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Bonds & Government Securities

Bond means debt instruments issued by the Central, State Governments and Corporates.

Debt instruments are contracts in which one party lends money to another on pre-determined terms with regard to rate of interest to be paid by the borrower to the lender. The periodicity of such interest payment and the repayment of principal amount borrowed are done either in instalments or in bullet.

Principal features of Bond Coupon rate refers to the periodic interest payments that are made by the borrower to the lender. Coupon rate is the rate at which interest is paid, and is usually represented as a percentage of the par value of the bond.

Principal is the amount that has been borrowed and is also called the par value or face value of the bond.

Maturity of the bond refers to the date on which the bond matures, or the date on which the borrower has agreed to pay the principal amount to the lender.

Term to maturity refers to the number of years remaining for the bond to mature. Term to maturity of the bond changes every day, from the date of issue of the bond until its maturity.

Government Securities These are medium to long-term interest-bearing obligations issued through the RBI by the Government of India and state governments. The RBI decides the cut-off coupon on the basis of bids received during auctions. There are issues where the rate is pre-specified and the investor only bids for the quantity. In most cases the coupon is paid semi-annually.

Treasury Bills Treasury bills (T-bills) are short term obligations issued through the RBI by the Government of India at a discount. T-bills are issued through auction procedure for different tenures i.e. 91 days and 364 days. The yield is determined on the basis of bids tendered and accepted.

Certificate of Deposit Certificates of deposits (CD) are issued by scheduled commercial banks excluding regional rural banks. These are unsecured negotiable promissory notes. Bank CD’s have maturity period of 91 days to one year, while those issued by financial institutions have maturities between one and three years.

Commercial Paper Commercial Paper (CP) is a short term, unsecured instrument issued by public or private corporate bodies to meet short term working capital requirements. Maturity varies between three months and one year. This instrument can be issued to individuals, banks, companies and other corporate bodies registered or incorporated in India.

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