Accrued interest is the interest that accumulates on a bond between coupon payments. For example, if you buy a bond between its payment dates, you may owe the seller accrued interest for the time they held the bond.
Accretion of bonds means that over time, the value of a bond goes up gradually. This happens because the bond was bought at a lower price than its face value (e.g. zero coupon bonds) and as time passes, its value moves closer to the face value.
Allotment denotes the allocation of bonds available for purchase to the public during a public offering. This process entails deciding the specific number of bonds assigned to each individual investor.
An American option is a form of option contract that permits the holder to activate their right to exercise the option at any point up until its expiry date.
Amortization is the gradual reduction of the principal amount throughout the loan term, achieved through regular installments or partial repayments.
An annuity is a financial instrument that delivers a stream of payments at consistent intervals.
Appreciation is increase in the value of an asset over time.
Arbitrage is the practice of capitalizing price differences of the same asset in different markets to make a profit with no risk.
An arbitrageur is an individual who capitalizes on price inconsistencies in financial markets to generate profits through arbitrage.
ASBA, which stands for “Applications Supported by Blocked Amount,” serves as a vital mechanism for individuals looking to subscribe to bonds or stocks in a public issue. Within the ASBA framework, an applicant’s bank account is earmarked for the desired subscription amount. However, this amount is only deducted from the account post the completion of stock or bond allocation.
Ask price is the price at which a seller is willing to sell a security.
An asset refers to any resource with economic value that an individual, corporation, or entity owns or controls, which is expected to provide future probable benefits.
An asset class refers to a category of investments that have similar financial characteristics and behave similarly in the marketplace. Examples include stocks, bonds, real estate, commodities, etc. Investors often diversify their portfolios by investing across different asset classes to manage risk and achieve their financial goals.
Asset & liability management is a financial strategy used by financial institutions to match their assets and liabilities to reduce risks and optimize returns.
Asset allocation involves strategically distributing investments across different asset categories such as equities, bonds, and gold. This approach aims to reduce risk and achieve investment goals.
Asset securitization is the process of pooling various types of debt contracts and selling them as securities to investors.
An asset swap involves an investor trading the cash flows of one asset for those of another. It’s like trading the interest payments from a bond for the interest payments of a loan.
An Asset-Backed Security (ABS) is a financial instrument supported by cash flows derived from a pool of underlying assets, including loans, leases or receivables.
AT1 bonds, or Additional Tier 1 bonds, are a type of debt issued by banks. They can convert into equity or be written off if specific conditions are met to bolster capital reserves.
An at-the-money (ATM) option is characterized by its strike price being the same as the prevailing market price of the asset it is derived from.
Auction is a method of selling securities wherein prospective buyers engage in competitive bidding to establish the price.
Available For Sale (AFS) is a classification of financial assets or securities that are not held for trading but can be sold if needed.
Baklava bonds are bonds denominated in Turkish lira issued by a foreign entity in the Turkish market.
Bank bonds are debt securities issued by banks to raise capital, offering fixed interest payments over a specified term. Investors receive regular interest and the principal back at maturity.
A barbell position in investment strategy entails maintaining short-term and long-term securities while steer clear of intermediate-term securities.
The base issue size represents the total volume of bonds an issuer makes available for purchase during a public offering of bonds.
A chart depicting the correlation between bond yields and their maturity periods for bonds of comparable credit ratings but varying maturity dates.
Basis points, often abbreviated as “bips” or “bps,” represent a unit of measurement for quantifying the percentage variation in the rate or value of a financial instrument. A single basis point corresponds to 0.01%, which is one-hundredth of a percent.
Basis risk refers to the uncertainty that the value of a hedge will not perfectly offset the value of the underlying asset. This risk arises when the prices of the hedged asset and the hedging instrument do not move in perfect correlation, potentially leading to unexpected financial losses.
A basis swap is a financial derivative with an agreement between two parties to exchange interest rate cash flows based on different floating interest rates. It’s used to manage or hedge risks associated with variations in interest rates.
Benchmark bond is preferably a risk-free bond that serves as a reference point for pricing other bonds in the market.
A benchmark rate is a standard interest rate used as a reference point for pricing financial instruments and loans.
Bid price is the price at which a buyer is willing to purchase a security.
The bid-ask spread represents the gap between the maximum price a buyer is ready to offer (bid) and the minimum price a seller agrees to accept (ask) for a financial security. It represents the transaction cost associated with trading the security and serves as a measure of market liquidity.
Bilateral netting is a financial agreement between two parties to combine multiple obligations into a single, net payment. It reduces the number of transactions and associated costs by offsetting receivables against payables, simplifying the settlement process and minimizing credit risk exposure.
Binomial tree is a graphical representation of possible future price movements of a financial instrument, commonly used in option pricing models. It’s like a decision tree showing different paths you could take in a game, each leading to different outcomes.
The Bank for International Settlements (BIS) is a global financial organization owned by central banks. Its primary role is to promote international monetary and financial collaboration and to act as a banking institution for central banks.
The Black-Scholes model is a mathematical framework designed to calculate the theoretical valuation of options. Created by Fischer Black, Myron Scholes, and Robert Merton, it enables investors to appraise option prices by considering variables including the price of the underlying asset, the duration until expiration, market volatility, and the risk-free rate of interest.
A bond is a type of fixed-income investment created by organizations like governments, or businesses to gather capital. It functions as a loan from investors to the bond’s issuer, who, in exchange, commits to periodic interest payments and the return of the initial investment on a predetermined date of maturity.
A Bond Calculator is a financial tool used to compute various aspects of bond investments, such as yield, price, maturity value and interest payments. It helps investors assess the value and potential returns of different bonds, enabling informed investment decisions.
Bond directory is a listing of available bonds in the market along with their characteristics and prices. It’s like a catalog of different types of bonds you can choose from.
A bond holder is an investor who owns a bond. Bond holders are entitled to receive periodic interest payments and the principal amount upon maturity of the bond.
A bond indenture represents a formal agreement between the issuer of the bonds and the bondholders, specifying the terms and conditions under which the bonds are issued. It specifies the interest rate, maturity date, repayment schedule and the rights and responsibilities of each party.
A bond ladder is an investment strategy where an investor distributes their capital across multiple bonds with different maturity dates. This approach staggers the redemption of bond investments over several years, aiming to manage interest rate risk and provide liquidity through regularly maturing securities.
A bond swap is a strategy where an investor exchanges one bond for another, typically to improve yield, adjust the portfolio’s duration, capitalize on market shifts, or obtain tax benefits. This involves selling one set of bonds and using the proceeds to purchase another.
Bond equivalent yield (BEY) is a calculation used to standardize the yield on bonds with different payment schedules into an annualized yield, making them comparable. This measure allows for easier comparison between bonds that pay interest at different frequencies.
The book value of a bond is the recorded value of the bond on the issuer’s financial statements, calculated as the bond’s face value minus any amortization of discounts or premiums incurred during its issue.
Bootstrapping refers to a method used to create a zero-coupon yield curve by extracting the implied interest rates from the prices of existing coupon-bearing bonds. This process involves calculating the yields for various maturities assuming no arbitrage opportunities, thereby allowing investors to estimate the return on zero-coupon bonds even if such bonds are not available in the market.
Broker/dealers are entities that buy and sell securities on behalf of their clients and for their own accounts. They facilitate trading in financial markets, provide investment advice, and may also offer additional services like market making and asset management.
Bombay Stock Exchange (BSE) is Asia’s oldest stock exchange which facilitates trading in financial assets like equities, bonds, derivatives.
A bullet security is a type of bond that repays the entire principal amount in a lump sum on the maturity date, rather than through amortized payments over the life of the bond.
A bullet payment refers to a single, large payment that settles the full balance of a loan or the principal of a bond. This payment is usually made at the end of the term, instead of distributing the total amount due over several smaller, regular payments.
A butterfly strategy is an options trading tactic involving multiple trades with the same expiration date but different strike prices to profit from changes in volatility.
A calendar spread is a strategy used in options trading where an investor simultaneously purchases and sells two options of the same kind with the same strike price, but they differ in their expiration dates. The trader aims to profit from the difference in time decay between the short-term and long-term options.
