PMs, however, may recover the actual charges paid by them to CCIL for settlement of trades or any other charges like transaction cost, annual maintenance charges AMC etc. In compliance to this, stock exchanges have launched debt trading G-Secs as also corporate bonds segment which generally cater to the needs of retail investors. The process involved in trading of G-Secs in Demat form in stock exchanges is as follows:. Major players in the G-Secs market include commercial banks and PDs besides institutional investors like insurance companies.
PDs play an important role as market makers in G-Secs market. A market maker provides firm two way quotes in the market i. Other participants include co-operative banks, regional rural banks, mutual funds, provident and pension funds. Foreign Portfolio Investors FPIs are allowed to participate in the G-Secs market within the quantitative limits prescribed from time to time. The important guidelines to be kept in view by the UCBs relate to formulation of an investment policy duly approved by their Board of Directors, defining objectives of the policy, authorities and procedures to put through deals, dealings through brokers, preparing panel of brokers and review thereof at annual intervals, and adherence to the prudential ceilings fixed for transacting through each of the brokers, etc.
Segregate dealing and back-office functions. Officials deciding about purchase and sale transactions should be separate from those responsible for settlement and accounting. Monitor all transactions to see that delivery takes place on settlement day. The funds account and investment account should be reconciled on the same day before close of business.
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Restrict the role of the broker only to that of bringing the two parties to the deal together, if a deal is put through with the help of broker. Have a list of approved brokers. A disproportionate part of the business should not be transacted with or through one or a few brokers.
Open a funds account for securities transactions with the same Scheduled Commercial bank or the State Cooperative bank with whom the Gilt Account is maintained. Ensure availability of clear funds in the designated funds accounts for purchases and sufficient securities in the Gilt Account for sales before putting through the transactions. Observe prudential limits for investment in permitted non-SLR securities bonds of nationalized banks, unlisted securities, unlisted shares of all-India Financial Institutions and privately placed debt securities. Do not use brokers in the settlement process at all, i.
Do not routinely make investments in non-SLR securities e. The deal slips should be serially numbered and verified separately to ensure that each deal slip has been properly accounted for. Once the deal is concluded, the deal slip should be immediately passed on to the back office it should be separate and distinct from the front office for recording and processing. For each deal, there must be a system of issue of confirmation to the counter-party.
The timely receipt of requisite written confirmation from the counter-party, which must include all essential details of the contract, should be monitored by the back office. In case of trades finalized in the OTC market and reported on NDS-OM reported segment, both the buying and selling counter parties report the trade particulars separately on the reporting platform which should match for the trade to be settled. What are the important considerations while undertaking security transactions? Which security to invest in — Typically this involves deciding on the maturity and coupon.
Maturity is important because this determines the extent of risk an investor like an UCB is exposed to — higher the maturity, higher the interest rate risk or market risk. If the investment is largely to meet statutory requirements, it may be advisable to avoid taking undue market risk and buy securities with shorter maturity. Within the shorter maturity range say years , it would be safer to buy securities which are liquid, that is, securities which trade in relatively larger volumes in the market.
The coupon rate of the security is equally important for the investor as it affects the total return from the security. Where and Whom to buy from- In terms of transparent pricing, the NDS-OM is the safest because it is a live and anonymous platform where the trades are disseminated as they are struck and where counterparties to the trades are not revealed.
In case, the trades are conducted on the telephone market, it would be safe to trade directly with a bank or a PD. Wherever a broker is used, the settlement should not happen through the broker.
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Trades should not be directly executed with any counterparties other than a bank, PD or a financial institution, to minimize the risk of getting adverse prices. To be sure of prices, only liquid securities may be chosen for purchase. A safer alternative for investors with small requirements is to buy under the primary auctions conducted by RBI through the non-competitive route. Since there are bond auctions almost every week, purchases can be considered to coincide with the auctions. Please see question 14 for details on ascertaining the prices of the G-Secs. The price of a G-Sec, like other financial instruments, keeps fluctuating in the secondary market.
