Debt instruments represent contracts where one party is the lender (investor) and the other party is the borrower (issuer). The debt contract specifies the rate of interest, time of interest payment, repayment of principal, etc. In India, the term “bond” is used to represent the debt instrument issued by the central and state governments and PSU. The term “debenture” is used to mean debt issues from the private corporate sector. The principal features of a debt instrument are:
• Maturity
• Coupon
• Principal
Maturity refers to the date on which the principal would be repaid. Coupon is the rate at which interest is calculated with reference to the face value. For example, a 10% 2008 bond refers to face value of Rs.100, coupon rate of 10% p.a. And repayment of the face value in the year 2008.
The coupon rate may be fixed for the entire period or may be related to a benchmark rate. In the latter case, the coupon rate changes as the benchmark rate changes. This instrument is called a floating rate debt instrument.
There are debt instruments that come with options to redeem the principal earlier than the maturity date. If the option rests with the issuer, it is a bond that is callable. If the option to redeem rests with the investor, it is puttable.
There are many different types of debt instruments in India. These are:
• PSU bonds
• Government securities
• Treasury bills
• State loans
• Corporate debentures
• Bonds from financial institutions
• Certificates of deposits
The secondary market activity for debt instruments takes place in the debt segment of the exchange. The trends in the debt market are reflected in the debt indices and the turnover data. In India, the debt market activity is dominated by banks and institutions.
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