A callable bond is a financial instrument that allows the issuer to pay off the bond prior to its scheduled maturity date. This feature allows the issuer to pay back the principal early, typically to take advantage of declining interest rates or to refinance debt under more favorable conditions.
Call date is a specific date on which a bond issuer has the right to repay the principal amount of the bond before its maturity.
A call option is a type of financial agreement that grants the buyer the right, though not the requirement, to purchase a certain quantity of an asset at a fixed price during a specified time frame.
Call price is the predetermined price at which an issuer of callable bonds has the right to repurchase them from investors before their maturity date.
Call Risk refers to the possibility that a bond issuer will redeem or call a bond before its maturity date, usually when interest rates decline. This can lead to investors receiving their principal back earlier than expected, potentially forcing them to reinvest at lower interest rates.
A cap typically refers to the maximum limit on the interest rate or the maximum level of a variable that can be imposed on a financial product such as a loan, bond, or adjustable-rate mortgage (ARM).
Capital adequacy refers to the financial health and stability of a bank or financial institution, specifically its ability to absorb potential losses without becoming insolvent. It is measured by comparing a bank’s capital (such as equity and reserves) to its risk-weighted assets, ensuring that it has enough capital to cover its risks and obligations.
Capital Indexed Bonds are fixed-income securities whose principal value is adjusted periodically to reflect changes in the inflation rate. The adjustments to the principal value are typically based on a specific price index.
Capital gain bonds, also known as 54EC bonds, are financial instruments issued by government-backed entities to allow investors to exempt taxes on capital gains realized from the sale of assets such as property or land.
Capital gains tax is a tax on the profit made from selling a capital asset. This tax is determined by subtracting the original purchase price of the asset from the price at which it was sold, after accounting for any relevant costs linked to the sale.
The capital market is a financial trading space where long-term securities are exchanged. It plays a pivotal role in channeling capital from individuals or entities with surplus funds (investors) to those in need of funds (issuers), thus promoting economic expansion and progress.
Carry refers to the profit or cost associated with holding a financial asset, such as a bond or currency, over a certain period. It includes income generated by interest, dividends, or other yields earned from holding the asset, as well as any associated financing or holding costs.
Cash flow describes the transfer of funds into or out of a business or financial institution, usually tracked within a defined timeframe. It encompasses the inflow of funds from sources such as sales, investments and financing activities, as well as outflows including expenses, investments and debt repayments.
Cash management bills are short-term securities issued by the government to manage their short-term cash needs. These bills typically have short maturities less than 91 days.
Cash-and-carry arbitrage is an investment strategy that involves simultaneously buying a financial asset and selling a related futures contract. The investor profits from price differences between the asset and its corresponding futures contract by borrowing funds to purchase the asset (the “cash” component) and selling the futures contract (the “carry” component).
The Clearing Corporation of India Limited (CCIL) serves as a central counterparty clearing house in India, offering services for the clearing and settlement of transactions across fixed income, currency, and derivative markets. CCIL acts as an intermediary between buyers and sellers, ensuring the smooth and efficient completion of trades while mitigating counterparty risk.
A Certificate of Deposit (CD) is a financial instrument available through scheduled commercial banks and certain qualified financial institutions. It allows investors to invest for a predetermined different periods, ranging from 1-year to 3-year, at a specified interest rate.
Cheapest to deliver refers to the least expensive bond or security that can be delivered to fulfill the obligations of a futures contract. This term is commonly used in the context of bond futures, where the seller has the option to deliver any bond that meets the specifications of the contract and typically chooses the one that minimizes their cost.
The clean price refers to the price of a bond that does not include any accrued interest. It is the quoted price of the bond excluding the interest that has accumulated since the last interest payment.
Climate bonds are financial instruments specifically designed to fund projects and initiatives aimed at mitigating or adapting to climate change. These bonds are earmarked for investments in renewable energy, energy efficiency, sustainable infrastructure and other climate-friendly projects. The proceeds from climate bonds are dedicated to activities that help reduce greenhouse gas emissions.
A collar represents a risk management approach entailing the purchase of a put option to safeguard against potential losses, coupled with the sale of a call option on the identical underlying asset. This strategy sets a price range within which the asset’s value is allowed to fluctuate, providing downside protection while limiting potential upside gains.
Collateralized Mortgage Obligation (CMO) is a financial instrument that pools together various mortgages into a single security, which is then divided into multiple classes or tranches. Each tranche has different risk and maturity characteristics, allowing investors to choose securities that align with their investment preferences.
A Collateralized Debt Obligation (CDO) is a financial instrument that aggregates different kinds of debt, including mortgages, bonds, and loans, and converts them into assorted securities. These securities are then divided into different tranches with varying levels of risk and return. CDOs are typically structured so that investors in higher tranches receive priority in receiving payments from the underlying debt, while investors in lower tranches face higher risk but potentially higher returns.
A commercial paper is a short-term debt instrument issued by corporations, financial institutions and sometimes governments to finance short-term obligations. It typically matures within 1 year and is unsecured, making it reliant on the issuer’s creditworthiness. Commercial paper is often used to meet short-term liquidity needs and is usually issued at a discount to its face value.
The Consumer Price Index (CPI) reflects the typical variation in prices that urban shoppers pay for a diversified set of consumer goods and services over time. It’s like a report card for the economy, showing how much prices have changed for everyday items like groceries and fuel.
A competitive bid is made by an investor to purchase securities in an auction at the best available price.
Compound interest is a financial concept where interest is calculated on both the initial principal and the accumulated interest from previous periods. Over time, compound interest leads to exponential growth, as each interest payment contributes to the principal amount, resulting in a compounding effect.
A downward-sloping yield curve visually illustrates how bond yields compare with their maturity lengths, demonstrating that bonds with longer maturities offer lower yields than those with shorter terms.
Contango refers to a market condition in commodities or financial instruments where the futures price of a commodity or security is higher than the spot price, indicating an upward sloping futures curve.
Contingent Convertible Bonds (CoCo Bonds) or Enhanced Capital Note (ECN) are bonds that automatically convert into equity when a predefined trigger event occurs.
Convertible bonds are a form of corporate debt that allows the holder to exchange the bond for a predefined amount of the issuer’s common stock during a set period and at a fixed conversion rate.
A convex yield curve is a graphical representation of the relationship between bond yields and their respective maturities. In this curve, longer-term bonds have higher yields compared to shorter-term bonds. However, the rate at which yields increase slows down as maturity extends, resulting in a curve that bends upwards.
Convexity adjustments refer to the modifications made to bond prices or interest rates to account for the convex shape of the bond price-yield curve. These adjustments are necessary because bonds exhibit convexity, meaning their price-yield relationship is not linear.
Convexity refers to the curvature of the price-yield relationship of a bond or fixed-income security. Convexity reflects how a bond’s price reacts to changes in interest rates; It aids investors in grasping how bond prices react to changes in interest rates beyond the predictions made by duration alone.
Corporate bonds are issued by corporations to raise capital, typically with fixed interest payments and a maturity date. It’s like lending money to a company in exchange for regular interest payments and the return of the principal amount at the end of the loan term.
Correlation is a statistical measure of the relationship between the returns of two assets or securities. It indicates how the performance of one asset is related to the performance of another asset over time.
Cost of carry refers to the expenses incurred by holding an asset or position over a certain period, including costs such as financing charges, storage costs and opportunity costs.
Coupon rate is the fixed interest rate paid on a bond. It is expressed as a percentage of the bond’s face value and determines the periodic interest payments that bondholders receive.
Coupon Equivalent Yield (CEY) refers to a method used to compare the yield on a discount security to the yield on an interest-bearing security on an annualized basis. It calculates the yield on a discount security as if it were an interest-bearing instrument, allowing for easier comparison between different types of securities with varying coupon rates and maturities.
A covenant refers to a promise or agreement made within a contract or bond issue. Covenants outline specific conditions, restrictions, or obligations that parties involved must adhere to. These conditions can include financial performance metrics, restrictions on borrowing, or limits on asset sales, among others.
Credit enhancement refers to the strategies or mechanisms employed to improve the credit quality of a financial instrument or transaction. This can include methods such as guarantees, insurance, collateral, or other forms of security that provide additional assurance to creditors regarding the repayment of debt obligations.
