government of India. The corporate bond market (also known as the non-gsec market) consists of financial institutions (FI) bonds, public sector units (PSU) bonds, and corporate bonds/debentures.
Listed below are the various terminologies used in the fixed income market:
Coupon: A coupon payment on a bond is a periodic interest payment that the bondholder receives during the time between when the bond is issued and when it matures. Coupons are normally described in terms of the coupon rate, which is calculated by adding the total amount of coupons paid per year and dividing by the bond’s face value.
Maturity: Maturity refers to the term of the bond i.e. the date on which the issuer has to repay the principal amount to the bondholder.
Yield to maturity: The Yield to maturity (YTM) is the internal rate of return or the discount rate at which the sum of all future cash flows from the bond (coupons and principal) is equal to the price of the bond. (more…)