Trading Fixed Income, Securities Markets, Investments and Liquidity – Abans Group

Fixed Income

What are securities?

Securities are financial instruments that represent a creditor relationship with a corporation or government. Generally they represent agreements to receive a certain amount depending on the terms contained within the agreement.

What are fixed income securities?

Fixed-income securities are financial investments where the cash flows are according to a predetermined amount of interest, paid on a fixed schedule.

What are the types of fixed income securities?

The different types of fixed income securities include government securities, corporate bonds, commercial paper, treasury bills, strips etc.

What is the difference between a fixed income security and equity?

Holders of fixed-income securities are creditors of the issuer, not owners. Equity represents a share in the ownership of the issuer.

What are fixed interest rate securities and floating interest rate securities?

Fixed interest rate securities are those in which the interest payable is fixed beforehand. Floating interest rate securities are those in which the interest payable is reset from at pre-determined intervals according to a pre-determined benchmark.

What are the key components of fixed income securities?

Credit quality, yield, and maturity are key components of fixed-income securities.

What is credit quality?

Credit quality is an indicator of the ability of the issuer of the fixed income security to pay back his obligation. The credit quality of fixed-income securities is usually assessed by independent rating agencies such as Standard & Poor's, Moody's in the U.S. and CRISIL in India. Most large financial institutions also have their own internal rating systems.

What is the yield on a security?

Yield on a security is the implied interest offered by a security over its life, given its current market price.

What is maturity?

Maturity indicates the life of the security i.e. the time over which interest flows will occur.

What are coupon payments?

Coupon payments are the cash flows that are offered by a particular security at fixed intervals. The coupon expressed as a percentage of the face value of the security gives the coupon rate.

Why is there a difference between coupon rate and yield?

The difference between coupon rate and yield arises because the market price of a security might be different from the face value of the security. Since coupon payments are calculated on the face value, the coupon rate is different from the implied yield.

Why do long term securities offer more return than short- term securities?

Long-term securities typically offer more return than short-term securities because investors usually prefer to lend money for shorter terms. Hence money lent out for longer terms will have a higher yield.

What is Securities Trading?

The investments in debt or equity that management plans to actively trade for profit in the current period is termed as “Trading Securities”.

What are callable securities?

Callable securities are those which can be called by the issuer at a predetermined time/times, by repaying the holder of the security a certain amount which is fixed under the terms of the security.

What is the relationship between price and Yield?

Prices and interest rates are inversely related.

What is the Coupon rate of the Security?

The Coupon rate is simply the interest rate that every debenture/Bond carries on its face value and is fixed at the time of issuance. For example, a 12% p.a coupon rate on a bond/debenture of Rs 100 implies that the investor will receive Rs 12 p.a. The coupon can be payable monthly, quarterly, half-yearly, or annually or cumulative on redemption.

What is meant by a Maturity date for Security?

Securities are issued for a fixed period of time at the end of which the principal amount borrowed is repaid to the investors. The date on which the term ends and proceeds are paid out is known as the Maturity date. It is specified on the face of the instrument. In respect of Demat Debt instrument due date is known from ISIN Number of the security.

What is Redemption of Bond/Debenture?

On reaching the date of maturity, the issuer repays the money borrowed from the investors. This is known as Redemption or Repayment of the bond/debenture. If the redemption proceeds are more than the face value of the bond/debentures, the debentures are said to be redeemed at a premium. If one gets less than the face value, then they are redeemed at a discount and if one gets the same as their face value, then they are redeemed at par.

What is meant by Current yield?

This is the yield or return derived by the investor on purchase of the instrument (yield related to purchase price).

It is calculated by dividing the coupon rate by the purchase price of the debenture. For e. g: If an investor buys a 10% Rs 100 debenture of ABC company at Rs 90, his current Yield on the instrument would be computed as: Current Yield = (10%*100)/90 X 100 , That is 11.11% p.a

What is Yield to maturity (YTM)?

The yield or the return on the instrument is held till its maturity is known as the Yield-to-maturity (YTM). It basically measures the total income earned by the investor over the entire life of the Security.

This total income consists of the following:

  • Coupon income: The fixed rate of return that accrues from the instrument
  • Interest-on-interest at the coupon rate: Compound interest earned on the coupon income
  • Capital gains/losses: The profit or loss arising on account of the difference between the price paid for the security and the proceeds received on redemption/maturity

What is record date/shut period?

G-Sec/Bonds/Debentures keep changing hands in the secondary market. Issuer pays interest to the holders registered in its register on a certain date. Such date is known as record date. Securites are not transferred in the books of issuer during the period in which such records are updated for payment of interst etc. Such period is called as shut period. For G-Secs held in Demat form (SGL) shut period is 3 working days.

What do you mean by "Cum-Interest" and "Ex-Interest"?

Cum-interest means the price of security is inclusive of the interest accrued for the interim period between last interest payment date and purchase date.
Security with ex-interest means the accrued interest has to be paid separately.