The Cash Reserve Ratio (CRR) represents the mandatory percentage of total deposits that banks must keep as reserves, either in cash or as deposits at the central bank. Central banks utilize this ratio to manage liquidity and affect the overall money supply within the economy.
Credit rating evaluates the likelihood that a borrower or a debt issuer will fulfill their financial obligations. It evaluates the borrower’s ability to meet its financial obligations and repay debts in a timely manner. Credit ratings are expressed as letter grades or alphanumeric symbols, indicating the risk level associated with lending to the borrower.
Credit rating agencies are entities that assess the creditworthiness of corporations, governments and financial instruments. Credit ratings are assigned to indicate an issuer’s capacity to fulfill its financial commitments. These ratings offer investors a gauge of the risk involved when investing in a specific entity or financial instrument.
Credit derivatives are financial instruments whose value is derived from the credit risk of underlying assets, typically bonds or loans. These instruments allow investors to hedge against or speculate on changes in credit quality, including the likelihood of default.
A credit event refers to a significant occurrence or situation that triggers a default or potential default by a borrower on their debt obligations. This could include events such as bankruptcy, failure to make timely interest or principal payments, or a downgrade in credit rating by a recognized credit agency.
Credit risk pertains to the potential for financial loss stemming from a borrower’s failure to meet their agreed-upon financial obligations.
Credit spread or credit default spreadrefers to the difference in yield between two securities or bonds with similar maturities but varying credit qualities. It measures the additional return investors demand for holding a bond with higher credit risk compared to a bond with lower credit risk.
A cross hedge is a risk management tactic where an investor mitigates a specific risk by using a financial instrument that does not have a perfect correlation with the asset or risk they are protecting against.
Current yield is the yearly income produced by a bond, presented as a percentage of its present market value. It’s like the coupon you earn on the bond, divided by the current market price.
Curvature risk refers to the potential for losses resulting from changes in the yield curve’s shape.
A custodian refers to a financial entity tasked with the protection and management of assets for its clients. The custodian’s role involves ensuring the security and proper handling of the assets.
Collateral Trust Bond refers to a type of bond secured by a pledge of financial assets, such as stocks, bonds, or other securities, held in a trust by the issuer. In the event of default, these assets serve as collateral to repay bondholders.
Convertible Bond Arbitrage is an investment strategy that involves simultaneously buying convertible bonds and selling short the underlying stock. The aim is to capitalize on price discrepancies between the convertible bond and the stock.
Day count is the method used to calculate the number of days between two dates for the purpose of calculating accrued interest on bonds.
A dealer refers to a person or organization involved in the purchase and sale of securities, commodities, or various financial assets, operating either for their own benefit or for that of their clients.
Debt refers to an obligation owed by one party (the debtor) to another party (the creditor), typically involving the borrowing of money or assets with the agreement to repay the borrowed amount, often with interest, within a specified timeframe.
Debt service coverage is a financial metric used to assess the ability of an entity to meet its debt obligations, particularly interest payments and principal repayments. It is typically calculated by dividing the entity’s net operating income by its total debt service obligations, including interest and principal payments.
A debenture is a type of debt instrument issued by a corporation that acknowledges a debt and specifies the terms of repayment, including the interest rate, maturity date and any security or collateral pledged against the debt.
Debenture holder is anyone who owns a debenture, which is a type of debt instrument issued by corporations. Debenture holders are creditors to the issuer and are entitled to receive regular interest payments and repayment of the principal amount upon maturity.
A debenture trustee is a financial entity or institution appointed to safeguard the interests of debenture holders. Their responsibilities typically include ensuring compliance with debenture terms, overseeing debt servicing and representing the interests of debenture holders in case of default or restructuring.
Deep discount bond is issued at a significantly lower price than its face value, typically at a steep discount. These bonds usually have a longer maturity period and offer no periodic interest payments. Instead, they are redeemed at their full face value upon maturity, allowing investors to earn their return through the difference between the purchase price and the redemption value.
Default is a failure to fulfill a financial obligation, such as the non-payment of a loan or interest, as agreed upon in the contractual terms.
Default risk is the potential that a borrower might not fulfill their debt commitments, which could lead to losses for the lender or investor.
A deliverable bond is a particular kind of bond that satisfies the requirements specified in a futures contract and can be used to meet the obligations of the contract when it matures.
Delivery versus Payment (DvP) is a financial term describing a settlement method in securities transactions. In DvP, the transfer of securities occurs simultaneously with the transfer of funds, ensuring that delivery of securities only happens if payment is made and vice versa. This mechanism reduces counterparty risk by ensuring that both parties fulfill their obligations before the transaction is considered complete.
Demat, short for “dematerialization,” refers to the process of converting physical certificates of securities into electronic form. Demat accounts are used by investors to facilitate the seamless trading and safekeeping of securities in electronic format.
Deferred Interest Bond is a type of bond where the issuer delays paying interest to the bondholder until a specified future date. During the deferral period, interest accrues and compounds, but the bondholder does not receive periodic interest payments. Once the deferral period ends, the bondholder receives both the accumulated interest and the regular interest payments as specified in the bond agreement.
Derivative securities are financial agreements or tools whose worth is based on the behavior of a base asset, index, or entity. These contracts include options, futures, swaps and forward contracts. They are used for hedging against risk, speculation, or gaining exposure to assets without owning them directly.
Discount bond is a type of bond that is issued or sold at a price lower than its face value, typically because it offers no coupon payments or pays a coupon rate that is lower than prevailing market rates.
The Discounted Cash Flow (DCF) approach stands as a valuation method employed to assess the value of an investment. It achieves this by projecting the future cash flows of the investment and subsequently converting these anticipated earnings into their present value through the application of an appropriate discount rate. This rate generally accounts for the time value of money and the investment’s risk level.
Downgrade risk signifies the potential for a bond or any fixed-income investment to experience a reduction in its credit rating, as assessed by a credit rating agency. Such downgrades commonly arise when the financial condition of the issuer worsens, heightening the probability of default or failure to fulfill its financial commitments.
Dual currency bonds are financial instruments that pay interest and principal in one currency but are issued in another currency. For example, a bond issued in Japan but pays in US dollars.
Delta is a measure of how much the price of an option changes compared to the price movement of the underlying asset. It reflects the sensitivity of the option’s price to changes in the asset’s price.
Dim Sum Bonds are those bonds issued outside of China but denominated in Chinese renminbi.
The dirty price represents the total cost of purchasing a bond, incorporating both the bond’s quoted price and any accrued interest up to the transaction date.
Discount rate refers to the rate used to calculate the present value of future cash flows, often used in valuation.
Duration serves as an indicator of how a bond will react to fluctuations in interest rates, reflecting the weighted average period until all its cash flows are collected.
Duration matching is a strategy used in investment management where the duration of assets matches the duration of liabilities.
E-Kuber stands as the foundational banking solution for the Reserve Bank of India, offering an integrated platform that centralizes all banking activities and facilitates efficient liquidity management operations.
External Commercial Borrowings (ECBs) refer to loans availed by eligible resident entities in India from non-resident lenders. These borrowings are typically in the form of bank loans, buyers’ credit, suppliers’ credit, securitized instruments (e.g., floating rate notes and fixed rate bonds) and foreign currency convertible bonds (FCCBs), among others.
Effective duration refers to a measure used in bond investing to estimate the sensitivity of a bond’s price to changes in interest rates. It takes into account not only the bond’s coupon payments and final maturity but also the possibility of changes in cash flows due to embedded options such as call or prepayment options.
Embedded option refers to a feature included within certain financial instruments that grants the holder the right to undertake specific actions at predetermined times or under particular conditions. Common types of embedded options include call options, put options and convertible features, which can influence the instrument’s value and behavior in response to changes in market conditions.
The Emerging Markets Bond Index (EMBI) serves as a pivotal financial metric, monitoring the performance of bonds issued by both governmental bodies and corporations within emerging market nations. This index provides investors with a measure of the returns generated by investing in debt securities from developing economies.
Equity denotes a stake or share of ownership in a corporation. It signifies the residual value of an entity’s assets after liabilities are deducted and represents the ownership claim on the company’s assets and earnings.