The price is determined by demand and supply of the securities. Specifically, the prices of G-Secs are influenced by the level and changes in interest rates in the economy and other macro-economic factors, such as, expected rate of inflation, liquidity in the market, etc. Developments in other markets like money, foreign exchange, credit and capital markets also affect the price of the G-Secs. Policy actions by RBI e. This will show a screen containing the details of the latest trades undertaken in the market along with the prices.
On this page, the list of securities and the summary of trades is displayed. The total traded amount TTA on that day is shown against each security. Typically liquid securities are those with the largest amount of TTA. Pricing in these securities is efficient and hence UCBs can choose these securities for their transactions.
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Since the prices are available on the screen they can invest in these securities at the current prices through their custodians. The screenshots of the above webpage are given below:. Reporting on NDS-OM is a two stage process wherein both the seller and buyer of the security have to report their leg of the trade. System validates all the parameters like reporting time, price, security etc.
The securities leg of these trades settle in the CSGL account of the custodian. The system, in turn, will match the orders based on price and time priority. That is, it matches bids and offers of the same prices with time priority. It may be noted that bid and offer of the same entity do not match i. The NDS-OM platform is an anonymous platform wherein the participants will not know the counterparty to the trade. Once an order is matched, the deal ticket gets generated automatically and the trade details flow to the CCIL.
The settlement cycle for auctions of all kind of G-Secs i. On the settlement date, the fund accounts of the participants are debited by their respective consideration amounts and their securities accounts SGL accounts are credited with the amount of securities allotted to them.
The securities and funds are settled on a net basis i. CCIL guarantees settlement of trades on the settlement date by becoming a central counter-party CCP to every trade through the process of novation, i. During the period under shut, no trading of the security which is under shut is allowed. The main purpose of having a shut period is to facilitate finalizing of the payment of maturity redemption proceeds and to avoid any change in ownership of securities during this process.
Currently, the shut period for the securities held in SGL accounts is one day. Delivery versus Payment DvP is the mode of settlement of securities wherein the transfer of securities and funds happen simultaneously. This ensures that unless the funds are paid, the securities are not delivered and vice versa. DvP settlement eliminates the settlement risk in transactions. There are three types of DvP settlements, viz.
DvP I — The securities and funds legs of the transactions are settled on a gross basis, that is, the settlements occur transaction by transaction without netting the payables and receivables of the participant. DvP II — In this method, the securities are settled on gross basis whereas the funds are settled on a net basis, that is, the funds payable and receivable of all transactions of a party are netted to arrive at the final payable or receivable position which is settled.
DvP III — In this method, both the securities and the funds legs are settled on a net basis and only the final net position of all transactions undertaken by a participant is settled. Liquidity requirement in a gross mode is higher than that of a net mode since the payables and receivables are set off against each other in the net mode. In effect, during settlement, the CCP becomes the seller to the buyer and buyer to the seller of the actual transaction.
Once CCIL receives the trade information, it works out participant-wise net obligations on both the securities and the funds leg. All "WI " transactions are on an "if" basis, to be settled if and when the security is actually issued. WI market helps in price discovery of the securities being auctioned as well as better distribution of the auction stock. Short Sale is defined as sale of securities one does not own.
Certain Urban Cooperative Banks specifically permitted by the Department of Cooperative Bank Supervision for the purpose, can also undertake intra-day short sale of Government securities subject to adherence to the short sale limits, reporting and other risk management requirements prescribed for eligible entities by RBI from time to time. What are the basic mathematical concepts one should know for calculations involved in bond prices and yields?
An outline of the same with illustrations is provided in Box II below. The concept of time value of money is based on the premise that an investor prefers to receive a payment of a fixed amount of money today, rather than an equal amount in the future, all else being equal. In particular, if one receives the payment today, one can then earn interest on the money until that specified future date. Further, in an inflationary environment, a Rupee today will have greater purchasing power than after a year.
