1. FIXED INCOME AND MONEYFIXED INCOME AND MONEY
MARKET INSTRUMENTSMARKET INSTRUMENTS

2. BondsBonds

3. DefinitionDefinition
 AA bondbond is a debt security, in which the issuer owes theis a debt security, in which the issuer owes the
holders a debt and is obliged to repay the principal andholders a debt and is obliged to repay the principal and
interest (the coupon).interest (the coupon).
 Bonds are generally issued for a fixed term (the maturity)Bonds are generally issued for a fixed term (the maturity)
longer than one year.longer than one year.

4. Features of BondFeatures of Bond
 Issued by public authorities, credit institutions,Issued by public authorities, credit institutions,
companies and supranational institutions in thecompanies and supranational institutions in the primaryprimary
markets.markets.
 Issued through underwriting,auctioningIssued through underwriting,auctioning..
 The return on a bond is composed of three elements:The return on a bond is composed of three elements:
 Interest paid on the bond - the couponInterest paid on the bond - the coupon
 Return on interest paid on the bond that is reinvested - i.e.Return on interest paid on the bond that is reinvested - i.e.
interest on interestinterest on interest
 The capital gain or loss on the bond in terms of its price.The capital gain or loss on the bond in terms of its price.
 A bond’s price and a bond’s yield are inversely related.A bond’s price and a bond’s yield are inversely related.

5. Features of Bond-Cont.Features of Bond-Cont.
 Nominal, principal or face amountNominal, principal or face amount ..
 Issue price - The price at which investors buy the bonds when theyIssue price - The price at which investors buy the bonds when they
are first issued.are first issued.
 Maturity date - The date on which the issuer has to repay theMaturity date - The date on which the issuer has to repay the
nominal amount.nominal amount.
 Coupon - The interest rate that the issuer pays to the bond holders.Coupon - The interest rate that the issuer pays to the bond holders.
 Optionality - A bond may contain an embedded option.Optionality - A bond may contain an embedded option.
 Callability - Some bonds give the issuer the right to repay the bondCallability - Some bonds give the issuer the right to repay the bond
before the maturity date on the call dates. This is mainly the case forbefore the maturity date on the call dates. This is mainly the case for
high-yield bonds.high-yield bonds.
 Puttability - Some bonds give the bond holder the right to force thePuttability - Some bonds give the bond holder the right to force the
issuer to repay the bond before the maturity date on the put datesissuer to repay the bond before the maturity date on the put dates

6. Bond Interest CalculationsBond Interest Calculations
 Purchase Interest/Sale Interest – When any bond isPurchase Interest/Sale Interest – When any bond is
purchased/sold generally it is done cum interest. In casepurchased/sold generally it is done cum interest. In case
of purchase of Bond the interest paid by buyer is knownof purchase of Bond the interest paid by buyer is known
is Purchase Interest. In case of sale the interest receivedis Purchase Interest. In case of sale the interest received
by seller is known as sell interest.by seller is known as sell interest.
 It is calculated from the last day the bond paid interestIt is calculated from the last day the bond paid interest
up to but not including Settle Dateup to but not including Settle Date
 Interest accrual is getting started on a daily basis onInterest accrual is getting started on a daily basis on
Settle DateSettle Date
 It gets stopped accruing on day before Maturity DateIt gets stopped accruing on day before Maturity Date
 Bondholder receive Coupon and Principal on MaturityBondholder receive Coupon and Principal on Maturity
DateDate

7. ExampleExample
 Buy: 50,000,000 US Treasury Bond 7.25%Buy: 50,000,000 US Treasury Bond 7.25%
05/15/1005/15/10
 Price: 96.3125 (par 100, price on % terms)Price: 96.3125 (par 100, price on % terms)
 Trade date:Trade date: 10/28/0610/28/06
 Settle date:Settle date: 10/31/0610/31/06
 Accrual Con.:Accrual Con.: 30/36030/360
 Coupon Freq.:Coupon Freq.: Semi-AnnualSemi-Annual
Calculate purchase interest.Calculate purchase interest.