Event risk refers to the possibility of a significant and unexpected occurrence affecting the financial markets or a specific investment. These events can include natural disasters, geopolitical conflicts, regulatory changes, corporate scandals, or other unforeseen incidents that can have a sudden and profound impact on asset values and market conditions.
Eurobond is a type of bond issued in a currency different from that of the country or market in which it is issued.
A European option is a type of financial derivative contract that can only be exercised at its expiration date.
A bond with extendable features provides the bondholder with the choice to prolong the maturity date of the bond beyond its initial duration. This feature provides flexibility to the investor, allowing them to prolong the period of the bond’s ownership if desired.
Extrapolation refers to the process of extending or projecting existing data or trends into the future, typically assuming that current conditions or patterns will continue unchanged. It involves making predictions or estimations beyond the known data points based on the assumption of a consistent trend or pattern.
FIMMDA, or Fixed Income Money Market and Derivatives Association of India, is a self-regulatory organization established in India to regulate the fixed income, money market, and derivatives markets. It plays a crucial role in setting standards, promoting best practices and ensuring the integrity and efficiency of these markets.
Foreign Portfolio Investors (FPIs) usually refer to institutional investors who allocate funds into various financial instruments like equities, debt, or securities in a jurisdiction different from their home country. FPIs seek to diversify their investment portfolios globally to potentially benefit from different market conditions and opportunities.
Flight to quality is a financial phenomenon where investors move their capital from riskier assets perceived as less secure to safer investments during times of uncertainty or market turbulence.
Financial Benchmark India Limited is a company responsible for the calculation, administration and oversight of financial benchmarks in India. These benchmarks serve as reference points for various financial instruments and transactions, providing a standard for comparison and evaluation within the Indian financial markets.
Fixed rate bonds or plain vanilla bonds are debt securities issued by entities with a predetermined interest rate that remains constant throughout the life of the bond. These bonds provide investors with regular interest payments at the fixed rate until maturity.
Floating rate bonds are debt securities with interest rates that adjust periodically according to specified benchmark rates.
Floor refers to the minimum level or price at which a financial instrument is expected to trade or be valued. It serves as a protective measure against significant losses, establishing a limit below which the asset’s worth isn’t anticipated to drop.
Foreign bonds refer to debt instruments issued by an international entity but denominated in the currency of the host country.
Foreign institutional investors (FIIs) are entities, typically large financial institutions or organizations that invest in financial in countries outside of their own jurisdiction. FIIs play a significant role in global financial markets, contributing to liquidity, diversification and capital flows across borders.
Forward contracts represent financial arrangements entered into by two parties for the purchase or sale of an asset at a prearranged price on a specified future date. These contracts are customizable and are not traded on exchanges, typically used for hedging against future price movements.
Forward price is the price agreed upon in a forward contract for the delivery of an asset at a specified future date. It is determined at the time of entering the contract and is based on factors such as the current spot price, interest rates and the time to maturity.
Forward Rate Agreement is a financial contract where two parties agree to exchange a predetermined interest rate on a specified principal amount for a future period of time. FRAs are used to hedge against fluctuations in interest rates or to speculate on future interest rate movements.
Forward rates of interest are the interest rates agreed upon in a forward rate agreement (FRA) or implied by the forward pricing of interest rate futures contracts. These rates represent the expected future interest rates for a specific period, as determined by market participants’ expectations.
Foreign Currency Convertible Bonds (FCCBs) are bonds issued by a company in a currency different from its own, which can be converted into the issuer’s stock or equity shares at a predetermined conversion price.
The future value represents the projected worth of an investment or asset at a specific point in time in the future, based on assumptions about its growth rate or interest rate.
Futures contracts represent standardized financial arrangements for purchasing or selling a particular asset at an agreed-upon price on a specified date in the future.
FX risk, also known as foreign exchange risk or currency risk, refers to the potential financial loss that may occur due to fluctuations in exchange rates between different currencies.
Gamma quantifies the rate at which the delta of an option adjusts in response to shifts in the price of the underlying asset. It gauges the degree of sensitivity of an option’s delta to changes in the underlying asset’s price.
Gross Domestic Product (GDP) stands as the comprehensive financial metric representing the sum total of all goods and services crafted within the confines of a nation’s borders over a designated timeframe.
Gap ratio is a financial metric used to measure the difference between a bank’s assets and its liabilities, usually expressed as a percentage of total assets.
Gilt-edged securities often known as gilts are high-quality bonds issued by the UK government.
Government bonds are debt securities issued by a government to raise capital, typically backed by the sovereign commitment, essentially making it risk-free.
Government securities also known as government bonds are issued by the Indian government. The types of gsecs include Treasury bills, Cash Management Bills, Dated G-Secs, State Development Loans.
Green bonds represent debt instruments that are specifically issued to raise funds for environmentally beneficial projects or endeavors. These projects typically include initiatives aimed at renewable energy development, climate change mitigation, or other environmentally sustainable activities.
Hard call protection is a feature of certain bonds that prevents the issuer from redeeming or “calling” the bonds before a specified date or at a specified price, providing investors with protection against early redemption.
The hedge ratio refers to the proportion between the size of a derivative contract position and the size of the underlying asset. It serves the purpose of mitigating potential losses or gains in the asset’s value through hedging strategies.
Hedging is a risk management strategy used to minimize or offset the impact of adverse price movements in financial markets by taking offsetting positions in related instruments.
Held for Trading (HFT) is a phenomenon where financial assets held for the purpose of generating short-term profits from price fluctuations, typically reported at fair value on the balance sheet.
Held till maturity (HTM)Securities are securities that are held until they mature, at which point the principal amount is repaid along with any accrued interest.
High net worth Individuals are investors interested in allocating over INR 10 Lakhs in various investment choices, including Resident Indian Individuals and Hindu Undivided Families (HUFs), often fall into this category.
High yield bonds are bonds with lower credit ratings and higher yields to compensate investors for the relatively increased risk.
Historical simulation is a risk management technique that estimates the potential losses of a portfolio by simulating its performance based on historical market data. It involves using past market movements to predict future outcomes, providing insights into the potential risks associated with a portfolio’s investments.
Historical disallowance refers to the practice of excluding certain extreme events or outliers from historical data when calculating risk measures such as Value-at-Risk (VaR). By disregarding extreme events, historical disallowance aims to create a more realistic estimation of potential losses and risks faced by a portfolio.
Humped yield curve exhibits a distinct upward or downward slope in the intermediate maturity range while maintaining relatively flat yields at both shorter and longer maturities. This curve shape indicates varying expectations for interest rates over different time horizons and may reflect market uncertainties or expectations of future economic conditions.
Immunization serves as a strategic investment approach aimed at shielding a portfolio from interest rate fluctuations. This is achieved by aligning the duration of assets with that of liabilities. By ensuring that the sensitivity of the portfolio’s value to interest rate changes is minimized, immunization aims to provide a hedge against fluctuations in interest rates.
Inflation denotes the continuous rise in the overall price level of goods and services within an economy over a specific duration. This phenomenon gradually diminishes the buying power of currency, resulting in a decline in the actual worth of savings and investments.
Inflation-indexed bonds are fixed-income securities whose principal and interest payments are adjusted periodically to account for changes in inflation. These bonds provide investors with protection against inflationary pressures, as their returns are linked to changes in the consumer price index or another inflation index.
Inflation risk pertains to the possibility of increasing inflation gradually diminishing the buying power of an investor’s assets and earnings as time progresses.
Interest rate risk pertains to the possibility that fluctuations in interest rates could negatively impact the value of a bond or a bond portfolio. Bonds featuring longer maturities or lower coupon rates tend to be more vulnerable to such fluctuations. This is because their prices may undergo more pronounced fluctuations in reaction to changes in prevailing market interest rates.
An Information Memorandum is a comprehensive document prepared by issuers before offering bonds, to potential investors. It contains detailed information about the issuer, the terms of the bond offering, financial statements, risk factors and other relevant information.
Infrastructurebonds are issued to finance infrastructure projects such as roads, bridges, and airports.
An Institutional Investor denotes entities that allocate substantial funds on behalf of various stakeholders, including pension funds, insurance companies, mutual funds, and hedge funds. These investors generally possess considerable financial capital and specialized knowledge in evaluating and overseeing investment portfolios.