It is a standard method for using the time value of money to appraise long-term projects. Used for capital budgeting, and widely throughout economics, it measures the excess or shortfall of cash flows, in present value PV terms, once financing charges are met. Then they are summed. Where t - the time of the cash flow N - the total time of the project r - the discount rate the rate of return that could be earned on an investment in the financial markets with similar risk.
C t - the net cash flow the amount of cash at time t for educational purposes, C 0 is commonly placed to the left of the sum to emphasize its role as the initial investment. How is the Price of a bond calculated? What is the total consideration amount of a trade and what is accrued interest? The price of a bond is nothing but the sum of present value of all future cash flows of the bond. The interest rate used for discounting the cash flows is the Yield to Maturity YTM explained in detail in question no.
Accrued interest is the interest calculated for the broken period from the last coupon day till a day prior to the settlement date of the trade. Since the seller of the security is holding the security for the period up to the day prior to the settlement date of the trade, he is entitled to receive the coupon for the period held.
The last coupon date being Nov 25, , the number of days in broken period till Jan 29, one day prior to settlement date i. In the instant case, it is If market interest rate levels rise, the price of a bond falls. Conversely, if interest rates or market yields decline, the price of the bond rises. In other words, the yield of a bond is inversely related to its price.
The relationship between yield to maturity and coupon rate of bond may be stated as follows:. When the market price of the bond is less than the face value, i. When the market price of the bond is more than its face value, i. When the market price of the bond is equal to its face value, i. The three yield measures commonly used by investors to measure the potential return from investing in a bond are briefly described below:. Coupon yield refers to nominal interest payable on a fixed income security like G-Sec. This is the fixed return the Government i. Coupon yield thus does not reflect the impact of interest rate movement and inflation on the nominal interest that the Government pays.
Illustration: Coupon: 8. The current yield does not take into account the reinvestment of the interest income received periodically. The current yield for a 10 year 8. The price of a bond is simply the sum of the present values of all its remaining cash flows.
Present value is calculated by discounting each cash flow at a rate; this rate is the YTM. Thus YTM is the discount rate which equates the present value of the future cash flows from a bond to its current market price. In other words, it is the internal rate of return on the bond. The calculation of YTM involves a trial-and-error procedure. YTM could be calculated manually as well as using functions in any standard spread sheet like MS Excel.
Manual or trial and error method is complicated because G-Secs have many cash flows running into future. This is explained by taking an example below. In the MS Excel programme, the following function could be used for calculating the yield of periodically coupon paying securities, given the price. Settlement is the security's settlement date. The security settlement date is the date on which the security and funds are exchanged. Maturity is the security's maturity date. The maturity date is the date when the security expires. Basis is the type of day count basis to use.
What are the day count conventions used in calculating bond yields? Day count convention refers to the method used for arriving at the holding period number of days of a bond to calculate the accrued interest. As the use of different day count conventions can result in different accrued interest amounts, it is appropriate that all the participants in the market follow a uniform day count convention.
Hence, in the case of T-Bills, which are essentially money market instruments, money market convention is followed. Hence the convention changes in different countries and in different markets within the same country eg. Money market convention is different than the bond market convention in India.
In simplest form, duration refers to the payback period of a bond to break even, i. Duration is expressed in number of years. A step by step approach for working out duration is given in the Box IV below. First, each of the future cash flows is discounted to its respective present value for each period. Since the coupons are paid out every six months, a single period is equal to six months and a bond with two years maturity will have four time periods.
Second, the present values of future cash flows are multiplied with their respective time periods these are the weights. That is the PV of the first coupon is multiplied by 1, PV of second coupon by 2 and so on. Third, the above weighted PVs of all cash flows is added and the sum is divided by the current price total of the PVs in step 1 of the bond. The resultant value is the duration in no. Since one period equals to six months, to get the duration in no. This is the time period within which the bond is expected to pay back its own value if held till maturity.
