The debt market, also known as the bond market, is the area that is gaining a lot of recognition in the investing industry. In this, loan investments are both bought and also sold.
As compared to other investment of the share market the investments made in the debt market are safer, and the fluctuations in price are minimal. Since economic growth is the priority of every country, the role, and fame of the debt market increases.
If you plan to set your foot in the debt market world, it is essential to know all the basics. Let us begin from scratch and learn everything about it.
Debt Market In India
The various features and advantages have added to the popularity and usage of the debt market in India. India’s debt market is one of the largest in Asia and is increasing because of various technologies and instruments.
The debt market in India offers various debt instruments, including both government entities and non-government ones.
Just like every growing economy, the debt market in India also has a huge role to play.
Debt Market Meaning
The debt market is the area that investors use to buy and sell their debt securities. The process is usually carried out in the form of bonds.
The debt market has gained immense popularity among investors. The main reason behind this is the safety quotient attached to the debt market. It is convenient and safe for all kinds of investors.
The debt market is broad, accommodating different bonds, including corporate bonds, municipal bonds, and government bonds.
The debt market also consists of bonds from individual investors and lenders that are later combined and produced in more massive amounts.
Debt Market Instruments
A security issued by the private sector, government, or the public sector entity to raise funds is a debt market instrument.
Generally, the rate of interest is fixed and is paid at constant intervals. To be precise, debt instruments serve as a documented obligation.
According to the terms of the contract, the entity borrowing the funds has to repay it to the investor. Many debt instruments have made their way into the debt market.
Let‘s discuss some of the most used debt market instruments.
Debt Instrument Types
There are various types of debt instruments available in India. Some of which are as follows.
Bonds are debt market instruments serving as documented and detailed information of debt, rates, and repayment between the borrower and the lender.
The government entities and individual businesses are capable of issuing bonds. The investors involved have to give the issuer the market price of the bond.
After the bond is issued, it becomes the investor’s responsibility to guarantee repayment of the loan. The rate of interest of a bond is called the face value of the bond. The face value is usually in percentage form.
Various bodies are allowed to issue the bonds, including government bonds, institutional bonds, corporate bonds, and municipal bonds.
Debentures are used when there is a need to raise capital for very particular projects. Any collateral does not back up the debentures.
Simply put, there are no assets that work as a security of this debt market instrument. The credit of the investor and the issuer’s trust are the two things that back a debenture.
Debenture guarantees a fixed rate of income throughout and has become a prevalent option for investors.
Debentures are used frequently by both government and corporate businesses to raise funds. The debentures issued by the government are usually for a longer-term.
The risk in investment stays low, and the government issuer serves as the security for government bonds. When it comes to corporations using debentures, it is usually unsecured.
Debentures are outstanding for companies. They have a low-interest rate with a longer duration for repayment.
Commercial paper is a type of promissory note that is also issued to the investor. This is often uncertain and unsecured. Commercial paper has to be compulsorily rated by at least one agency of credit rating.
A fixed deposit is an excellent way of earning a better and higher rate on the return interest. It is safer than mutual funds and stocks. It has become a superb debt market instrument type.
Fixed deposits also work as a regular source of income for many. You can easily invest in fixed deposits and later put the interest rates to your benefit.
National Saving Certificate
The Government of India issues a National Saving Certificate. Issued by the Department of post, NSC acts like a fixed and long-term investment. The government backs NSC that makes it very safe and almost risk-free.
NSC generally has a six-year maturity period and can be bought from any authorized post-office near you.
Types Of Debt Market
There are primarily two types of debt markets, primary and secondary markets.
In the primary market, it is the borrower that will approach the investor to raise capital. The price at which the bonds will be issued is decided when raising money.
The bonds are usually traded in the investing market. The secondary market is used to sell bonds by the investors. Whenever the investor thinks to leave the bond, it can be sold.
The price of the bond fluctuates depending on the closeness of the bond to the interest payment. The closer the bond is to the interest payment date, the higher the bond price. If the cost of the bond goes up, the interest rate decreases.
Debt Market Risks
Along with the significant role that the debt market has to play in the Indian economy, it also comes with some risks. Every investor should measure both sides before entering into the arena of the debt market.
Let us now discuss some of the debt market risks.
Risk of Interest Rate
The debt market comes with a risk of interest rates. Interest risk is a common concern for investors.
In the debt market, when the interest rate increases, there is a high possibility that the bond price will decrease. The decrease causes the holder or the investors to lose all the security.
There is also a constant credit risk associated with the debt market. The credit risk happens when the person who issues the bond cannot pay the interest on time.
Sometimes there is also an irregular decrease in the interest rates that closes many options of reinvesting. The periodic decline is known as the reinvestment risk.
Advantages of Debt Market
The debt market is a great option to explore. It is great to start by knowing the advantages of the debt market.
The best advantage of the debt market is that it guarantees returns. The risk associated with it is less, making it a popular choice of investors.
The debt market instruments can be a good source of fixed income.
The liquidity of the debt market is comparatively high. So if you want to liquidize your funds to cash, you won’t face any significant troubles.
The debt market also ensures to give low-interest rates and sufficient time to repay the loans.
It is easier to plan when investing in a debt market. You know the conditions and rates beforehand that makes it extremely convenient.
Disadvantages of Debt Market
Though there are various advantages attached to the debt market, it also comes with certain disadvantages.
The debt market is riskier than the traditional market. Although there are various instruments attached to the debt market, it still poses risks.
Sometimes the funds are not backed up by any asset. The lack of backing makes the debt market a little insecure.
Investing in the debt market can often get confusing and skeptical at times. The debt market functions as the platform where an investor can conveniently sell and buy their debt securities.
Studying debt instruments and their types will ensure that you don’t face any trouble getting your foot into the debt market.
With low-interest rates and a longer time to repay the loans, the debt market offers the companies a chance to grow economically. However, investing in the debt market also comes with some risks.
The debt market is a safe and convenient way for investors and issuers to sail smoothly through borrowing, lending, buying, and selling.
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