InvestorQ : Are there multiple types of dated securities or is there just one plan type?
Dilmini Mercia made post

Are there multiple types of dated securities or is there just one plan type?

NISHA Nayak answered.
3 years ago

Following are some of the popular types of Dated Government Securities

Fixed Rate Bonds

These are bonds on which the coupon rate is fixed for the entire life of the bond. Most government bonds are issued as fixed rate bonds only.

Floating Rate Bonds

Floating rate bonds are securities that do not have a fixed coupon rate. The coupon is re-set at pre-announced intervals (say, every 6 months, or 1 year) by adding a spread over a base rate. In the case of most floating rate bonds issued by the Government of India so far, the base rate is the weighted average cut-off yield of the last three 364-day Treasury bill auctions preceding the coupon re-set date, and the spread is decided through the auction. Floating rate bonds were first issued in India in September 1995.

Zero Coupon Bonds

As the name suggests, zero coupon bonds (ZCBs) are bonds with no coupon payments. Like T-Bills, they are issued at a discount to the face value. The Government of India issued such securities in the 90s; it has not issued zero coupon bonds after that.

Capital Indexed Bonds

These are bonds, the principal of which is linked to an accepted index of inflation with a view to protecting the holder from inflation. Capital indexed bonds, with the principal hedged against inflation, were first issued in December 1997. These bonds matured in

2002. The government is currently working on a fresh issuance of Inflation Indexed Bonds wherein the payment of both the coupon as well as the principal on the bonds would be linked to an Inflation Index (Wholesale Price Index). In the proposed structure, the principal will be indexed and the coupon will be calculated on the indexed principal. In order to provide the holders protection against actual inflation, the final WPI will be used for indexation.

Bonds with Call/Put Options:

Bonds can also be issued with features of call and put option embedded; wherein the issuer can have the option to buy back (call option) or the investor can have the option to sell the bond (put option) to the issuer during the currency of the bond.

The option on the bond could be exercised after the completion of five years from the date of issue on any coupon date falling thereafter. The government has the right to buy-back the bond.

Special Securities

In addition to T-Bills and dated securities issued by the Government of India under the market borrowing program, the government also issues special securities, from time to time, to entities such as oil marketing companies, fertilizer companies, the Food Corporation of India, and so on as compensation to these companies in lieu of cash subsidies. These securities are usually long-dated securities carrying a coupon with a spread of about 20–25 basis points over the yield of the dated securities of comparable maturity. These securities are, however, not eligible SLR securities, but are eligible as collateral for market repo transactions. The beneficiary oil marketing companies may divest these securities in the secondary market to banks, insurance companies, primary dealers, etc., for raising cash.

Separate Trading of Registered Interest and Principal of Securities (STRIPS)

Steps are being taken to introduce new types of instruments such as the STRIPS (Separate Trading of Registered Interest and Principal of Securities). Accordingly, guidelines for the stripping and the reconstitution of government securities have been issued. The STRIPS are instruments in which each cash flow of the fixed coupon security is converted into a separate tradable zero coupons bond and traded. These cash flows are traded separately as independent securities in the secondary market. The STRIPS in government securities will ensure the availability of sovereign zero coupon bonds, which will facilitate the development of a market-determined zero coupon yield curve (ZCYC). The STRIPS will also provide institutional investors with an additional instrument for their asset-liability management. Further, as the STRIPS have zero reinvestment risk (being zero coupon bonds), they can be attractive to retail/non-institutional investors. The process of stripping/reconstituting government securities is carried out at the RBI, the Public Debt Office (PDO) in the PDO-NDS (Negotiated Dealing System) at the option of the holder at any time from the date of issuance of a government security till its maturity. All dated government securities, other than floating rate bonds, having coupon payment dates on January 2 and July 2 (irrespective of the year of maturity) are eligible for stripping / reconstitution. The eligible government securities are held in the Subsidiary General Ledger (SGL) / Constituent Subsidiary General Ledger (CSGL) accounts maintained at the PDO, RBI, in Mumbai. Physical securities are not eligible for stripping/reconstitution. The minimum amount of securities that needs to be submitted for stripping/reconstitution will be ` 1 crore (face value) and multiples thereof.