Fixed Income Markets
The maturity of the Fixed income markets is longer than 1 year. There are two kinds of instruments in the Fixed Income Markets viz. Bonds and Debentures.
Bond is an interest asset which can be issued by the Government, Companies, Banks, Public Bodies and any other large entities. The Bonds can be discount bonds, in which a fixed amount is paid back on maturity, or Coupon Bonds, in which the interest is paid at intervals.
In our country, the only the Government bonds are famous and make the bulk markets.
A debenture is a Bond which is issued by a corporate. Its basically a debt instrument used by the large companies to borrow medium and long term loans. The debenture holders can freely trade them and have NO voting rights in the company. The Interest paid against the debentures is charged from the profit of the company.
The following news appeared in Economic Times in March 21, 2010.
Reserve Bank of India will sell 2.87 trillion rupees ($64 billion) of bonds in the first half of 2010/11, 63 percent of its record full-year target, less than market expectations, sending yields down. On an average, Rs 110-150 billion of issuance would come to the market every week, Shyamla Gopinath, a deputy governor of the Reserve Bank of India (RBI), told reporters after officials of the central bank and the finance ministry met to finalize the first-half borrowing schedule.
Gopinath said the central bank would try to smoothly conduct the government’s borrowing programme. The RBI will provide later in the day details on the size and the maturity of the bonds to be auctioned. India’s gross borrowing in 2010/11 is set to rise an annual 1.3 percent to 4.57 trillion rupees to fund a fiscal deficit that is projected at 5.5 percent of the gross domestic product. (ET 21.3. 2010)
The underlined sentence illustrated the importance of the Government Bonds. Typically Government resorts to the route of selling bonds to finance its needs.
The bond is a loan received by the issuer from the bondholders who are lenders.
At the time of the Budget, the governments normally decide an amount that they plan to borrow for the financial year. This amount is determined usually on the basis of the deficit projected for that particular year, like the above news article says that government has the target of Fiscal deficit of 5.5%. This is called Planned Borrowing. Planner Borrowing is managed by the Reserve bank of India.
However, there may be an unplanned increase in the Government expenditures due to recession, war, natural calamities or an unforeseen decline in revenues of the Government. Then also Government can borrow. This borrowing is called “Unplanned Borrowing“.
Government Bonds are called G-secs.
G-secs have a minimum maturity of 2 years and maximum maturity of 30 years, though the bulk of the trading is in between 5-15 years.
The market of the Government securities / bonds is called Guilt Edge Market.
This investment is Risk Free and there is NO default risk.