Government Security Markets in India

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2. Contents
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Topics Slide No.
GS Market Definition, Need, Features &
Major Participants
2-6
Classifications Of 4 Main Market
Securities
7
Money Market Security 8-9
Capital Market Security 10-13
Derivative Market Security 14-16
Indirect Invest. Market Security 17-19
Non-Marketable Security 20-22
Dated Security Bonds 23-25
Why GS?? & Conclusion!! 26

3. • A tradable instrument issued by the Central Government or the
State Governments
• Acknowledges the Government’s debt obligation
• May be short term or long term
• Issued by the Reserve Bank of India on behalf of the government
to finance any deficit and public sector development programs
3
Definition

4. Government needs enormous amount of money to
perform the following main functions:
Creation and maintenance of physical infrastructure
They are issued in order to finance the fiscal deficit
and managing the temporary cash mismatches of the
Government.
4
Need of GS

5. • Issued at face value
• No default risk as the securities carry sovereign guarantee
• Ample liquidity as the investor can sell the security in the
secondary market
• Interest payment on a half yearly basis on face value
• No tax deducted at source
5
Features of GS

6. The Government securities market consists of securities
issued by the State government and the Central
government.
Government securities include Central Government
securities, Treasury bills and State Development Loans.
All entities registered in India like banks, financial
institutions, Primary Dealers, firms, companies, corporate
bodies, partnership firms, institutions, mutual funds,
Foreign Institutional Investors, State Governments,
Provident Funds, trusts, research organizations, Nepal
Rashtra bank and even individuals are eligible to purchase
Government Securities. 6
Major Participants

7. Classification of Markets
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8. Money Market Security
8
o Stocks, bonds or any other types of securities
which can be traded easily in organized financial
markets or between two investors with the help
of brokers, are known as marketable securities.
o Feature:
It is easier to trade them and they can be
converted into cash whenever required by the
investor

9. Classification

10. The common stocks in which we trade in the open
market are classic examples of a capital market
security. In such securities, the maturity period is
greater than one year and for some securities (for
example, stocks), there is no defined maturity period.
Capital Market Security
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11. Classification
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12.  Fixed Income Securities: These are investments that promise guaranteed income on the
amount invested, though at a lower rate of return.
 Bonds: They are a form of fixed-income securities, and payments are made as per the
time and depending on the conditions mentioned in the deal.
 Treasury Notes and Bonds: These securities offer higher interests, and they also repay
the principal on maturity. The terms of treasury notes are usually between 1 to 10 years
while for the treasury bonds, it is between 10-30 years.
 Municipal Bonds: These are tax-exempted investments and hence, one of the most
sought after bonds issued by the government.
 Corporate Bonds: These are almost similar to the treasury bonds with the major
difference that they are issued by corporate entities, so the risk of default is higher.
 Stocks: Stocks are divided into two types:
 Preferred stocks : Suppose if a company shuts down or goes broke, common stock
shareholders are the last investors to get compensated. Dividend, if it is distributed at
all, first goes to creditors, bondholders, and preferred shareholders.
 Common stocks: The general trading we see in stock markets is done in common
stocks. 12

