Debt Markets

Source: NSE

Corporate Bonds

Corporate bonds are debt securities issued by the private and public corporations. Companies issue corporate bonds to raise money for a variety of purposes, such as building a new plant, purchasing equipment, or growing the business. When one buys a corporate bond, one lends money to the "issuer," the company that issued the bond. In exchange, the company promises to return the money, also known as "principal," on a specified maturity date. Until that date, the company usually pays you a stated rate of interest, generally semiannually. While a corporate bond gives an IOU from the company, it does not have an ownership interest in the issuing company, unlike when one purchases the company's equity stock.

Need for Corporate Bonds

One of the announcements in the budget 2005-06 was to appoint a high level expert committee on corporate bonds and securitization to look into the legal, regulatory, tax and market design issues in the development of corporate bond market.

A committee was formed under the chairmanship of Dr. R. H. Patil to look into the factors inhibiting the development of an active debt market and recommend policy actions necessary to develop an appropriate market infrastructure for the growth of an active corporate bond market.

A few of the recommendations for the development of an active secondary market for corporate bonds are as follows:

Establish a system to capture all information related to trading in corporate bonds, as accurately and as close to execution as possible, and disseminate it to the market in real time.

Clearing and settlement of transactions in this market must adhere to the IOSCO standards.

To introduce online-order matching system based on the increase of awareness amongst the participants


Yield is a critical concept in bond investing, because it is the tool used to measure the return of one bond against another. It enables one to make informed decisions about which bond to buy. In essence, yield is the rate of return on bond investment. However, it is not fixed, like a bond’s stated interest rate. Its changes reflect the price movements in a bond caused by fluctuating interest rates. The following example illustrates how yield works.

You buy a bond, hold it for a year while interest rates are rising and then sell it.

You receive a lower price for the bond than you paid for it because, no one would otherwise accept your bond’s current lower-than-market interest rate at the time of selling.

Although the buyer will receive the same amount of interest as you did and will also have the same amount of principal returned at maturity, the buyer’s yield, or rate of return, will be higher than yours, because the buyer paid less for the bond.

Yield is commonly measured in two ways, current yield and yield to maturity.

Current yield

The current yield is the annual return on the amount paid for a bond, regardless of its maturity. If you buy a bond at par, the current yield equals its stated interest rate. Thus, the current yield on a par-value bond paying 6% is 6%.

However, if the market price of the bond is more or less than the par, the current yield will be different. For example, if you buy a Rs. 1,000 bond with a 6% stated interest rate at Rs. 900, your current yield would be 6.67% (Rs. 1,000 x .06/Rs.900).

Yield to maturity

It tells the total return you will receive if you hold a bond until maturity. It also enables you to compare bonds with different maturities and coupons. Yield to maturity includes all your interest plus any capital gain you will realize (if you purchase the bond below par), or minus any capital loss you will suffer (if you purchase the bond above par).

Valuation of Corporate Bonds

Corporate bonds tend to rise in value when interest rates fall, and they fall in value when interest rates rise. Usually, the longer the maturity, the greater is the degree of price volatility. By holding a bond until maturity, one may be less concerned about these price fluctuations (which are known as interest-rate risk, or market risk), because one will receive the par, or face value of the bond at maturity. The inverse relationship between bonds and interest rates—that is, the fact that bonds are worthless when interest rates rise and vice versa can be explained as follows :-

When interest rates rise, new issues come to market with higher yields than older securities, making those older ones worthless. Hence, their prices go down.

When interest rates decline, new bond issues come to market with lower yields than older securities, making those older, higher-yielding ones worth more. Hence, their prices go up.

As a result, if one sells a bond before maturity, it may be worth more or less than it was paid for.

Wholesale Debt Market

The Wholesale Debt Market segment deals in fixed income securities and is gaining fast grounds in an environment that has largely focussed on equities.

The Wholesale Debt Market (WDM) segment of the Exchange commenced operations on June 30, 1994. This provided the first formal screen-based trading facility for the debt market in the country.

This segment provides trading facilities for a variety of debt instruments, including Government Securities, Treasury Bills and Bonds issued by Public Sector Undertakings/ Corporates/ Banks like Floating Rate Bonds, Zero Coupon Bonds, Commercial Papers, Certificate of Deposits, Corporate Debentures, State Government loans, SLR and Non-SLR Bonds issued by Financial Institutions, Units of Mutual Funds and Securitized debt by banks, financial institutions, corporate bodies, trusts and others.

Large investors and a high average trade value characterize this segment. Till recently, the market was purely an informal market with most of the trades directly negotiated and struck between various participants. The commencement of this segment by NSE has brought about transparency and efficiency to the debt market. Further, the products of WDM (Wholesale Debt Market) are now disseminated jointly with FIMMDA. The FIMMDA NSE MIBID/MIBOR is used as a benchmark rate for majority of deals struck for Interest Rate Swaps, Forwards Rate Agreements, Floating Rate Debentures and Term Deposits in the country.


