Zero Coupon Bonds

Bonds issued at discount and repaid at face value. The difference between the issue price and the redemption price represents the return to the investor. No periodic interest payment is made. Zero Coupon Bonds bear no reinvestment risk but they are prone to interest rate risk making their prices highly volatile. The buyer of zero coupon bonds receives one and only one payment, at maturity of the bond.

Floating Rate Bonds

Floating Rate Bond is an instrument whose periodic interest or dividend rates are indexed to some reference index such as Treasury bills etc. These instruments give a variable rate, a characteristic that allows both issuer and investor to share the risk inherent in changing interest rates.

Tap Stock

A gilt edged security from an issue that has not been fully subscribed and it released into the market slowly when its market price reached predetermined levels.

Partly Paid Stock

An innovative instrument for which the payment is made in installments. It is designed for institutions with regular flow of investible resources requiring investment outlets.

Auction

A special market in which there is one seller and many buyers. An auction sale is conducted by an auctioneer who permits buyers to bid one against other, the good going to the highest bidder.

Par Value (face value; nominal value)

It is the nominal price of a share or security. If the market value of a security exceeds the par value it is said to be above par; if it falls below the par value it is below par.

Premium

An amount in excess of the nominal value of the share, bond or security.

Discount

The amount by which the market price of a security is below its par value.

Multiple Price Auction

Under a multiple price auction, every bidder gets allocation according to his bid and apparently the issuer collects a premium from all bidders quoting lower than the cut-off yield.

Uniform Price Auction

In the case of this auction, competitive bids are accepted at the minimum discounted price, called cut-off price, determined at the auction, irrespective of the bid-prices tendered, below/at the cut-off price.

Yield Curve

A curve on a graph in which the yield of fixed interest securities is plotted against the length of time they have to run to maturity.

Yield

The income from an investment. The nominal yield of a fixed interest security is the interest it pays, expressed as a percentage of its par value.

Cut-off Yield

Cut-off yield is the yield at which or below which the bids are accepted.

Redemption Yield

The redemption yield or yield to maturity covers the current yield plus the capital gain or loss divided by the number of years to redemption.

Open Market Operation (OMO)

The purchase or sale by a Government of bonds (gilt edged securities) in exchange for money. OMO is a flexible instrument of monetary policy through which the Central Bank of a country, on its own initiative, can alter the liquidity in the system by sale or purchase of marketable
securities.

Derivatives

A financial instrument that is valued according to the expected price movements of an underlying asset, which may be a commodity, currency or a security. Derivatives can be used either to hedge a position or to establish an open position. Examples of derivatives are futures, options, swaps, etc.

Futures

An agreement to buy or sell a fixed quantity of a particular commodity, currency, or security for delivery at a fixed date in the future at a fixed price. Afutures contracts involves a definite purchase or sale and not an option to buy or sell.

Options

The right to buy or sell a fixed quantity of a commodity, currency, security, etc. at a particular data at a particular price. Unlike futures, the purchaser of an option is not obliged to buy or sell at the exercise price and will only do so if it is profitable.

Swaps

The means by which intending parties can exchange their cashflows, usually through the intermediary of a bank. A currency swap will enable parties to exchange the currency they possess for the currency they need. An interest rate swap (IRS) is an agreement between two parties to exchange interest obligations (or receipts) for a given national principal for a defined period.

Strips

"STRIPS" stands for Separately Traded Registered Interest and Principal of Securities. Strips are created by separating the coupon from the principal and trading them independently.

When Issued Market

It refers to a security being allowed to be traded in the market well before its actual date of issue, after the announcement about the issue.

Primary Dealers (PDs)

Primary Dealers are market makers in governments securities. There are 17 Primary Dealers in India as on 31st January 2002. They have a minimum threshold limit of Net Owned Funds of Rs. 50 crore and are expected to strengthen the government securities market by acting as underwriters and market makers with commitments to bid in auction and to offer two way quotes.

Satellite Dealers

Satellite Dealers form the second tier in government securities market after PDs and are expected to provide a retail outlet for government securities thereby encouraging voluntary holding of government securities among a wider investor base.

Private Placements

Government may sell bonds by various ways. Some bond can be publicly placed, whereas some bonds may be sold directly to one or only few buyers. When it is places with few or one buyer it is referred to as private placements.