The weighted average term time from now to payment of a bond's cash flows or of any series of linked cash flows. The higher the coupon rate of a bond, the shorter the duration if the term of the bond is kept constant. Duration is useful primarily as a measure of the sensitivity of a bond's market price to interest rate i. It is approximately equal to the percentage change in price for a given change in yield. In other words, duration is the elasticity of the bond's price with respect to interest rates.
It refers to the change in value of the security to one per cent change in interest rates Yield. The formula is. It is the present value impact of 1 basis point 0. It is often used as a price alternative to duration a time measure. Higher the PV01, the higher would be the volatility sensitivity of price to change in yield.
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From the modified duration given in the illustration under In value terms that is equal to 1. Thus, if the yield of a bond with a Modified Duration of 1. This is because the relationship between bond price and yield is not strictly linear i. Over large variations in prices, the relationship is curvilinear i. This is measured by a concept called convexity, which is the change in duration of a bond per unit change in the yield of the bond.
The book value of individual securities in AFS and HFT categories would not undergo any change after marking to market.
Prices of all Central G-Secs are given out everyday. Currently, a spread of 25 basis points 0. An illustration of valuation taking a State Government bond is given in the Box V below. Illustration for valuation of State Government Bonds Security — 9. Since valuation is being done on Jan 27, , we need to find out the number of years from this date to the maturity date of the security i.
Jan 1, to get the residual maturity of the security. This could be done manually by counting the number of years and months and days. However, an easier method will be to use MS. This gives us the residual maturity of 9. To find the Central Government yield for 9. The yield for the 9. Here we are finding the yield difference for 0. Also notice that the yield has to be used in decimal form e.
Having found the Central Government yield for the particular residual maturity, we have to now load the appropriate spread to get the yield of the security to be valued. Customarily, coupons are issued by manufacturers of consumer packaged goods or by retailers, to be used in retail stores as a part of sales promotions. They are often widely distributed through mail, coupon envelopes, magazines, newspapers, the Internet social media, email newsletter , directly from the retailer, and mobile devices such as cell phones. Since only price conscious consumers are likely to spend the time to claim the savings, coupons function as a form of price discrimination , enabling retailers to offer a lower price only to those consumers who would otherwise go elsewhere.
In addition, coupons can also be targeted selectively to regional markets in which price competition is great. He transformed Coca-Cola from an insignificant tonic into a profitable business by using advertising techniques. Candler's marketing included having the company's employees and sales representatives distribute complimentary coupons for Coca-Cola. The company gave soda fountains free syrup to cover the costs of the free drinks.
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Similarly, there are different uses of coupons which include: to incentive a purchase, to reduce the price of a particular item or items, provide a free sample, or to help allow marketers better-understand the demographics of their customer. Coupons can be used to research the price sensitivity of different groups of buyers by sending out coupons with different dollar values to different groups.
In addition, it is generally assumed that buyers who take the effort to collect and use coupons are more price sensitive than those who do not. Therefore, the posted price paid by price-insensitive buyers can be increased, while using coupon discounts to maintain the price for price-sensitive buyers who would not buy at a higher price. Store coupons are coupon-based discounts offered for a particular item or group of items. The issuing store will accept its own "store coupons", but some stores will also accept store coupons that are issued by competitors. Coupons issued by the manufacturer of a product may be used at any coupon-accepting store that carries that product.
Manufacturer's coupons have the advantage of being currency at a variety of retailers, not just at one store. Grocery coupons are incentives for people who want to save money, but manufacturer coupons are primarily intended to advertise products and lure new customers with financial incentives. They may also be used to increase the sales of newspapers or other publications. For example, people may purchase multiple copies of a newspaper or magazine in order to use the coupons contained within.
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