Interest Rate Parity is a financial principle asserting that the gap in interest rates between two nations ought to correspond to the disparity between the forward exchange rate and the spot exchange rate. It suggests that arbitrage opportunities will not exist due to interest rate differentials between countries, as exchange rate movements will offset any potential gains from interest rate differentials.
An Interest Rate Swap constitutes a financial agreement wherein two entities exchange interest rate payments over a predetermined duration. Under this arrangement, one party commonly disburses a fixed interest rate, while the other disburses a variable (floating) interest rate.
The Internal Rate of Return (IRR) serves as a crucial measure for assessing investment profitability. It signifies the discount rate at which the net present value (NPV) of all investment cash flows amounts to zero. In simpler terms, IRR is the rate of return at which an investment breaks even.
The International Monetary Fund (IMF) stands as a global institution dedicated to fostering international monetary collaboration, ensuring financial stability, facilitating global trade, fostering widespread employment, nurturing sustainable economic advancement, and alleviating poverty on a global scale.
Interpolation is a statistical method used to estimate values that fall between known data points. It involves using existing data to predict or estimate values for intermediate points within a data set.
In-the-Money denotes a scenario within options trading wherein the current market value of the underlying asset proves advantageous for the holder of the option.
Intrinsic Value is the actual value of an asset or investment based on its fundamental characteristics, such as earnings, cash flows, dividends and other relevant factors.
An Inverse Floater is a type of debt instrument with a variable interest rate that moves in the opposite direction of a specified benchmark rate. As the benchmark rate increases, the interest rate on the inverse floater decreases and vice versa.
An inverted yield curve arises when short-term interest rates surpass long-term rates. This occurrence holds significance as it usually signals investor pessimism regarding the future trajectory of the economy. It implies anticipations of reduced inflation and the potential onset of an economic downturn.
Investment-grade debt refers to bonds or other fixed-income securities that are considered to have a relatively low risk of default by credit rating agencies.
An IOU is a written acknowledgment of a debt owed by one party to another. While not a formal legal document like a bond, an IOU serves as a simple promise to repay a specific amount of money at a later date.
An ISIN is a unique alphanumeric code used to identify specific securities, including bonds, stocks and derivatives, on a global scale. It provides a standardized method for securities identification, facilitating trading, settlement and regulatory oversight across different markets and jurisdictions.
The issue date of a bond refers to the date on which the bond is initially issued and made available to investors. It marks the beginning of the bond’s life cycle, including its maturity period and interest payment schedule. Investors who purchase bonds after the issue date may do so on the secondary market.
Junk bonds, represent fixed-income securities that are issued by companies or entities possessing lower credit ratings. These bonds present an elevated risk of default, yet they provide investors with the incentive of higher yields. Typically, junk bonds are issued by companies facing financial challenges or those with speculative business models.
Kangaroo bonds are bonds issued in Australian dollars by foreign entities in Australia.
Kimchi bonds are bonds denominated in non-won issued in South Korea by foreign entities.
KYC is a regulatory requirement that financial institutions must adhere to in order to verify the identity of their clients. It involves gathering information about customers’ identity, financial activities and risk profile to prevent money laundering, fraud and other illicit activities.
A letter of credit stands as a financial guarantee provided by a bank or financial entity, assuring the payment of a designated sum to a beneficiary, acting on behalf of the applicant.
In bond issuance, the lead manager is the financial institution or investment bank responsible for coordinating the entire bond issuance process on behalf of the issuer. This includes structuring the bond, pricing it, marketing it to investors and managing the issuance process.
Leverage encompasses utilizing borrowed capital or financial tools to enhance the potential return on investment. This strategy entails employing debt to fund investments with the goal of maximizing profits. While leverage has the capacity to boost gains, it simultaneously elevates the risk of losses, as they are similarly amplified.
A liability is an obligation or debt that an individual or entity owes to another party. It represents a claim on the assets or resources of the debtor and typically arises from borrowing money, purchasing goods or services on credit, or other financial transactions.
A liability swap is a financial derivative contract in which two parties agree to exchange cash flows based on different types of liabilities, such as fixed-rate debt for floating-rate debt or liabilities denominated in different currencies.
LIBOR stands as a pivotal benchmark for the interest rates at which banks lend to one another in the London interbank market, especially for short-term loans. It functions as a fundamental reference point across the globe for an array of financial instruments, encompassing bonds, loans, and derivatives. Nevertheless, the ongoing process involves the gradual phase-out of LIBOR, with alternative risk-free rates such as SOFR (Secured Overnight Financing Rate) stepping in to fill the void.
Liquidity pertains to the ease with which an asset can be traded in the market without causing substantial fluctuations in its price. Assets with high liquidity can be swiftly exchanged with minimal impact on their value, whereas those with low liquidity may necessitate more time and resources for transactions.
Liquidity risk pertains to the potential that an investor might encounter difficulty in swiftly purchasing or offloading an asset at a fair price owing to inadequate market liquidity. It encompasses the possibility of incurring losses or being unable to access funds when needed, particularly in times of market stress or economic downturns.
The Liquidity Adjustment Facility (LAF) is a monetary tool used by the Reserve Bank of India to regulate the liquidity and stability of the rupee. It allows banks to borrow money through repo or reverse repo agreements, thus managing day-to-day banking system cash flows efficiently.
A liquidity gauge serves as a financial indicator utilized to evaluate the ease with which an asset can be traded in the market, without causing notable fluctuations in its price.
Liquidation involves the conversion of assets into cash, typically to settle debts or distribute funds to stakeholders. It often occurs when a company is insolvent or undergoing bankruptcy proceedings.
Listed bonds are those that are traded on a public exchange, where investors can buy and sell them freely. These bonds are subject to the rules and regulations of the exchange. Being listed enhances the liquidity and transparency of the bonds.
A long position in bonds refers to the ownership of bonds with the expectation that their value will increase over time. This strategy is often used by investors who are bullish on the bond market or who seek to hold bonds for the long term as part of their investment portfolio.
Long-term capital gain is the profit earned from the sale of capital assets (listed bonds) that have been held for more than one year.
The long-term capital gains tax is imposed on the profits accrued from selling an asset, such as listed bonds, that has been held for over a year. This tax is calculated at a rate of 10% without indexation.
The maintenance margin represents the threshold of minimum equity required in a margin account to prevent triggering a margin call. When trading on margin, investors borrow funds from their broker to buy securities, including bonds. The maintenance margin requirement ensures that investors have sufficient funds or securities in their account to cover potential losses.
A margin call occurs when a broker requests that an investor inject more funds or securities into their margin account to fulfill the minimum maintenance margin stipulation.
Market risk capital charge (MRCC) is a regulatory requirement that financial institutions must hold a certain amount of capital to cover potential losses from market risk exposure. The MRCC helps ensure that banks and other financial institutions have sufficient capital reserves to absorb losses stemming from adverse market movements.
Market-linked debentures (MLDs) are non-convertible debentures whose returns are tied to a specific market index or benchmark. MLDs do not offer a fixed interest rate but provide potential higher returns if the linked market index performs well.
A market-maker is a financial institution or individual that facilitates trading in securities, by providing liquidity to the market. Market-makers buy and sell securities from their own inventory, thereby creating a market for buyers and sellers to execute trades.
Mark-to-market (MTM) stands as a methodology for assessing the worth of assets and liabilities grounded on their present market prices or equitable values.
Market risk, sometimes referred to as systematic risk or non-diversifiable risk, pertains to the potential for financial losses stemming from changes in market prices or broader market conditions impacting the valuation of financial assets. Market risk encompasses various factors such as changes in interest rates, exchange rates, inflation rates and economic conditions, which can impact the returns on investments.
Masala bonds are rupee-denominated bonds issued outside of India.
Matador bonds are bonds issued in Spanish pesetas by foreign entities in the Spanish market.
Maturity date is the date on which the principal amount of a bond becomes due and is repaid to the bondholder.
Medium term notes (MTNs) are debt securities with maturities typically ranging from five to ten years, issued by corporations, financial institutions, or governments to raise capital. MTNs offer flexibility in terms of maturity and coupon payments, allowing issuers to tailor the terms of the notes to meet their financing needs and investor preferences.