8. Players in Bond MarketPlayers in Bond Market
 IssuersIssuers
 InvestorsInvestors
 RegulatorsRegulators

9. IssuerIssuer
• The issuer base includes governments, MNCs, large localThe issuer base includes governments, MNCs, large local
corporates, financial institutions.corporates, financial institutions.
• PurposePurpose
 Diversification of funding base and increased stability in the capitalDiversification of funding base and increased stability in the capital
structurestructure
 To secure intermediate maturity funding for long term projects andTo secure intermediate maturity funding for long term projects and
capital expenditurecapital expenditure
 Mitigation of FX riskMitigation of FX risk
 Funding costs relative to maturity tends to be cheaper than rollingFunding costs relative to maturity tends to be cheaper than rolling
over short-term bank facilitiesover short-term bank facilities
 Positive impact on branding through market publicityPositive impact on branding through market publicity

10. InvestorsInvestors
• The investor base includes insurance companies, pensionThe investor base includes insurance companies, pension
funds, asset managers, broker dealers and banks.funds, asset managers, broker dealers and banks.
• PurposePurpose
 Higher yield pick-up over government securitiesHigher yield pick-up over government securities
 Diversification of investment portfolio to reduce overall risk profileDiversification of investment portfolio to reduce overall risk profile
 Matching duration of assets and liabilitiesMatching duration of assets and liabilities
 To fulfill criteria set by asset allocation policiesTo fulfill criteria set by asset allocation policies
 Contribute towards development of the domestic capital marketsContribute towards development of the domestic capital markets

11. RegulatorsRegulators
• Key regulators in the are Government, CMA or equivalent body,Key regulators in the are Government, CMA or equivalent body,
and the Stock Exchangeand the Stock Exchange
• PurposePurpose
 GovernmentGovernment has overall responsibility to institute macro economichas overall responsibility to institute macro economic
measures and a strong legal framework that create an enabling environmentmeasures and a strong legal framework that create an enabling environment
 The Capital Markets AuthorityThe Capital Markets Authority ensures investor protection throughensures investor protection through
supervision of the securities industry.supervision of the securities industry.
 The Stock ExchangeThe Stock Exchange provides a market place for secondary trading activityprovides a market place for secondary trading activity
and approves the listing of new issues.and approves the listing of new issues.

12. Types of bondTypes of bond
 Fixed rate bondsFixed rate bonds
 Have a coupon that remains constant throughout the life of theHave a coupon that remains constant throughout the life of the
bond.bond.
 Floating rate notesFloating rate notes
 Have a coupon that is linked to a money market index, such asHave a coupon that is linked to a money market index, such as
LIBORLIBOR..
 High yield bondsHigh yield bonds
 Bonds that are rated below investment grade by the credit ratingBonds that are rated below investment grade by the credit rating
agencies.agencies.
 RRelatively risky.elatively risky.
 Also called Junk bonds.Also called Junk bonds.
 Zero coupon bondsZero coupon bonds
 Do not pay any interest.Do not pay any interest.
 Traded at a substantial discount from par valueTraded at a substantial discount from par value ..

13. Types of bond – Cont.Types of bond – Cont.
 Inflation linked bondsInflation linked bonds
 Principal amount is indexed to inflationPrincipal amount is indexed to inflation..
 Interest rate is lower than for fixed rate bondsInterest rate is lower than for fixed rate bonds with a comparable maturity.with a comparable maturity.
 Eg:Treasury Inflation-Protected Securities (TIPS) and I-bonds.Eg:Treasury Inflation-Protected Securities (TIPS) and I-bonds.
 Asset-backed securitiesAsset-backed securities
 Bonds whose interest and principal payments are backed by underlying cashBonds whose interest and principal payments are backed by underlying cash
flows from other assets.flows from other assets.
 Eg: MBS, CMO, CDOEg: MBS, CMO, CDO
 Subordinated bondsSubordinated bonds
 Has a lower priority than other bonds of the issuer in case of liquidation.Has a lower priority than other bonds of the issuer in case of liquidation.
 Has a lower credit rating and a higher risk.Has a lower credit rating and a higher risk.
 Perpetual bondsPerpetual bonds
 No maturity date.No maturity date.
 Eg : UK ConsolsEg : UK Consols