Settlement is on a rolling basis, i.e, there is no account period settlement. Each order has a unique settlement date specified upfront at the time of order entry and is used as a matching parameter. It is mandatory for trades to be settled on the predefined settlement date. The Exchange currently allows settlement periods ranging from the same day (T+0) settlement to a maximum of (T+2) for non-government securities, while settlement of all outright secondary market transactions in government securities was standardized to T+1. In case of repo transactions in government securities, first leg can be settled either on T+0 basis or T+1 basis. The above guidelines came into effect from May 24, 2005.(Refer Circular no: NSE/WDM/6313)

In case of government securities, the actual settlement of funds and securities are effected directly between participants or through the Reserve Bank of India (RBI). All trades in government securities are reported to RBI-SGL through the Negotiated Dealing the System (NDS) of RBI. Clearing Corporation of India Limited (CCIL) provides settlement guarantee for transactions in government securities, including repos. The trades are settled on a net basis through the DvP-III system. In the DvP-III, the settlement of Securities and Funds are carried out on a net basis.

For securities other than the government securities and T-bills, trades are settled on a gross basis directly between participants on delivery versus payment basis.

On the scheduled settlement date, the Exchange provides data/information to the respective member/participant regarding trades to be settled on that day with details, like security, counter party and consideration.

The settlement details for non-government securities, i.e. certificate no., cheque no., constituent, etc. are reported by the member/participant to the Exchange.

The Exchange closely monitors the settlement of transactions through the reporting of settlement details by members and participants. In case of deferment of settlement or cancellation of trade, participants are required to seek prior approval from the Exchange. For any dispute arising in respect of the trades or settlement, the exchange has established arbitration mechanism for resolving the same.

Reporting of settlement details through 'NSE Extranet'

NSE has dedicated a server called ‘NSE Extranet’ in its premises that will store various information useful to the trading members and participants for their daily operations, as well as announcements made by the Exchange from time to time. The privileged user of Trading Members and Participants can easily access this information using their NEAT trading server. Clearing data for the respective Trading Members and Participants is updated daily in the said server for download to their local machines. This will help to reduce paper work like preparing and sending faxes to the Exchange giving settlement details.

Products and Services


A reference rate is an accurate measure of the market price. In the fixed income market, it is an interest rate that the market respects and closely watches. It plays a useful role in a variety of situations.

In particular, a call money reference rate can find the following applications:

Traders can make many decisions as offsets compared with the prevailing reference rate.

Derivatives require a clearly defined reference rate as a foundation, off which the pay-off from the derivative is defined.

A variety of contracts can be structured as offsets from the future levels of a reference rate. The simplest example may be a floating rate bond that uses an interest rate which is a given 'n' offset above a given reference rate.

Apart from its accuracy, such a reference rate needs to have other qualities. The methodology of collation and computation should be scientific, should eliminate noise, and resist manipulation. It should be from an unbiased source, representative of the market, transparent, reliable, and continuously available. Moreover, it should find applicability across a wide range of products. A reference rate, which embodies all these qualities, would be widely acceptable to the market as the benchmark rate.


  • Unbiased

The National Stock Exchange of India (NSEIL) is trusted by the securities markets for its unbiased independence and professionalism. The function of forecasting has become more meaningful as the information comes from a source, which is not only reliable, but has no vested interest of its own in the market movements.

  • Market Representation

FIMMDA-NSE MIBID MIBOR is based on rates polled by NSE from a representative panel of 30 banks/ primary dealers.

  • Transparent

The reference rate is released to all the market participants simultaneously through various media, making it transparent along with the aspiration of the market. Ensuing transparency helps the market participants to judge the market mood, as well as the probable rate one is likely to encounter in the market. This information is useful not only to the banks but also to the issuers and investors.

  • Reliable

The high level of co-relation between actual deals and the reference rate gives an indication of its reliability. The bootstrapping technique guards against the possibility of cartelisation and of extreme observations influencing the mean.

  • Scientifically Computed

The methodology of "Polling" with "Bootstrapping" is scientific and the values are generated through a system that has been extensively tested. The technique involves generating multiple data sets based on the rates polled with a dynamically determined number of iterations, identification of outliers, trimming of the data set of its extreme values, and computation of the mean and its standard deviation.

  • Elimination of Noise

The trimming procedure is vulnerable to market manipulation of the rates due to the amount of sampling noise. Excessive trimming may lead to loss of information; whereas no trimming may lead to an excessive influence of extreme values. To derive a true representative benchmark for the market, NSE ensures that after trimming at least 14 data points should remain in observation for the bid and for the asked rates.