Mumbai Interbank Offered Rate, MIBOR is the benchmark interest rate at which banks in Mumbai offer to lend funds to one another in the Indian interbank market. MIBOR serves as a reference rate for various financial products and transactions, including loans, bonds and derivatives.
Mumbai Interbank Forward Offer Rate, which is a benchmark interest rate used in the Indian financial markets for pricing forward rate agreements (FRAs) and other interest rate derivatives.
Modified duration evaluates how a bond’s price reacts to fluctuations in interest rates. It gauges the percentage alteration in the bond’s price corresponding to a one-unit shift in its yield to maturity. Unlike conventional duration, modified duration takes into account the bond’s yield, rendering it a more precise indicator of interest rate exposure.
The money market refers to the financial market where short-term debt securities are bought and sold, typically with maturities of one year or less. It includes various instruments such as Treasury bills, commercial paper and certificates of deposit.
A mortgage-backed security (MBS) represents a form of asset-backed security backed by a pool of mortgages. Those who invest in MBS receive returns originating from the principal and interest payments homeowners make on the mortgages underlying the security.
The concept of moving average involves employing statistical methods to diminish fluctuations within data by computing the average of sequential data points over a predetermined timeframe. These moving averages come in various forms such as simple, exponential, or weighted, with each type differing in the assigned weight to individual data points.
A multiple price auction is a type of auction where bidders can submit bids at various prices and the auctioneer accepts bids at different price levels until all the securities being auctioned are sold.
Municipal bonds are debt securities issued by urban local bodies (ULBs) or municipal corporations to fund public projects such as infrastructure improvements, housing, schools, and utilities.
Naked often refers to engaging in a financial transaction without owning the underlying asset or security. For example, a naked option is an options contract that is sold without owning the underlying stock.
NDS-OM (Negotiated Dealing System-Order Matching) is an electronic platform used in India for facilitating the trading of government securities. It allows market participants to trade government bonds transparently and efficiently by matching buy and sell orders in a systematic manner. The Reserve Bank of India oversees the administration of the platform, which plays a crucial role in bolstering the liquidity and transparency within the government securities market.
Non-Banking Financial Company (NBFC) is a financial institution that provides banking services like loans, deposits, advances, acquisition of securities or other marketable securities.
Non-convertible debentures serve as financial instruments utilized by corporations to secure long-term funding. Unlike their convertible counterparts, NCDs lack the feature of being converted into equity shares of the issuing company.
A non-competitive bid is a bid submitted by an investor in a bond auction where the bidder accepts the yield determined by the auction process.
Non-institutional investors category includes Limited Liability Partnerships, Public and Private Charitable Trusts, Partnership Firms and Associations of Persons.
The National Stock Exchange(NSE) is one of the largest exchanges by trading volume, featuring a modern, electronic trading system. It offers a variety of financial instruments and hosts the benchmark NIFTY 50 index, playing a key role in enhancing transparency and accessibility in India’s financial markets.
Net Present Value (NPV) serves as a crucial financial gauge for assessing the profitability of an investment. It accomplishes this by juxtaposing the current value of anticipated cash inflows with the present value of the initial investment expenditure. A positive NPV indicates that the investment is expected to generate more cash inflows than outflows and is considered financially attractive.
An Online Bond Platform Provider is a SEBI-registered tech enabled platform that facilitates the buying and selling of bonds digitally. This platform enables investors to access a wide range of bond offerings, compare prices and execute transactions electronically.
The offer price denotes the amount at which a seller is prepared to vend a bond or security. It’s the specified price presented by the seller when putting the bond up for sale.
Off-market refers to a situation where a transaction occurs outside of the prevailing market conditions or at a price that differs significantly from the current market price.
Offset is a strategy used to neutralize the risk associated with an existing position by entering into an opposing position that effectively cancels out the original position. This can be done to mitigate losses or manage risk in a portfolio.
An off-the-run security refers to a bond or financial instrument that is no longer the most recently issued or actively traded in the market.
An on-the-run security refers to the most recently issued and actively traded bond or financial instrument in the market.
Open interest refers to the total number of outstanding contracts for a particular financial instrument, such as futures or options, that have not been closed or offset by an opposing trade. It is often used as an indicator of market activity and investor sentiment.
Open Market Operations (OMO) involve the purchase and sale of government securities conducted by a central bank within the open market with the aim of managing both the money supply and interest rates.
Operational risk pertains to the potential for financial loss stemming from deficient or malfunctioning internal procedures, mechanisms, or human oversight. It encompasses a wide range of potential risks, including technology failures, fraud, legal and compliance issues and disruptions to business operations.
Opportunity cost is the potential benefit that is forgone when one alternative is chosen over another. It represents the value of the next best alternative that is not chosen when making a decision.
Optimal hedge refers to the most effective strategy for reducing or eliminating the risk of an investment position through the use of hedging instruments such as options, futures, or other derivatives.
An option is a financial derivative that gives the holder the right, but not the obligation, to buy or sell an asset at a predetermined price within a specified period.
Option-adjusted spread (OAS) serves as a metric indicating the difference in yield between a bond and a benchmark rate, factoring in any embedded options like call or prepayment options. It accounts for the potential variability in cash flows caused by these options, providing a more accurate comparison to bonds without such features.
Out-of-the-money refers to an option contract that has no intrinsic value because the underlying asset’s price is below (for a call option) or above (for a put option) the option’s strike price.
OTC, or over-the-counter, denotes a decentralized marketplace facilitating the direct trading of securities among parties. This occurs primarily through a network of dealers rather than on a centralized exchange. OTC markets offer flexibility and accessibility but may lack transparency and liquidity compared to exchange-traded markets.
Overnight Index Swaps (OIS) are derivative contracts that allow investors to exchange fixed-rate cash flows for floating-rate cash flows based on an overnight interest rate index.
Yuan-denominated bonds issued by foreign entities in China’s domestic market.
The par value of a bond, often referred to as its face value or nominal value, represents the original amount invested by the bondholder, which the issuer commits to repay upon maturity.
The par yield curve illustrates the yields of bonds with varying maturities, all bearing identical coupon rates and trading at their par value.
A perfect hedge is an investment position or strategy that eliminates all risk by offsetting potential losses in one asset with corresponding gains in another asset. It effectively neutralizes the impact of market fluctuations, but it is often difficult to achieve in practice due to imperfect correlations between assets.
A perpetual bond is a type of bond with no maturity date, which means it pays interest indefinitely.
Physical delivery refers to the process of transferring the underlying asset of a derivative contract from the seller to the buyer upon the contract’s expiration. It is used in futures and options contracts where the buyer exercises their right to receive the physical asset rather than settling in cash.
A premium bond is a bond that is trading at a price higher than its par value. The premium is the difference between the market price of the bond and its par value.
Prepayment risk pertains to the possibility of borrowers settling their loans or mortgages ahead of schedule, leading to a potential loss of anticipated future interest payments for investors who hold corresponding securities.
The present value represents the existing worth of a forthcoming sum of money or cash flow, adjusted for the time value of money by discounting it at a designated rate of return. It is used in financial analysis to evaluate investment opportunities, calculate bond prices and assess the value of future cash flows.
The concept of Price Value of a Basis Point (PVBP), sometimes referred to as Price Value of 1 Basis Point (PV01), quantifies the alteration in the price of a bond or security in response to a one basis point shift in yield.
The primary market constitutes the arena where freshly minted securities make their debut, being issued and vended for the inaugural time from issuers to investors. It serves as the pivotal platform through which corporations, governments, and assorted entities procure capital, peddling stocks, bonds, or alternative financial instruments directly to the public or institutional investors.
Primary dealers are financial institutions that buy government securities directly from the government and facilitate their distribution in the secondary markets. They play a crucial role in supporting government debt auctions and maintaining market liquidity.
Private placement involves raising capital by directly selling securities to a select group of investors or accredited individuals, bypassing the need to offer them to the broader public.
Public placement refers to the sale of securities to the general public through a public offering, typically conducted to raise capital. Public placements can take the form of initial public offerings (IPOs), follow-on offerings, or debt issuances and they are subject to regulatory approval and disclosure requirements.