14. RISKSRISKS
 Credit risk or default riskCredit risk or default risk
 Market or interest rate riskMarket or interest rate risk
 Reinvestment riskReinvestment risk
 Inflation riskInflation risk
 Liquidity riskLiquidity risk
 Political or legal riskPolitical or legal risk
 Event riskEvent risk

15. REPURCHASEREPURCHASE
AGREEMENT(REPO)AGREEMENT(REPO)

16. Repo-DefinitionRepo-Definition
 Transaction involving selling of securities andTransaction involving selling of securities and
simultaneously agreeing to purchase of thesimultaneously agreeing to purchase of the
same after specified time at a given price.same after specified time at a given price.
 Repo when viewed from the perspective of theRepo when viewed from the perspective of the
supplier of the securities and a reverse reposupplier of the securities and a reverse repo
from the point of view of the supplier of funds.from the point of view of the supplier of funds.
 Terminology depends largely on which partyTerminology depends largely on which party
initiated the transaction.initiated the transaction.

17. CharacteristicsCharacteristics
MaturitiesMaturities
CollateralCollateral
 Type- G-Sec, Federal Bonds ,T-bills.Type- G-Sec, Federal Bonds ,T-bills.
 Value-Dirty Price.Value-Dirty Price.
YieldsYields
 The sale and repurchase at the same price.The sale and repurchase at the same price.
 Provider of funds receives agreed upon interest.Provider of funds receives agreed upon interest.
 Lender of security receives the coupon, if any.Lender of security receives the coupon, if any.

18. DETERMINANTS OF REPODETERMINANTS OF REPO
RATESRATES
 Rates negotiated by the counterparties.Rates negotiated by the counterparties.
 Repo rate varies as per Fed rate movement.Repo rate varies as per Fed rate movement.
 Independent of the coupon rate on theIndependent of the coupon rate on the
underlying securities.underlying securities.
 Influenced by overall money market conditionsInfluenced by overall money market conditions
and demand supply factor.and demand supply factor.

19. SELECTED REPO ARRANGEMENTSSELECTED REPO ARRANGEMENTS
 Letter repoLetter repo..
 Hold-in-custody repoHold-in-custody repo (HIC Repo)(HIC Repo)
 Dollar Repo (Dollar Roll)Dollar Repo (Dollar Roll)
 ““Fixed-coupon dollar roll”-Same couponFixed-coupon dollar roll”-Same coupon
 ““Yield maintenance agreement”–Same YieldYield maintenance agreement”–Same Yield
 Reverse to maturityReverse to maturity
 Maturity of the agreement covers the remaining term to maturityMaturity of the agreement covers the remaining term to maturity
of the underlying securities.of the underlying securities.
 Purchaser retains the final payment of interest and principal.Purchaser retains the final payment of interest and principal.
 This amount is netted against the seller's repurchase obligation.This amount is netted against the seller's repurchase obligation.

20. SELECTED REPO ARRANGEMENTS-SELECTED REPO ARRANGEMENTS-
Cont.Cont.
 Flex RepoFlex Repo
 Repo arrangement with a flexible term to maturity.Repo arrangement with a flexible term to maturity.
 Sells some of the securities before repo matures.Sells some of the securities before repo matures.
 The dealer pays a lower rate to compensate earlyThe dealer pays a lower rate to compensate early
maturity.maturity.
 Index RepoIndex Repo
 Underlying interest rate resets periodically based onUnderlying interest rate resets periodically based on
Fed Rate, LIBOR etc.Fed Rate, LIBOR etc.
 Resembles flex repos.Resembles flex repos.
 Used regularly to hedge or finance positions inUsed regularly to hedge or finance positions in
securities such as floating-rate notessecurities such as floating-rate notes

