Currency Market, Commodity Market, and Government Securities

Lesson -> The Government securities

19.1 - The New Beginning

A fascinating new development is that the NSE and RBI have made it possible for retail investors, in partnership with RBI, to invest in Government Securities. This includes long-dated bonds as well as treasury bills (Tbills).

These products were previously only available to large financial institutions and banks. However, we now have the ability to invest in them and enjoy attractive returns. These are still new financial instruments, at least for retail investors. It is therefore important to understand the nuances of these investments before you make any investment. We have created the following conversational FAQs in the hope that you can understand the basics.

Continue reading and leave your feedback below.

19.2 - G-Sec FAQs

Where should I invest?

You are buying Bonds/Tbills from the Government of India. These are almost risk-free investments because the Government of India backs them. Also known as the 'Sovereign Guarantee,' this guarantee is provided by the Government.

What is a bond/T-bill? Please tell me more.

We go to the bank whenever we need money. We promise to pay periodic interest to the bank and return the money within a specified time. This is a common practice in which the principal and interest are repaid to banks.

The Government of India needs money as well to build roads, bridges and dams, hospitals, and other infrastructure. They approach their bank to get a loan from the RBI when they are short of funds. The RBI then auctions the loan to you in the form bonds/T-bills. In essence, you lend a portion of the total loan sought by the government. The Government of India promises to pay interest on this loan and repay the principal at the end of the term.

T-bills, or Treasury Bills, are the loans that the government plans to repay in a year. Bonds are loans that the government intends to repay over a long period of time.

Which should I choose? What should I choose? T-Bills, Bonds?

If you are looking for safety and security, both of these instruments can be great investments. Before you make a decision on whether to invest in either of these G-Sec instruments, there are some simple things that you should know.

Variables like which? Please start with T-bills.

There are three types of T-bills. They vary depending on their maturity period. There are three types of T-bills: 91, 182 and 364 days. T-bills don't have an interest component. This is actually the largest difference between Bonds and T-bills. T-bills can be issued at a discount relative to their true (PAR value) and are redeemed upon expiry at their true value.

Woah! This sounds complicated. Please give me an example!

Okay, let's say you have a 91-day Tbill. The Par value, also known as the true value, is Rs.100. This T-bill will be issued at a discount of Rs.97 to its par value. You will receive Rs.100 back after 91 days. This is a return of Rs.3. This is the same as buying stock at Rs.97, and then selling it at Rs.100 after 91 days. This transaction is guaranteed, so there's no chance of you selling below 100 or above 100.

That sounds very straightforward. Is there any more information about T-bills that I should know?

This is it. Remember that t-bills can be purchased at a discount of par and you receive the Par value upon maturity. You can also get technical and calculate the yield of this investment.

Let's get technical, I'm all ears!

Yield is basically the annualized measure of your return on investment. All investments should be measured in terms of their annualized returns. If you had invested Rs.97 in 91 days and made 3 dollars, what would your annualized returns have been?

The formula is:

Yield = [Discount Value]/[Bond price] * [365/number days until maturity]

= [3/97]*[365/91]

= 0.0309*4.010989


In other words, the Tbill has a 12.4052% return on investment, but you'll get this return pro-rata because you have it for 91 consecutive days.

Average 91-day yields range from 6-7.5% to 6-7.5%. It is obvious that the higher the yield, it is better.

What happens after a T-bill matures?

The Government debits your DEMAT's T-bill automatically upon maturity. This is known as 'Extinguishment of Securities'. The par value is paid to the DEMAT account's bank account.

What does that have to do with T-bills? Do you have any other information I should know?

That's it. All is well for you to begin.

Tell me about the bonds.

Two counts are what make bonds different from T-bills. Bonds are long-dated and pay interest twice per year.

It sounds interesting. Could you please give me an example?

Each bond will be issued with a unique symbol or name. The symbol includes all information that you need. Here is an example of a symbol: 740GS2035A. This is what it really means.

Annualized interest - 7.40%

Type - Government Securities

Maturity - 2035

Issue - A means that it is a new issue. (Don't be too concerned about this. This is NSE's internal nomenclature to their book-keeping.

This bond will expire in 2035, or 17 years after now (we were in 2018). You would get 7.4% interest each year until the bond matures in 2035 if you invested in it. The interest will be paid semi-annually, so you will receive 3.7% interest twice per year. Final, your principal amount will be returned to you upon maturity.

These are just a few of the government security symbols (GS) that you might be interested in.

SymbolAnnualized interestSemi-Annual interestYear of Maturity# years to Mature
662GS20516.2%3.31 %205133

Could you please show me an example to show me how much I would earn if I invested in a bond?

It's all well and good, but before we get to the details, there is one more thing.

Each bond has a par value of Rs.100. You can invest in bonds at a discount (ex. 98,97, etc.). Par (100), or a premium (101,102, etc.) are the most common ways to invest in a bond. An "auction process" determines the price at which you can invest in a bond. You will learn more about that later. For now, however, it is important to know that you can either invest at par or at a discount or a premium in bonds.