  • Consistency

The Exchange ensures that everyday the FIMMDA-NSE MIBID MIBOR, along with the respective standard deviations, are disseminated to the market at 0955 (IST) for overnight rate and at 1200 (IST) for 14 days, 1 month and 3 month rates.

  • Dissemination

FIMMDA-NSE MIBID MIBOR rates are broadcast through the NEAT-WDM trading system immediately on release. The NSE website carries the daily rates, as well as the historical data on the FIMMDA-NSE MIBID MIBOR. The FIMMDA also disseminates the FIMMDA-NSE MIBID MIBOR rates through its website and other means.

In addition to leading information vendors carry these rates on a daily basis. Reuters on its news information page, Bridge News Service (Knight Ridder) on page no.2811, Bloomberg on its money market page as well as a news story, and PTI on its money market page.

FIMMDA-NSE MIBID MIBOR rates are also carried by all leading financial dailies, including Economic Times, Financial Express, Business Standard and Business Line.

In addition to the above, FIMMDA-NSE MIBID MIBOR rates are released to the contributors and users through E-mail.

NSE Zero Coupon Yield Curve (ZCYC)

With NSEIL's strong focus on Debt Market Segment and the long-felt need to create standardized market practices, NSEIL has embarked upon developing products that can be used by the market participants to address themselves to the issues relating to this market segment.

In its continuing effort to innovate, the Exchange has developed a 'Zero Coupon Yield Curve' (ZCYC) that helps in valuation of sovereign securities across all maturities irrespective of their liquidity. It aims to create uniform valuation standards in the market. The product has been developed keeping in mind the requirements of the banking industry, financial institutions, mutual funds, insurance companies, etc that have substantial investment in sovereign papers. NSE ZCYC aims to help in improving Asset Liability Management of institutions with realistic valuations of portfolio of sovereign papers. It has been developed keeping in mind the emergence of a scientific forward curve for the market that will be useful in developing derivative products and STRIPS in the emerging scenario.

NSE Government Securities Index

The increased activity in the Government Securities market in India and simultaneous emergence of Mutual (gilt) Funds have given rise to the need of a well-defined Bond Index to measure returns in the bond market. The NSE-Government Securities Index prices components of the NSE Benchmark ZCYC, so that movements reflect returns to an investor on account of change in interest rates only, and not those arising on account of the impact of idiosyncratic factors. The index is available from January 1, 1997, to the present time.. The index would provide a benchmark for portfolio management by various investment managers and Gilt Funds. It could also form the basis for designing index funds and for derivative products, such as options and futures.

Salient features of the Index:

The base date for the index is January 01, 1997 and the base date index value is 100.

The index is calculated on a daily basis from January 01, 1997 onwards; weekends and holidays are ignored.

The index uses all the Government of India bonds issued after April 1992. These were issued on the basis of an auction mechanism that imparted some amount of market-relatedness to their pricing. Bonds issued prior to 1992 were on the basis of administered interest rates.

Each day, the prices for all these bonds are estimated off the NSE Benchmark-ZCYC for the day.

The constituents are weighted by their market capitalisation.

Computations are based on arithmetic and not geometric calculations.

The index uses a chain-link methodology

Coupons and redemption payments are assumed to be reinvested into the index in proportion to the constituent weights.

Both the Total Returns Index and the Principal Returns Index are computed.

The indices provided are: Composite, 1-3, 3-8, 8+ years, TB index, GS index

Retail Debt Market

With a view to encouraging wider participation of all classes of investors across the country (including retail investors) in Government Securities, the Government, RBI and SEBI have introduced trading in government securities for retail investors.

Trading in this retail debt market segment (RDM) on NSE has been introduced w.e.f. January 16, 2003. Trading shall take place in the existing Capital Market segment of the Exchange.

In the first phase, all outstanding and newly issued Central Government securities would be traded in the retail segment. Other securities like the State Governments’ securities, T-Bills etc. will be added in subsequent phases.


Trading in the Retail Debt Market takes place in the same manner in which the trading takes place in the equities (Capital Market) segment. The RETDEBT Market facility on the NEAT system of Capital Market Segment is used for entering transactions in RDM session.

Members eligible for trading in RDM segment-Trading Members who are registered members of NSE in the Capital Market segment and Wholesale Debt Market segment are allowed to trade in Retail Debt Market (RDM), subject to fulfilling the capital adequacy norms.

Trading Members with membership in Wholesale Debt Market segment alone, can participate in RDM on submission of a letter in the prescribed format as per Circular No. NSE/CMTR/3860, dated January 11, 2003.

Market Timings and Market Holidays

Market Timings and Market Holidays Trading in RDM segment takes place on all days of the week, except Saturdays and Sundays, and holidays declared by the Exchange in advance. (The holidays on the RDM segment shall be the same as those on the Equities segment).