Public issue of Non-Convertible Debentures (NCDs) or Bond IPO refers to the offering of debt securities by a company to the general public through a public issuance process.
Probability of default (PD) is a measure of the likelihood that a borrower will fail to meet its debt obligations.
A product note is a detailed document that informs investors about the specifics and conditions of a bond offering. It acts as an exhaustive resource on the bond, detailing the issuer’s profile, application of the funds, maturity timeline, interest rates, credit assessments and other critical information, facilitating informed investment choices.
Protection buyer refers to a party in a credit derivatives transaction who purchases protection against the default or credit risk of a reference entity, such as a corporate borrower or sovereign government.
Protection seller refers to a party in a credit derivatives transaction who sells protection against the default or credit risk of a reference entity, such as a corporate borrower or sovereign government.
PSU bonds are bonds issued by public sector undertakings (PSUs), which are government-owned companies or enterprises. PSU bonds are typically backed by the government and offer fixed-income returns to investors. They are considered relatively safe investments due to the government’s implicit guarantee of repayment.
A put option is a financial derivative that gives the holder the right, but not the obligation, to sell a specified asset at a predetermined price within a specified time period.
A puttable bond, alternatively referred to as a put bond, is a type of bond that grants the bondholder the option to sell the bond back to the issuer at a prearranged price prior to its maturity date.
A quasi-government bond is a debt security issued by entities that are affiliated with the government but operate independently, such as government agencies or state-owned corporations.
The date on which a bond matures or the issuer repays the principal amount to bondholders.
A reference asset is a specific asset or group of assets to which a financial instrument’s performance is linked.
The Reserve Bank of India (RBI) stands as the cornerstone of India’s financial framework, wielding authority over the circulation and regulation of the Indian rupee while also directing the nation’s monetary policies.
A Registrar refers to an entity responsible for maintaining records of bondholders and managing administrative tasks associated with bond issuance.
The pace at which funds generated from an investment can be redirected into further investments.
The risk revolves around the possibility that the forthcoming cash inflows generated by an investment might need to be reinvested at a diminished interest rate.
The repo rate is the interest rate at which a country’s central bank lends short-term money to commercial banks. This rate is crucial for managing the country’s monetary policy and influencing inflation and economic growth.
An Request For Quote (RFQ) platform is an electronic system that facilitates the requesting and receiving of quotes for debt securities transactions. This platform is designed to enhance transparency, efficiency and competitiveness in securities trading by enabling market participants to solicit and compare multiple quotations before executing a trade.
Residual maturity signifies the duration remaining until a bond attains its maturity date, denoting the time until the bondholder is entitled to receive the principal amount.
Retail investors are individual investors who manage their personal investment portfolios by buying and selling securities. This group typically includes those investing up to INR 10 Lakhs across all options and comprises Resident Indian Individuals and Hindu Undivided Families (HUFs).
Reverse cash-and-carry arbitrage is a trading strategy where an investor sells a security short in the spot market and simultaneously buys the same security in the futures market. The goal is to profit from price discrepancies between the spot and futures markets.
The Reverse Repo Rate is the interest rate at which a central bank borrows money from commercial banks through short-term agreements. It is a monetary policy tool used to control liquidity and stabilize the currency by influencing short-term interest rates.
Risk management involves the systematic identification, evaluation, and mitigation of potential risks to mitigate their effects on the goals and objectives of either an individual or an organization.
The return on an investment with zero risk of loss, typically represented by government bonds. G-secs are often considered risk-free investments because they are backed by the Indian government and have virtually no default risk.
Rolling returns refer to the average annualized returns of an investment over multiple overlapping periods. Instead of looking at the cumulative returns over the entire investment period, rolling returns provide insights into how the investment performed over different holding periods.
Samurai bonds are Yen-denominated bonds issued in Japan by foreign entities.
Sovereign Gold Bonds are government securities denominated in grams of gold, issued by the government to allow investors to own gold without physical possession. These bonds offer a fixed interest rate and provide a secure and alternative way to invest in gold.
SEBI is the regulator of financial markets in India under the jurisdiction of the Ministry of Finance, responsible for protecting investor interests and promoting and regulating the securities markets.
The secondary market serves as a platform for the trading of previously issued securities. It plays a crucial role in providing liquidity to investors, granting them the opportunity to buy and sell securities subsequent to their initial release. Additionally, the secondary market fosters the process of price determination, aiding investors in adapting their investment strategies to evolving market dynamics.
Securitization involves consolidating diverse debt obligations and transforming them into marketable securities.
Secured bonds are debt securities that are backed by specific assets or collateral pledged by the issuer to bondholders. If a default occurs, bondholders possess a right to the collateral as a means to recoup their investment.
Senior bonds are debt securities that have a higher priority of payment than other classes of bonds issued by the same issuer. In cases of bankruptcy or liquidation, senior bondholders hold priority in receiving payments over other creditors and holders of subordinate debt.
A serial bond is a type of bond issue that is structured to mature in installments over several dates rather than having a single maturity date. This allows the issuer to spread out the repayment of principal across multiple years, aligning with their cash flow abilities and financial planning.
Settlement encompasses the finalization of a financial transaction, involving the exchange of securities and the transfer of funds among the concerned parties. It encompasses verifying that every aspect of the transaction adheres to the agreed terms and conditions, facilitating the seamless transfer of asset ownership from the seller to the buyer.
The settlement date marks the culmination of a financial transaction, like buying or selling securities, when the ownership of assets shifts from the seller to the buyer.
Settlement risk, also known as counterparty risk, is the risk that one party to a financial transaction will fail to fulfill its obligations, leading to a disruption in the settlement process.
Short hedge is a risk management strategy used by investors to protect against the potential decline in the value of an asset or portfolio. It involves taking a short position in a futures contract or selling short an asset that is negatively correlated with the asset being hedged.
A short position refers to a trading tactic wherein an investor sells a security they don’t possess, anticipating a future decrease in its price. This involves borrowing the security from a broker or another investor and selling it on the market, aiming to later buy it back at a lower price to settle the loan. If the security’s price indeed drops as expected, the investor can repurchase it at a reduced price, return it to the lender, and capitalize on the price variance.
Short term capital gain refers to the profit earned from the sale of an asset (listed bond) held for a short period, typically one year or less.
Short-term capital gains tax applies to the profits generated from selling an asset, such as listed bonds, which were held for a brief duration. The tax rate for these short-term capital gains corresponds to the applicable income tax slab rates.
Simple interest is a straightforward approach to computing interest on a principal sum that remains consistent over the entirety of the investment duration. It is calculated by multiplying the principal amount by the interest rate and the time period in years.
A single price auction is a type of auction where all successful bidders pay the same price, regardless of the bid they submitted. In a single price auction, the auctioneer sets a clearing price based on the highest bid that allows all available units of the item being auctioned to be sold.
The Secured Overnight Financing Rate (SOFR) stands as a pivotal benchmark interest rate gauging the overnight borrowing cost, anchored on U.S. Treasury securities serving as collateral. It is used as a reference rate for various financial products. SOFR was developed as a replacement for the London Interbank Offered Rate (LIBOR).
Specific risk, alternatively termed as idiosyncratic risk, pertains to the inherent risk linked with individual assets. It entails the uncertainties unique to a specific company, sector, or asset category, which cannot be mitigated through diversification within a portfolio. Specific risk can arise from factors such as changes in management, competitive pressures, regulatory issues, or company-specific events.
A special purpose vehicle (SPV), also known as a special purpose entity (SPE), is a legal entity created for a specific and often temporary purpose, such as facilitating a financial transaction, managing risk, or isolating assets and liabilities. SPVs are commonly used in structured finance transactions, securitization and project finance to ring-fence risks and assets, protect investors and achieve specific financial objectives.
Speculation is an investment strategy focused on making high-risk bets in anticipation of future price movements.
The spot price designates the prevailing market value at which a specific asset, be it a commodity, currency, or security, is available for immediate purchase or sale.
The spot rate of interest refers to the current yield on a zero-coupon bond.
Special securities are specific types of debt securities distributed to certain organizations, including oil marketing firms, fertilizer producers and the Food Corporation of India. These organizations typically receive oil bonds, fertilizer bonds and food bonds as a form of compensation, substituting direct cash subsidies.