13. These class of marketable securities represent those
investments values of which are dependent on the
performance of several other securities. That means,
their values are derived from the value of other
investment instruments and hence, the name
derivatives.
Derivative Market Security
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14. Classification Of Capital Market
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15. Options: It is an interesting security that provides the holder the right, but not
obligation to buy or sell securities at some fixed point of time in the future.
The buying is typically known as 'a call option' while selling is popular as 'a put
option'. In case, the holder doesn't carry the transaction within the specified
time constraints, the deal expires.
Very speculative and hence only ideal for sophisticated investors.
Futures: Futures securities are just like options, but with a major difference
that in future securities, the buyer is obligated to fulfill the terms of contract
unlike the options.
The futures market is extremely liquid, risky and very complex.
Rights and Warrants: Similar to options and futures, are rights and warrants
that grant the shareholders some rights of ownership and profit from the
company's performance.
Rights and warrants are issued by the companies for raising money.
Rights are generally for short-term and expire within a week, while warrants may
be traded for one to a few years.
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16. Investments in securities that are made by purchasing
shares of an investment company, are known as
indirect investments. Just like any other company,
even an investment company tries to diversify its
portfolio and generate funds for its business
purposes.
Indirect Investment Market Security
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17. Classification
Unit Trusts Investment Trusts Hedge Funds
Indirect Investment
Market Security
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18.  Unit Trusts: Also known as open-ended investments, the value of a unit trust depends
on the number of units issued and the price of each unit. The success of a unit trust
depends on the expertise and experience of the fund managers handling it.
 Investment Trusts: One of the most popular investment instruments are the mutual
funds. Investment trusts, like mutual funds, also known as open-end investment
companies sell shares of the companies even after the Initial Public Offering (IPO) gets
over.
Another type of marketable securities are in the form of closed-end investments. These
are the companies under trusts that don't sell the shares after the IPO of a company
gets over.
 Hedge Funds: Hedge fund is a general, non-legal term used to describe private,
unregistered investment pools that traditionally have been limited to sophisticated,
wealthy investors.
Hedge funds are not mutual funds and, as such, are not subject to the numerous
regulations that apply to mutual funds for the protection of investors - including
regulations requiring a certain degree of liquidity.
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19. Non-Marketable Securities
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o Securities that are difficult to trade in a normal financial market are generally
called non-marketable securities.
o It is difficult to get a potential buyer for non-marketable securities and hence,
some of the financial instruments that comprise non-marketable securities are
traded in private transactions.
o Although these securities can't be traded easily, they from a significant portion of
an investor's portfolio.
o These securities are traded between investors and large financial institutions like
commercial banks, so it is a risk-free and safe investment.

20. Classification

21.  Savings Account
They are a form of non-marketable securities that earn an interest over a period. The
interest rates and maturity period depends on the banks. For the account to function,
investor needs to maintain some minimum balance as per the directives of the bank. It
is a safe and simple form of investment although, the returns are not very high.
 Government Savings Bonds
Those government bonds that can't be traded in the open market, constitute a part of
government savings bonds. These government debt instruments are traded amongst
investors and financial institutions (banks) indirectly. These bonds earn interest only
when they are redeemed.
 Non-negotiable Certificates of Deposits (CDs)
CDs are promissory notes (the bearer is promised some return on investment with
interest) that are issued by commercial banks.
CDs have a maturity period of one month to five years and any withdrawal prior to
maturity attracts penalty.
Money Market Deposit Accounts (MMDAs)
MMDA securities have very high interest rates along with some restrictions as:
 An investor is allowed a limited number of transactions every month
 It is also mandatory to maintain a minimum balance that is normally higher than that
in normal savings account.
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22. Dated Security Bonds
Dated Government securities are longer term
securities and carry a fixed or floating coupon
(interest rate) paid on the face value, payable at fixed
time periods (usually half -yearly).
The tenor of dated securities can be up to 30 years
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Classification
Dated Security Bonds
Fixed
Rate
Bonds
Floating
Rate
Bonds
Zero
Coupon
Bonds
Capital
Indexed
Bonds
Bonds with
Call/Put
options

24. o Fixed Rate Bonds
These are bonds on which the coupon rate is fixed for the entire life of the bond
o Floating Rate Bonds
Floating Rate bonds are securities which do not have a fixed coupon rate and the
coupon is reset at pre-announced intervals based on a specified methodology.
o Zero Coupon Bonds
Zero coupon bonds are bonds with no coupon payments. Like Treasury Bills,
they
are issued at a discount to face value
o Capital Indexed Bonds
These are bonds, the principal of which is linked to an accepted index of
inflation
with a view to protect the holder from inflation
o Bonds with Call/Put options
Bonds can also be issued with features of option wherein the issuer can have the
option to buy back (call option) or the investor might have the option to sell the

25. Why Government Securities???
• It Constitutes the principal segment of the debt market
• Acts as a benchmark for pricing corporate papers of varying maturities
• Helpful in implementing the fiscal policy of the government
• Provide the highest type of collateral for borrowing against their
pledge
• Have the highest degree of security of capital and the return on each
security depending on the coupon rate and period of maturity
• Switches between the short dated and long dated securities take place
on the basis of difference in redemption yields.
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