Bid & Ask
Bid-An offer made by an investor, a trader or a dealer to buy a security. The bid will stipulate both the price at which the buyer is willing to purchase the security and the quantity to be purchased.
Ask-It stipulates the price a seller is willing to accept for a security and the quantity of the security to be sold at that price.Ask will always be higher than the bid. The terms 'bid' and 'ask' are used in nearly every financial market in the world covering stocks, bonds, currency and derivatives.
Bench-mark Rates
In developed markets, Treasury Bill rates set the course of other short term rates in the system. In India, the cut-off yield rates arrived through the competitive bids received in the auctions of Treasury Bills have emerged as benchmark short term rates. Since April 1997 Bank Rate has been activated as a bench-mark rate.
Constituent SGL Account
A Constituent Subsidiary General Ledger Account (CSGL) is a service provided by Reserve Bank of India through Primary Dealers and Banks to those entities who are not allowed to hold direct SGL Accounts with it. This account provides for holding of Central/State Government Securities and Treasury bills in book entry/dematerialized form. Individuals are also allowed to hold a Constituent SGL Account.
Coupon
In relation to bond, coupon is the interest rate that the issuer pays to the bond holder. It’s the cash flow that is offered by a particular security at a fixed interval.
Convertible Bond
It’s a hybrid security with debt and equity like features. It’s a type of a bond which can be converted into shares of stocks in the issuing company, usually at some pre announced ratio.
Callable Securities
Callable securities are those which can be called by the issuer at a predetermined time/times, by repaying the holder of the security a certain amount which is fixed under the terms of the security
Cum-Interest and Ex-Interest
Cum-interest means the price of security is inclusive of the interest accrued for the interim period between last interest payment date and purchase date. Security with ex-interest means the accrued interest has to be paid separately
Debt Market
There is no single location or exchange where debt market participants interact for common business. Participants talk to each other, over telephone, conclude deals, and send confirmations by Fax, Mail etc. with back office doing the settlement of trades. In the sense, the wholesale debt market is a virtual market. The daily transaction volume of all the debt instruments traded would be about Rs.4000 - 5000 crores per day. In India, NSE has its separate segment, which allows online trades in the listed debt securities through its member brokers. Recently BSE as well as OTCI have introduced Debt Market Segment. Reserve Bank of India has proposed Negotiated Dealing System (NDS) for trades in the G-Secs and Repos.
Debt Instrument
A tradable form of loan is normally termed as a Debt Instrument. They are usually obligations of issuer of such instrument as regards certain future cash flow representing Interest & Principal, which the issuer would pay to the legal owner of the Instrument. Debt Instruments are of various types. The distinguishing factors of the Debt Instruments are as follows: -
- Issuer class
- Coupon bearing / Discounted
- Interest Terms
- Repayment Terms (Including Call / put etc.)
- Security / Collateral / Guarantee
Discount
The amount by which the market price of a security is below its par value.
Derivatives
A financial instrument that is valued according to the expected price movements of an underlying asset, which may be a commodity, currency or a security. Derivatives can be used either to hedge a position or to establish an open position. Examples of derivatives are futures, options, swaps, etc.
Futures
An agreement to buy or sell a fixed quantity of a particular commodity, currency, or security for delivery at a fixed date in the future at a fixed price. Unlike an option, a futures contract involves a definite purchase or sale and not an option to buy or sell. However, futures provide an opportunity for those who must purchase goods regularly to hedge against changes in price.
Floating Rate Bond
Floating Rate Bond is an instrument whose periodic interest or dividend rates are indexed to some reference index such as Treasury security etc. These instruments give a variable rate, a characteristic that allows both issuer and investor to share the risk inherent in changing interest rates. The volatility of interest rates have led to creation of these instruments designed to offer some protection to the players. Thus, Floating Rate Bonds enable investors to take advantage of movements in interest rates. Floating Rate Bonds were introduced by Government of India on September 29, 1995 linking it to the 364 day Treasury Bill rate.
Interest Rate Swap
An agreement between two counterparties where one stream of future interest payment is exchanged with another based on specified principal amount wherein one side pays the other a particular interest rate (fixed or floating) and the other side pays the other a different interest rate (fixed or floating).
Maturity
Maturity indicates the life of the security i.e. the time over which interest flows will occur
Open Market Operations (OMO)
OMO or Open Market Operations is a market regulating mechanism often resorted to by Reserve Bank of India. Under OMO Operations Reserve Bank of India as a market regulator keeps buying or/and selling securities through its open market window. It's decision to sell or/and buy securities is influenced by factors such as overall liquidity in the system, disciplining a sentiment driven market, signaling of likely movements in interest rate structure, etc.
