Long term debt instruments issued by the Central Government are referred to as Central Government Dated securities. Such securities carry a fixed or floating coupon (interest rate) which is paid on the face value at fixed time periods (usually half-yearly) till the maturity of the security and redemption of the face value at maturity. The tenor of these securities may range up to 40 years.
Most common types of Government bonds:
Among the variety of instruments available in the market, the most popular and liquid Government bonds are the fixed rate bonds and the floating rate bonds.
Fixed Rate Bonds:
For fixed rate bonds, the coupon rate is fixed till maturity . This coupon rate remains the same throughout the life of the bond despite market movements. For example, 7.26% GOI 22-Aug-2032, is a fixed rate government bond with a coupon rate of 7.26%. The coupon on this security will be paid half yearly at 3.63%( half yearly payment is half of the annual coupon of 7.26%) of the face value every year until maturity on 22 Aug 2032.
Floating Rate Bonds:
For Floating rate bonds(FRBs) coupon rates are re-set at predefined intervals. The Floating Rate Bond carries the coupon, i.e, base rate plus a fixed spread(decided by way of auctions). The spread is fixed throughout the tenure of the bond. For example, FRB 2031 carries the coupon with base rate equivalent to weighted average yield of last 3 auctions (from the rate fixing day) of 182 Day T-Bills plus a fixed spread decided by way of auction. A floating rate bond pays interest in sync with the market interest rates. Hence, they have less exposure to volatility and negative price movement. When the interest rate is rising, they offer higher returns to the bondholder. In other words, they become profitable investments during the rising market interest rate scenario. Investing in floating rate bonds helps investors diversify their portfolios among various asset classes, especially when the interest rates are low and expected to rise.
The CGs are issued through auctions that the RBI conducts on behalf of the Government of India on the electronic platform called the E-Kuber. RBI makes available the notification and press release containing the auction details on its website on every Monday. G-Sec auctions are conducted every Friday for settlement on T+1 basis (i.e. securities are issued on next working day i.e. Monday). The underwriting auctions are held on the day of the auction but before the auction of the securities for the Primary Dealers and Banks, the notification for which is shared on Thursday by the RBI. The day count for CGs is taken as 360 days for a year and 30 days for every completed month, i.e, the day count is 30/360.
The G-Sec auctions are usually price based when there is a re-issuance of securities involved or yield based when a new G-Sec is issued. Depending upon the method of allocation to successful bidders, auction may be conducted on Uniform Price basis or Multiple Price basis as intimated by RBI from time to time in its press release. An investor, depending upon his eligibility, may bid in an auction either by the way of competitive bidding where investors are allowed to bid at specific and multiple price/yield levels , or by non-competitive bidding where the allocation of bids is restricted to a maximum of five percent of the aggregate nominal amount of the issue within the notified amount and allotment is at the weighted average rate of yield/price that will emerge in the auction on the basis of the competitive bidding. While competitive bidding is majorly preferred by well-informed and large players like banks, financial institutions, primary dealers, mutual funds, insurance companies, the non-competitive bidding route is meant for small and medium investor segments like individuals, small cooperative banks, etc. The minimum amount for bidding in both cases is ₹10,000 (face value) and in its multiples thereafter. In the secondary market, the trading takes place electronically on RBI/CCIL managed NDS-OM (Negotiated Dealing System-Order Matching) and the OTC market which is again reported on the NDS-OM platform.
Who can invest:
Overall, the whole compass of entities registered in India like banks, financial institutions, Primary Dealers, Cooperative Banks, Regional Rural Banks. Firms, Companies, Corporate Bodies, Partnership Firms, Institutions, Mutual Funds, Insurance Companies, Foreign Institutional Investors, State Governments, Provident Funds, Trusts, Research Organizations and Individuals are eligible to purchase/sell and participate in CGs in both primary and secondary markets.
Why invest in G-Sec:
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