State development loans (SDLs) are bonds issued by state governments in India to raise funds for infrastructure and development projects.
State government guaranteed bonds are debt securities issued by state governments and backed by the full faith and credit of the state. These bonds are considered relatively safe investments because they are guaranteed by the taxing authority of the issuing state, which has the power to raise taxes or allocate resources to meet its debt obligations.
The statutory liquidity ratio (SLR) is a mandatory reserve requirement that banks are required to maintain in the form of cash, gold, or other approved securities before offering credit to customers. This ratio is set by central banking authorities to ensure liquidity and financial stability in the banking system.
Staggered maturity refers to a strategy where the maturity dates of bonds are spread out over different periods. This approach helps manage cash flow, reduce refinancing risk, and provide liquidity at various intervals.
Step up/ Step down bonds are bonds with coupon rates that increase (step up) or decrease (step down) at specified intervals.
Stress testing entails evaluating the resilience of a portfolio or financial system by subjecting it to extreme scenarios to gauge potential risks.
The strike price, also referred to as the exercise price, stands as the prearranged value at which an option contract holder has the right to purchase or sell the underlying asset upon exercising the option.
Separate Trading of Registered Interest and Principal Securities or STRIPs, are zero-coupon bonds created by separating the interest and principal components of a conventional bond and trading them as individual securities. Each STRIP represents a single payment of either interest or principal at a specific future date. This allows investors to tailor their investment strategies to their specific income needs and risk profiles.
Subordinated debt is a type of debt instrument that ranks below other debts in priority of repayment in the event of bankruptcy or liquidation. Subordinated debt holders have a lower claim on the issuer’s assets and cash flows compared to senior debt holders.
A swap rate represents the predetermined fixed interest rate that is interchanged between two parties in a swap agreement. This agreement entails the mutual exchange of cash flows that are pegged to diverse interest rates or currencies.
The swap spread represents the variance between the fixed interest rate on a swap and the yield of a corresponding government bond with a similar duration.
Tax-free bonds are issued by government-supported entities and the interest income they generate is exempt from taxes. This feature makes them appealing to investors who are looking to simultaneously support growth and development initiatives while earning tax-free returns.
Tenor refers to the time period from the issuance of the bond to the date when the principal is due to be repaid to the bondholder. The tenor can range from short-term to long-term depending on the bond’s purpose and the issuer’s needs.
A term sheet in bonds is a preliminary document that outlines the key terms and conditions under which a bond will be issued. It includes details such as the interest rate, maturity date, redemption options and other legal and financial conditions.
A tranche in bond investments refers to a portion or slice of a larger debt issuance. It is commonly used in the issuance of bonds or structured finance products, where each tranche may have different characteristics such as risk, maturity and interest rates, tailored to meet specific investor needs or stages of financing.
Treasury bills (T-bills) are short-term government securities issued by the RBI. They are zero-coupon securities, meaning they are sold at a discount and redeemed at face value at maturity, with the difference representing the interest earned by the holder. T-bills typically have maturities of 91 days, 182 days, or 364 days.
UDAY bonds are special securities issued by the Indian state governments under the Ujwal DISCOM Assurance Yojana (UDAY), a scheme aimed at financial turnaround and revival of power distribution companies (DISCOMs).
The fundamental element, often referred to as the underlying asset or reference asset, serves as the foundation for a derivative contract. It encompasses various financial instruments or assets upon which the derivative contract is built. These could include stocks, bonds, commodities, currencies, indices, or any other asset that is traded on the market. The value of derivative contracts is intrinsically tied to fluctuations in the price or value of the underlying asset.
A uniform price auction is a type of auction where all successful bidders pay the same price, which is equal to the highest price at which all units of the item being auctioned can be sold. In a uniform price auction, participants provide bids indicating both the amount of the item they wish to acquire and the price they are prepared to pay. The auction organizer subsequently calculates the clearing price, which is determined by the highest bid that enables all units to be sold, and each successful bidder pays this price per unit.
Unlisted bonds are debt securities that are not traded on a formal stock exchange. These bonds are typically bought and sold over-the-counter (OTC) and are not subject to the same regulatory requirements as listed bonds, such as periodic disclosures and reporting standards.
An unsecured bond is a debt security that is not backed by specific collateral or assets pledged by the issuer. Instead, unsecured bonds are backed only by the issuer’s creditworthiness.
Value-at-risk (VaR) is a statistical measure used to quantify the potential loss or downside risk of a portfolio or investment over a specified time horizon and confidence level. It represents the maximum loss that a portfolio could suffer under normal market conditions with a given probability, typically expressed as a percentage of the portfolio’s value.
Vertical disallowance is a tax provision that disallows deductions or credits claimed by a taxpayer against certain types of income. It prevents taxpayers from offsetting losses or expenses incurred from one source of income against another source of income that is taxed at a different rate or subject to different tax rules.
Volatility reflects the degree of fluctuation in the price or value of the asset and indicates the level of risk or uncertainty associated with its future performance.
Volatility risk, also known as market risk or systematic risk, is the risk arising from fluctuations in the price or value of financial instruments due to changes in market conditions, such as interest rates, economic indicators, geopolitical events, or investor sentiment. It represents the uncertainty and potential for loss associated with investing in volatile markets.
The Wholesale Price Index (WPI) serves as a pivotal metric, quantifying the average fluctuation in wholesale goods prices. This index plays a crucial role in tracking inflation, showcasing price shifts before they impact consumers directly. By offering insights into economic trends and informing policy decisions, the WPI aids in understanding market dynamics and shaping appropriate interventions.
Yankee bonds are USD-denominated bonds issued in the United States by foreign entities.
Yield stands as a metric quantifying the return garnered from an investment within a specific timeframe. It delineates the annualized profit on investment and is articulated as a percentage of the investment’s price or nominal value.
The yield curve is a graphical representation of the relationship between the yields of bonds with different maturities issued by the same issuer or government. It plots the yields of bonds on the vertical axis against their respective maturities on the horizontal axis, forming a curve that shows the term structure of interest rates.
Yield spread, also known as credit spread or bond spread, is the difference in yields between two bonds with similar maturities but different credit qualities or risk levels. Widening yield spreads indicate increased credit risk or deteriorating market conditions, while narrowing spreads suggest improving credit quality or market sentiment.
Yield to maturity (YTM) is the total return anticipated on a bond if held until it matures. YTM represents the annualized yield earned by an investor who purchases a bond at its current market price and holds it until maturity, assuming all coupon payments are reinvested at the same rate.
Yield to Worst (YTW) is the lowest yield that a bond is expected to generate under various scenarios, including its call date, maturity date and any other potential redemption or call provisions. It represents the minimum return that an investor will receive if the bond is called, redeemed, or matures early, resulting in the least favorable outcome for the investor.
Yield to call (YTC) is the total return anticipated on a bond if it is called by the issuer before its stated maturity date. YTC represents the annualized yield earned by an investor who purchases a callable bond at its current market price and holds it until the call date, assuming all coupon payments are reinvested at the same rate.
The Yield to Put (YTP) represents the return an investor gains if they choose to exercise a put option, enabling them to sell the bond back to the issuer before its designated maturity date. It represents the total return anticipated on the bond if it is sold by the bondholder at the put price.
Yield to Average Life (YAL) is the yield earned by an investor if a bond is held until its average life, which is the average time it takes for the bond’s principal to be repaid based on its expected cash flows.
A zero coupon bond represents a specific form of debt security where investors do not receive regular interest payments. Rather, it’s issued at a discounted price compared to its face value and then redeemed at its full face value upon maturity. The difference between the purchase price and the face value represents the investor’s return on the bond, which is realized as a single payment at maturity.
The zero coupon yield curve is a graphical representation of the yields of zero coupon bonds with different maturities. It plots the yields of zero coupon bonds on the vertical axis against their respective maturities on the horizontal axis, forming a curve that shows the term structure of interest rates for zero coupon securities.
Disclaimer: Investments in debt securities/ municipal debt securities/ securitised debt instruments are subject to risks including delay and/ or default in payment. Read all the offer related documents carefully.