Options
The right to buy or sell a fixed quantity of a commodity, currency, security, etc. at a particular date at a particular price (also called exercise price). Unlike futures, the purchaser of an option is not obliged to buy or sell at the exercise price and will only do so if it is profitable; the purchaser may allow the option to lapse, in which case only the initial purchase price of the option is lost. An option to buy is known as a call option and is usually purchased in the expectation of a rising price; an option to sell is called a put option and is bought in the expectation of a falling price.
Overnight Interest Rate swaps
They are swaps where the floating rate is an overnight rate (such as NSE MIBOR) and the fixed rate is paid in exchange of the compounded floating rate over a certain period.
Par Value (face value, nominal value)
It is the nominal price of a share or security. If the market value of a security exceeds the par value it is said to be above par; if it falls below the par value it is below par.
Premium
An amount in excess of the nominal value of the share, bond or security.
Repo and Reverse Repo
A Repo deal is one where eligible parties enter into a contract with another to borrow money against at a pre-determined rate against the collateral of eligible security for a specified period of time. The legal title of the security does change. The motive of the deal is to fund a position. Though the mechanics essentially remain the same and the contract virtually remains the same, in case of a reverse Repo deal the underlying motive of the deal is to meet the security / instrument specific needs or to lend the money. Indian Repo Market is governed by Reserve Bank of India. At present Repo is permitted between permitted 64 players against Central & State Government Securities (including T-Bills) only at Mumbai.
Record Date or Shut Period
G-Sec/Bonds/Debentures keep changing hands in the secondary market. Issuer pays interest to the holders registered in its register on a certain date. Such date is known as record date. Securities are not transferred in the books of issuer during the period in which such records are updated for payment of interest etc. Such period is called as shut period. For G-Secs held in Demat form (SGL) shut period is 3 working days
Swaps
The means by which intending parties can exchange their cashflows, usually through the intermediary of a bank. A currency swap will enable parties to exchange the currency they possess for the currency they need. An interest rate swap (IRS) is an agreement between two parties to exchange interest obligations (or receipts) for a given national principal for a defined period.
Strips
'STRIPS' stands for separately Traded Registered Interest and Principal of Securities Strips are created by separating the coupon from the principal and trading them independently. Thus, if a conventional bond of five year maturity has ten semi annual coupon payments and one payment of principal, ten coupon STRIPS and one Principal STRIP will be created on stripping the bond.
Underwriting in Auction
One day prior to the auction bids are received from the Primary Dealers (PD), indicating the amount they are willing to underwrite and the fees expected. The auction committee of RBI then examines the bid on the basis of the market condition and takes the decision the amount to be underwritten and the fees to be paid. In case of devolvement the bids put in by the PD’s are set off against the amount underwritten while deciding the amount of devolvement and in case the auction is fully subscribed then the PD need not subscribe to the issue unless they have a bid for it.
When Issued Market
It refers to a security being allowed to be traded in the market well before its actual date of issue, after the announcement about the issue.
Yield
The income from an investment. The nominal yield of a fixed interest security is the interest it pays, expressed as a percentage of its par value. However, the current yield (also called interest yield, running yield, earnings yield or flat yield) will depend on the market price of the stock. Thus current yield is equal to face value/market price x interest rate.
Yield Curve
The relationship between time and yield on a homogenous risk class of securities is called the Yield Curve. The relationship represents the time value of money - showing that people would demand a positive rate of return on the money they are willing to part today for a payback into the future. It also shows that a Rupee payable in the future is worth less today because of the relationship between time and money. A yield curve can be positive, neutral or flat. A positive yield curve, which is most natural, is when the slope of the curve is positive, i.e. the yield at the longer end is higher than that at the shorter end of the time axis. This results, as people demand higher compensation for parting their money for a longer time into the future. A neutral yield curve is that which has a zero slope, i.e. is flat across time. T his occurs when people are willing to accept more or less the same returns across maturities. The negative yield curve (also called an inverted yield curve) is one of which the slope is negative, i.e. the long term yield is lower than the short term yield.
Yield to Maturity
The yield or the return on the instrument is held till its maturity is known as the Yield-to-maturity (YTM). It basically measures the total income earned by the investor over the entire life of the Security.
This total income consists of the following:
• Coupon income: The fixed rate of return that accrues from the instrument
• Interest-on-interest at the coupon rate: Compound interest earned on the coupon income
• Capital gains/losses: The profit or loss arising on account of the difference between the price paid for the security and the proceeds received on redemption/maturity
Zero Coupon Bonds
Bonds issued at discount and repaid at face value. The difference between the issue price and the redemption price represents the return to the investor. No periodic interest payment is made. Zero Coupon Bonds bear no reinvestment risk but they are prone to interest rate risk making their prices highly volatile. The buyer of zero coupon bonds receives one and only one payment, at maturity of the bond. In contrast, coupon bonds make a series of periodic coupon payments to the buyer as well as paying face value at maturity. Zero Coupon Bonds on auction basis was introduced in January 1994 by Government of India. |