Consider that 700GS2020 is 7% with a maturity date of 2020 or 2 Years from now at a discounted price of 98.4. Let's say you invest in 150 bonds. You would pay -


= Rs. 14.760 /-

The interest cycle begins when you make your first investment. The bond's face value is the basis for interest payments. The amount you earn is the following:

Time PeriodInterestCash flowRemarks
0-6 Months3.5%3.5% * 100 *150 = Rs.525Interest for half-year
6 months - 1 Year3.5%3.5% * 100 *150 = Rs.525Interest for half-year
1. - 1.5 Years3.5%3.5% * 100 *150 = Rs.525Interest for half-year
1.5 to 2 Years3.5%3.5% * 100 *150 = Rs.525Interest rates for half-years
Maturity (2 Years)Par repayment of principal150 * 100 = 15,000Additional Rs.240

For Rs.14.760/-, you can earn -

525 + 55 + 525 + 52 + 525 + 555 + 15,000

= 2100 + 15,000


This yields approximately 7.88% if you do the math.

I have heard of the expression "Yield to Maturity", is that the same thing?

Hmm, no. It is a bit tricky to understand the concept of YTM (Yield to maturity). The YTM calculation assumes you reinvest interest payments back into a comparable bond which generates more interest. Institutional investors and bond traders only consider YTM as the true comparable value of two bonds.

This is similar to reinvesting dividends in stock.

Okay, now tell me more about the interest payment. How is it paid?

Just like you receive dividends from companies, the interest payment is credited to your bank account linked with your DEMAT account.

Could you please give me some insight into the auction process?

G-Sec bonds/Tbills were only available to large financial institutions and banks with minimum tickets of 5 Cr. Recently, RBI and NSE have made it available to retail investors who invest at least Rs. 10,000/-.

The banks and major financial institutions still decide the price of the bonds. The banks and other major financial institutions place bids on the auction platform of RBI. Based on the bids, RBI determines the price for the bonds. The auction process basically determines the price you would pay for the bond. This is also known as the weighted average bond price.

This is the average weighted price of the bond.

Both yes and no.

You will pay slightly more when you place your order. This is known as the 'amount payable. After all orders have been placed, the auction process begins and RBI determines the weighted median price. The difference between the amount payable' amount and the weighted average prices' is credited to your account within 24 hours.

What do you mean with 'option to sale in the secondary market'?

This is exactly how you would buy and sell stock.

Let's suppose you decide to put your money into 740GS2035A. This will mean that you will continue to receive a semi-annual interest payout of 3.7% every six months for the next 17 year, until 2035.

After a while, you may decide that you no longer want to keep the bond. You can choose to sell the bond on the secondary market in such an instance, just like you would sell stocks on NSE.

It's great! It seems like I have all the basics down. Do you have any other questions?

The whole process can be compared to an IPO application followed by the stock being listed on the exchanges. It is pretty similar. It's similar to the IPO. Once the bidding has been completed, the Bond (or Tbill) will be listed on the exchange. The bond can be sold at any time, and you can trade it once it is listed.

Minimum ticket size is Rs.10,000/– and multiples thereof, with a maximum of Rs. 2 Cr. 2 Cr. The good news is that the RBI will notify you of the auction dates and schedules well in advance.

What is a SDL?

State governments also borrow money from the market to meet their budgetary needs. These loans are known as State Development Loans (SDLs). Similar to the Central Government's dated securities, these loans have a half-yearly interest credit and are repaid at maturity. SDLs are eligible for Statutory Liquidity Ratios (SLR) and can be used as collaterals to borrow through market repo. They are also eligible for borrowing by eligible entities under the Liquidity adjustment Facility (LAF), special repo under market repo by CCIL.

What does the Yield and Floatation of SDLs mean?

The RBI facilitates the issuance of SDL securities in Market. Auctions are usually held every other night. These securities can be traded electronically via the RBI managed NDSOM (Negotiated Trading System-Order Matching). Below is a snapshot of securities that were available for auction on the NDSOM managed by RBI.

As with all Government Security SDLs, they also have a unique symbol or name. Let's say that 05.75APSDL2024 Security is shown in the above photo. Here's what it actually means:

Annualized interest - 05.75

State Code - AP (Andhra Pradesh)

Type - SDL

Maturity - 2024

This issue will expire in 2024. This issue will expire in 2024, i.e. we are currently in 2020. You would get 5.7% interest every other year until the maturity date, which is 2024, if you invested in this bond. You will also receive 2.8% interest twice per year, just like other G-Secs. Final, your principal amount will be returned to you upon maturity.

What is the Risk Assessment?

Unlike many G-Secs with Implicit Sovereign Garant (High Risk or significant funding costs advantages for institutions that receive them), SDLs can be associated under Explicit SOVEREIG guarantee. This basically means that the risk associated with SDLs, as per CRAR prudential rule released from RBI, is zero. SDLs can be invested in by banks without capital requirements. It is therefore a risk-free investment option than other Central Government Securities.

What is the tax?

Bonds - Interest income will be credited to your account. It is treated as income from other sources, and you must pay the appropriate income tax slab. Capital gains are defined as any appreciation in bond prices. The long-term (LTCG), is 10% flat and 20% with indexation. STCG is determined by the applicable slab rate.

T-bills are - You purchase at a discount and then sell it at par. This appreciation is short-term capital gain and subject to taxes at the applicable slab rate.

G-Secs are considered long-term (LTCG), if the gain is held for longer than three years. It is considered short-term capital gain (STCG) otherwise.

If I place an order, will I receive assured allotment?

These securities can only be issued for a limited amount. If the number of bids received exceeds the issue size, there is no guarantee that allotment will occur. If you do not receive an allotment, however, you can apply for another one next week. Multiple issues are issued by RBI each month.

Have fun investing!