21. PARTICIPANTS IN THE REPOPARTICIPANTS IN THE REPO
MARKETMARKET
InvestorsInvestors
DealersDealers
BrokersBrokers
Federal ReserveFederal Reserve

22. TREASURY BILLSTREASURY BILLS

23. TREASURY BILLSTREASURY BILLS
 Short-term securities issued by the U.S.Short-term securities issued by the U.S.
Treasury.Treasury.
 Maturities – 1,3, 6 and 12 months.Maturities – 1,3, 6 and 12 months.
 Minimum denominations - $1,000.Minimum denominations - $1,000.
 Issuance.Issuance.
 Auction-Tue, Mon, Thu.Auction-Tue, Mon, Thu.
 Competitive and non-competitive bidding.Competitive and non-competitive bidding.
 When-issued trading.When-issued trading.

24. INVESTMENTINVESTMENT
CHARACTERISTICSCHARACTERISTICS
 Default RiskDefault Risk
 LiquidityLiquidity
 Taxes Taxes
 Low minimum denominationLow minimum denomination

25. INVESTORSINVESTORS
 IndividualsIndividuals
 commercial bankscommercial banks
 Money market mutual fundsMoney market mutual funds
 Foreign InvestorsForeign Investors
 Nonbank financial institutionsNonbank financial institutions
 Non financial corporations.Non financial corporations.
 State and local governments.State and local governments.

26. COMMERCIAL PAPERSCOMMERCIAL PAPERS

27. COMMERCIAL PAPERSCOMMERCIAL PAPERS
 An unsecured, short-term debt instrument issuedAn unsecured, short-term debt instrument issued
by a corporation for meeting short-term liabilities.by a corporation for meeting short-term liabilities.
 Not to be registered with the SEC if maturesNot to be registered with the SEC if matures
within 9 months.within 9 months.
 Rollover riskRollover risk..

28. ISSUING OF COMMERCIALISSUING OF COMMERCIAL
PAPERPAPER
IssuersIssuers
 BanksBanks
 NBFCNBFC
 Manufacturing co.Manufacturing co.
Types of issueTypes of issue
 DirectDirect
 Through DealersThrough Dealers

29. CHARECTERISTICS OFCHARECTERISTICS OF
COMMERCIAL PAPERCOMMERCIAL PAPER
 Maturity – Upto 1 year.Maturity – Upto 1 year.
 Large minimum denominations.Large minimum denominations.
 Issued to finance "current transactions”.Issued to finance "current transactions”.
 Issued at discount and matured at faceIssued at discount and matured at face
value.value.

30. CERTIFICATE OF DEPOSITCERTIFICATE OF DEPOSIT

31. Certificate of DepositCertificate of Deposit
 Debt instruments issued by banks and otherDebt instruments issued by banks and other
financial institutions.financial institutions.
 CD bears a maturity date, a specifiedCD bears a maturity date, a specified
fixed interest rate and can be issued in anyfixed interest rate and can be issued in any
denomination.denomination.
 Generally issued by commercial banks and areGenerally issued by commercial banks and are
insured by the FDIC.insured by the FDIC.
 Tenure- one month to five years.Tenure- one month to five years.
 Types- Small and large CDs.Types- Small and large CDs.
 Minimum deposit - $1000Minimum deposit - $1000

32. CD RATESCD RATES
 Fixed interest rate paid on CDFixed interest rate paid on CD
 Factors influencing the interest rate:Factors influencing the interest rate:
Principal.Principal.
Term to maturity.Term to maturity.
Size of the issuing bankSize of the issuing bank
Type of CDType of CD

33. FUNCTIONING OF CDFUNCTIONING OF CD
 Issued in the form of book entry.Issued in the form of book entry.
 Option of interest withdrawl.Option of interest withdrawl.
 Choice ofChoice of Rolling overRolling over..
 Penalty of withdrawl before the maturityPenalty of withdrawl before the maturity
date.date.