The market timings of the RDM segment are the same as the Equities segment, viz.:

Market Open: 09:15 hours

Market Close : 15:30 hours

Note: The Exchange may, however, close the market on days other than the above schedule holidays or may open the market on days originally declared as holidays. The Exchange may also extend, advance or reduce trading hours when its deems to be fit and necessary.

Trading Parameters

The trading parameters for RDM segment are as below:

Face Value

Rs. 100/-

Permitted Lot Size


Tick Size

Rs. 0.01

Operating Range

+/- 5%

Mkt. Type Indicator


Book Type


Trading System

Trading in RDM takes place on the 'National Exchange for Automated Trading' (NEAT) system, a fully automated screen based trading system, which adopts the principle of an order driven market. The RETDEBT Market facility on the NEAT system of Capital Market Segment is used for entering transactions in RDM session.

Trading Cycle

Trading in Retail Debt Market is permitted under Rolling Settlement, wherein each trading day is considered as a trading period and trades executed during the day are settled based on the net obligations for the day.

Settlement is on a T+2 basis i.e. on the second working day. For arriving at the settlement day all intervening holidays which include bank holidays, NSE holidays, Saturdays and Sundays are excluded. Typically trades that take place on Monday are settled on Wednesday, Tuesday's trades are settled on Thursday, and so on.

Clearing & Settlement (Retail Debt Market)

National Securities Clearing Corporation Limited (NSCCL) is the clearing and settlement agency for all deals executed in Retail Debt Market.

Salient features of Clearing and Settlement in Retail Debt Market segment:

Clearing and settlement of all trades in the Retail Debt Market shall be subject to the Bye Laws, Rules and Regulations of the Capital Market Segment, and such regulations, circulars and requirements, etc. as may be brought into force from time to time in respect of clearing and settlement of trading in Retail Debt Market (Government Securities).

Settlement in Retail Debt Market is on T + 2 Rolling basis that is on the second day. For arriving at the settlement day all intervening holidays, which include bank holidays, NSE holidays, Saturdays and Sundays, are excluded. Typically that take trades place on Monday are settled on Wednesday and Tuesday's trades are settled on Thursday, and so on.

Clearing and settlement would be based on netting of the trades in a day.

NSCCL shall compute member obligations and make available reports/data by T+1. The obligations for this market shall be computed separately from the obligations of the equity market.

The settlement schedule for the Retail Debt Market (Government Securities)

S .No.





Trade Date


T + 1 (11:00 a.m.)

Custodial Confirmation


T + 2 (10.30 a.m.)

Securities & Funds pay-in


T + 2

Securities & Funds pay-out

Funds and Securities settlement shall be through the existing clearing banks and depositories of NSCCL, in a manner similar to that of the Capital Market segment. The existing clearing bank accounts shall be used for funds settlement.

The existing CM pool account with the depositories that is currently operated for the CM segment, will be utilized for the purpose of settlements of securities.

In case of short deliveries, unsettled positions shall be closed out. The closeout would be done at Zero Coupon Yield Curve (ZCYC) valuation for prices, plus a 5% penalty factor. The buyer shall be eligible for the highest traded price from the trade date to the date of closeout or closing price of the security on the closeout date, plus interest calculated at the rate of overnight FIMMDA-NSE MIBOR for the closeout date whichever is higher, and the balance shall be credited to the Investor Protection Fund.

Members may please note that the penal actions and penalty points shall be similar to that of Capital Markets.

Risk Management (Retail Debt Market)

Base Capital and Net worth Requirements

Clearing members of Capital Market and Trading members of the WDM segment of the Exchange will be allowed to participate in the clearing and settlement of trade done in Government Securities, subject to a minimum net worth of Rs.1 crore.

An initial contribution to the Settlement Guarantee Fund (SGF) of this market by way of interest free security deposit (IFSD) of Rs.5 lakhs is required to be kept with NSCCL. A member desirous of participating in this segment may opt to set aside a contribution of Rs.5 lakhs from his additional base capital available on the Capital Market segment and / or Futures & Options segment (s) towards this IFSD.

Margins & Gross Exposure Limits

Mark to market margins will be applicable on all-open positions in Government securities and shall be calculated on the basis of ZCYC prices. This margin shall be payable on T + 1 day.

Institutions that are permitted under the relevant regulations to transact only on the basis of giving and taking delivery will operate through the custodial mechanism and shall be exempt from margin as in the case of the equities. Custodial trades on behalf of Provident Funds transacting through SGL – II accounts shall also be eligible for margin exemption.

The gross exposure in respect of these securities shall not exceed 20 times of the Interest Free Security Deposit (IFSD). Any member desirous of a higher exposure will be required to bring in additional base capital as it is done in Capital Market segment.

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