debt instruments derivatives

8/4/2019 Debt Instruments Derivatives

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DEBT INSTRUMENTDERIVATIVES


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DEBT INSTRUMENT DERIVATIVES

Group Members

Abhijeet Shewale PG - 01

Aditya Gole PG - 02

Sonam Patil PG -13

Vipula Bhavsar PG -17

Vishakha Rudra PG18

Deepti Deshpande PG -21


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DEBT INSTRUMENT

A paper or obligation that enables the issuing

party to raise funds by promising to repay a

lender according to the terms of a contract.

Types of debt instruments include bonds and

debentures.

Examples of debt instruments include

mortgages, promissory notes, bonds, and

Certificates of Deposit


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Trading in Indian Debt Market..

There are 2 trading-cum-reportingplatform:

BSE and NSE

One reporting platform for OTC market

FIMMDA


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Functions of FIMMDA:

Functions as the principal interface with Regulators .

Mandated by the RBI for valuation of GovernmentBonds, Corporate Bonds and Securitized Papers forvaluation of investment portfolios of Banks.

Undertakes developmental activities such asintroduction of benchmarks and new products .

Suggests Legal and Regulatory framework for thedevelopment of new products.

Training and Development Support to the Debt &Derivatives Market.

Standardisation of market practices.


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Characteristics

Ease of Issue

Fixed or Floating Rate of Interest

Low Risk , High Returns


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Long Term Debt

Debentures

- Fixed Interest

- Maturity Period Varies

-Place Privately or by Subscription

Bonds

-Various Types-Fixed , Floating & Discount Rate.
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Medium Term Debt

Mostly , taken to Repayment of long-term

loan, purchase of balancing equipments or

medium term expenses

Period of2-5 years

Avail on the basis ofCash flow Analysis


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Short Term Debt

Commercial Papers

-Unsecured promissory Notes with highcredit rating

-Period from 15 days to a year

-Issued at discounted value

Inter-corporate Deposits

- The Corporate with surplus Funding directly lend toother corporate


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Working Capital

Cash Credit

Bills Financing

Export Finance


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Derivatives Can Fit into a Portfolio

Derivatives mostly use byinvestor for,

To hedge a position

To increase leverage or

To speculate on an asset'smovement.


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Hedging

Hedging a position is usually done to protectagainst or insure the risk of an asset.

For example : if one owns shares of a stock and

he wants to protect against the chance that thestock's price will fall, then he may buy a putoption. In this case, if the stock price rises he gainbecause he owns the shares and if the stock price

falls, he gain because he own the put option. Thepotential loss from holding the security is hedgedwith the options position.


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Leverage

Leverage can be greatly enhancedby using derivatives.

Derivatives, specifically options aremost valuable in volatile markets.

When the price of the underlyingasset moves significantly in afavorable direction, then themovement of the option is

magnified.

High volatility increases the value ofboth Puts and calls.


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Speculating

Speculating is a technique when investors bet

on the future price of the asset.

Because options offer investors the ability to

leverage their positions, large speculative

plays can be executed at a low cost.


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Types of Debt Instruments

Bond

Fixed income security

Loan given by investor

Interest Rates

-Fixed rate

-Floating rate

-Discount bonds


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TYPES CNTD

LoanLender gives money to borrower

Promise by borrower

Lender want to secured it by collateral security

MortgageLoan on residential property

LeaseAgreement between owner & tenant


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OTHER INSTRUMENTS

Monthly income plans

Capital protection plans

Gilt funds

Fixed maturity plans

Liquid funds

Floating rate funds


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Monthly Income Plans

This type of a debt fund is for people who have abig corpus initially, and would like to generate a

monthly income for them with low to moderaterisk.


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Gilt Funds

Gilt Funds invest in government debt viz. the

debt issued by Reserve Bank of India on behalf of

the government. The investments are done in ultra safe paper

because they are backed by the government itself

but that doesnt mean the Gilt Funds are risk

free.


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Fixed Maturity Plans (FMPs)

Fixed Maturity Plans (FMPs) are quite similar to fixed

deposits in the sense that these funds are usually close

ended

These funds have become popular because of a sort of a

tax advantage where interest on fixed deposits are

charged at a higher tax rate than dividends from FMPs

for individuals who are in the higher tax bracket.


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Liquid Funds

Liquid Funds are funds that are used by investors for

extremely short time durations, and in most cases instead

of a savings account.

The current savings account interest rate is 3.5% per

annum, whereas funds like the SBI Magnum Cash Liquid

Float, LIC MF Liquid Fund and JM High Liquidity Fund have

returned over 5% since last year.


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Floating Rate Funds

Floating rate funds are funds that invest in

predominantly floating rate debt

instruments, and can invest in

government and corporate securities.


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CURRENT POSITION

Debt-based instruments went completely out of favour a couple of yearsago.

With the RBI tightening monetary policy from the beginning of 2010,

things have changed.

Higher interest rates are being offered.

Debt-based investment - guarantee the principal investment amount.

Debt instruments should be a part of every investor's investment

portfolio.


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debt instruments derivatives

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