34. CD- CharacteristicsCD- Characteristics
 CD REFINANCECD REFINANCE
 PPenalty for early withdrawalenalty for early withdrawal to be decided at the time of issue.to be decided at the time of issue.
 Opt for refinance is the added interest exceeds the cost of withdrawlOpt for refinance is the added interest exceeds the cost of withdrawl..
 CD LADDERSCD LADDERS
 Distributes the deposits over a period of several years.Distributes the deposits over a period of several years.
 Enjoys the benefits of the longterm rates.Enjoys the benefits of the longterm rates.
 Retain the option to re-invest or withdraw.Retain the option to re-invest or withdraw.
 CDCD DEPOSIT INSURANCEDEPOSIT INSURANCE
 Governed by complex FDIC rules.Governed by complex FDIC rules.
 Basic Coverage is $100,000 for a single account and $200,000 for a jointBasic Coverage is $100,000 for a single account and $200,000 for a joint
accountaccount..
 Callable CDsCallable CDs
 Bank reserves the right to "call" the investmentBank reserves the right to "call" the investment..
 pays a premium interest rate.pays a premium interest rate.
 Banks manage their interest rate risk by selling callable CDsBanks manage their interest rate risk by selling callable CDs

35. ASSET BACKED SECURITIESASSET BACKED SECURITIES
 An asset-backed security (ABS) is a securitized interestAn asset-backed security (ABS) is a securitized interest
in a pool of assets.in a pool of assets.
 The majority of these "pools" consist of:The majority of these "pools" consist of:
 Auto loans and leasesAuto loans and leases
 Credit Tenant LeasesCredit Tenant Leases
 Consumer and business installment receivablesConsumer and business installment receivables
 Bank and Financial AssetsBank and Financial Assets
 Equipment leasesEquipment leases
 Student loansStudent loans
 Specialized AssetsSpecialized Assets

36. Characteristics Of ABSCharacteristics Of ABS
ABS bring together a pool of financialABS bring together a pool of financial
assets that otherwise could not easily beassets that otherwise could not easily be
traded in their existing form.traded in their existing form.
ABSs are backed by non-mortgageABSs are backed by non-mortgage
assets.assets.
ABSs entail credit risk but tends to beABSs entail credit risk but tends to be
modest.modest.
ABSs can be structured into differentABSs can be structured into different
classes or tranches based on class ofclasses or tranches based on class of
debt, maturity etc.debt, maturity etc.

37. ADVANTAGES OF ABSADVANTAGES OF ABS
 Original lenders recover cash quickly, enablingOriginal lenders recover cash quickly, enabling
them to make more loans.them to make more loans.
 It improves liquidity as well as balance sheetIt improves liquidity as well as balance sheet
ratios while also reducing interest expense.ratios while also reducing interest expense.
 The originator of the receivables usuallyThe originator of the receivables usually
continues to service the assets and collect thecontinues to service the assets and collect the
payments.payments.
 Funding can be structured to be either fixed orFunding can be structured to be either fixed or
floating.floating.

38. Mortgage Backed SecuritiesMortgage Backed Securities

39. MORTGAGE BACKED SECURITIESMORTGAGE BACKED SECURITIES
 Debt obligations that represent claims to the cash flowsDebt obligations that represent claims to the cash flows
from pools of mortgage loans.from pools of mortgage loans.
 Represents pool of mortgages as collateral.Represents pool of mortgages as collateral.
 Belongs to a class of ABS.Belongs to a class of ABS.
 Individual investor earns interest in proportion to hisIndividual investor earns interest in proportion to his
stake in the entire pool.stake in the entire pool.
 Payments to investors usually made on a monthly basis.Payments to investors usually made on a monthly basis.

40. Types of MBSTypes of MBS
 Ginnie Mae- MBS issued by the GovernmentGinnie Mae- MBS issued by the Government
National Mortgage Association.National Mortgage Association.
 Fannie Mae – Issued by Federal NationalFannie Mae – Issued by Federal National
Mortgage Association.Mortgage Association.
 Freddie Mac - Federal Home Loan MortgageFreddie Mac - Federal Home Loan Mortgage
Corporation.Corporation.