I've heard various names for government securities; could you simplify these for me?
How different are various types of G-secs?
Need pointers on your investments?
The government borrows by issuing securities that are called government securities. Government security is a tradable instrument issued by the central or state governments recognising their debt obligations. These include:
Short-term securities - They are usually referred to as treasury bills with original maturities of less than one year, or
long-term securities - They are usually referred to as Government bonds or dated securities with an original maturity of one year or more.
The government of India issues both treasury bills and bonds or dated securities. whereas Indian state governments only issue bonds or dated securities, known as State Development Loans (SDLs). G-Secs have virtually no default risk and are thus referred to as risk-free gilt-edged instruments.
What are short-term g-secs known as?
These are known as Treasure bills or Cash Management Bills.
What are the treasury bills?
The instruments through which GoI borrows are known as Treasury bills, also called T-bills.
These are money market instruments issued by the Government of India.
GoI issues T-bills to borrow money for three tenors: 91 days, 182 days, and 364 days.
T-bills have no coupon and no intermittent cash outflow over the tenor because the borrowing is for a very short period. Instead, they are issued at a discount and redeemed at face value upon maturity. For example, a 91-day Treasury bill of 100/- (face value) may be issued at 98.40, a discount of 1.60, and redeemed at the face value of 100/-. The difference between the maturity value or face value (100) and the issue price is the return to investors.
What is a cash management bill?
To meet temporary cash flow mismatches, the Government of India issues Cash Management Bills (CMBs), a relatively new short-term instrument. CMBs have the general characteristics of T-bills but have maturities of less than 91 days.
What exactly is the distinction between CMBs and T-Bills?
CMBs differ from T-bills in that they are issued for less than 90 days, whereas T-bills are issued for more than 90 days (91-day, 182-day and 364-day treasury bills).
What is the long-term borrowing by GoI known as?
Dated G-secs are used by GoI to borrow for the long term. Every half-year, these securities pay a fixed or floating coupon (interest rate) on the face value. Dated securities typically have maturities ranging from 5 to 40 years, implying that they are borrowing for extremely long periods.
These could be of the following kinds:
Fixed-rate bonds have a fixed coupon rate for the duration of the bond's life (i.e. until maturity). The majority of government bonds in India are fixed-rate bonds.
For example, 8.24%GS2018 was issued on April 22, 2008, with a maturity date of April 22, 2018. This security coupon will be paid half-yearly at 4.12% (half of the annual coupon of 8.24%) of the face value on October 22 and April 22 of each year.
Floating Rate Bonds (FRBs1) are securities with no fixed coupon rate. It instead has a variable coupon rate that is reset at predetermined intervals (say, every six months or one year). For example, an FRB was issued on November 7, 2016, with an 8-year maturity date of November 7, 2024. Its variable coupon rate was determined to be the average rate of the last three auctions of 182-day T-Bills held before the date of notification. The coupon rate for subsequent semi-annual periods was fixed as the average rate of yields of the last three auctions of 182-day T-Bills held up until the start of the respective semi-annual coupon periods.
Alternatively, the Floating Rate Bond can carry a coupon with a base rate plus a fixed spread determined through an auction mechanism. The spread will be fixed for the tenure of the bond.
Bonds with no coupon payments are known as zero coupon bonds2. They are, however, issued at a discount and redeemed at face value, similar to T- Bills.
Capital Indexed Bonds3 are bonds whose principal is linked to an accepted index of inflation to protect investors' principal from inflation.
Inflation-indexed bonds4 have both coupons and principal amounts that are protected against inflation. In IIBs, the inflation index may be the Whole Sale Price Index (WPI) or the Consumer Price Index (CPI) (CPI).
GoI can also issue bonds with optional features, such as the ability to buy back the bond (call option) or sell the bond (put option) back to the issuer during the tenure of the bond. Such a bond could have either put or call options, or both5. The bond's optionality could be exercised after five years of tenure from the date of issuance on any subsequent coupon date.
As part of the market borrowing programme, the Government of India issues special securities to entities such as Oil Marketing Companies, Fertilizer Companies, the Food Corporation of India, and others (commonly known as oil bonds, fertiliser bonds, and food bonds, respectively) as compensation instead of cash subsidies. These securities are typically long-dated and carry a marginally higher coupon over comparable-maturity-dated securities6. Beneficiary entities may sell these securities in the secondary market to banks, insurance companies, and primary dealers, among others, to raise funds.
Separate Trading of Registered Interest and Principal of Securities (STRIPS) is formed by dividing each semi-annual coupon payment and the final principal payment due from the issuer into separate securities. They are, in essence, Zero Coupon Bonds (ZCBs). They are, however, created solely from existing securities and, unlike other securities, are not issued through auctions. Stripped securities represent the underlying coupon-bearing bond's future cash flows (periodic interest and principal repayment)7.
Sovereign Gold Bonds are financial instruments whose prices are linked to the price of gold. These are denominated in gold gramme increments and multiples thereof. The minimum investment is one gramme, with a maximum subscription limit of four kilogrammes per fiscal year for individuals, four kilogrammes for Hindu Undivided Families (HUF), and twenty kilogrammes for trusts and similar entities as notified by the government from time to time. The Bonds are repayable after eight years from the date of issuance. Premature redemption of the Bond is permitted after the fifth year from the date of issue, with repayments due on the next interest payment date.
What is the long-term borrowing by various States known as?
State governments can also borrow money from the market, which is known as a State Development Loan (SDL). SDLs are dated securities issued through a normal auction, similar to the auctions held for Central Government dated securities. Interest is paid every six months, and the principal is repaid on the maturity date.
FRBs were first issued in India in September 1995.
In 1996, the Government of India issued such securities. Following that, it did not issue zero coupon bonds.
The first Capital Indexed Bond was issued in December 1997 and matured in 2002.
In June 2013, the Indian government issued IIBs (linked to WPI) through the Reserve Bank of India. Since then, they have been issued monthly (on the last Tuesday of each month) until December 2013.
GoI issued the first G-Sec with both call and put options, 6.72% GS 2012, on July 18, 2002, for a 10-year maturity, maturing on July 18, 2012. In that, the government had the right to repurchase the bond (call option) at par value (face value), while the investor had the right to sell the bond to the government at par value on any of the half-yearly coupon dates beginning July 18, 2007.
These securities are not eligible as SLR securities, but they can be used as collateral in market repo transactions.
When 100 of the 8.60% GS 2028 is stripped, each coupon payment (4.30 each half year) becomes a coupon STRIP, and the principal payment (100 at maturity) becomes a principal STRIP. In the secondary market, these cash flows are traded as separate securities.Â