Special Services - Debt Instruments and Government Securities: formula sheet

Key formulas

Debt versus equity

Debt holder = lender; equity holder = owner

Debt holders get interest and principal and no voting rights as holders.

Discount instruments

Return = Face value − Issue price

CP and CDs are typically issued at a discount and redeemed at face value. The gain is the difference.

Annual interest on a coupon instrument

Coupon amount = Face value × Coupon rate

Example: ₹1,00,000 at 8% gives ₹8,000 a year, if paid annually.

Money market versus capital market debt

CP and CD = short term; debentures and bonds = generally longer term

Use tenor to classify the instrument when the question gives no other clue.

CP tenure

Minimum 7 days to maximum 1 year from the date of issue

Applies to commercial paper under RBI directions. Maturity date cannot go beyond the validity of the credit rating.

CP minimum denomination

₹5,00,000 and multiples thereof

Minimum investment per investor is also ₹5 lakh (face value).

CD tenure for banks

Minimum 7 days to maximum 1 year

Eligible financial institutions issuing CDs have been allowed a longer tenure, from 1 year up to 3 years. Verify the current figures in your latest NISM workbook.

CD minimum denomination

₹5,00,000 and multiples thereof

The current RBI directions (2024) set the same ₹5 lakh minimum for CP and CD. Older material may show a lower CD figure, so check your latest NISM workbook.

Issue price of a discount instrument

Issue price = Face value ÷ (1 + yield × days ÷ 365)

Discount = Face value − Issue price. Yield is the annual rate expressed as a decimal.

Form of issue

CP and CD → demat form with a depository

Holding and transfer are by electronic book entry through DPs.

T-bill maturities

91 days | 182 days | 364 days

T-bills are zero-coupon, issued at a discount, redeemed at face value. Original maturity is up to one year.

T-bill return

Return = Face value − Purchase price

No periodic interest is paid. The gain is the discount.

Dated security coupon

Half-yearly coupon = (Coupon rate × Face value) ÷ 2

Applies to fixed-rate dated securities that pay coupons twice a year.

Classification by tenor

Up to 1 year = T-bill; more than 1 year = dated security

State development loans are dated securities issued by States.

SGL account

SGL = account with RBI (Public Debt Office) for eligible entities

Holds the entity's own securities and can also hold clients' securities only through a CSGL arrangement. Not for retail investors directly.

CSGL account

CSGL = Constituent SGL account maintained by an SGL holder for its clients

Client holdings are recorded separately from the SGL holder's own holdings.

Retail holding chain

Retail investor demat account → DP → Depository (beneficial record) | underlying securities: CSGL account of an SGL holder with RBI

The investor is the beneficial owner. The securities are held in a CSGL account of an SGL holder with the RBI, and the depository records your holding.

Where the record sits

Master record: RBI PDO | Holding record: SGL/CSGL holder | Beneficial record: depository, shown in your demat account

Use this to decide which entity answers a given question.

DVP-1

Securities: gross | Funds: gross

Each trade is settled individually, with securities and funds moving together.

DVP-2

Securities: gross | Funds: net

Securities are settled trade by trade. Funds are netted.

DVP-3

Securities: net | Funds: net

Both are netted. This is the model with the most netting.

Periodic coupon

Coupon = Face value × Annual coupon rate ÷ Number of payments per year

For a half-yearly G-Sec, divide by 2.

Accrued interest (30/360 basis)

Accrued interest = Face value × Coupon rate × Days since last coupon ÷ 360

Used for Indian G-Secs, which follow a 30/360 day count. Check the day-count basis stated in the question.

Payment entitlement

Payee = Holder on the record date

The depository's holder list on the record date decides who receives interest or redemption.

Quick revision

• Debt instruments pay a fixed or defined return and are redeemed at maturity.
• CP and CD are money market instruments, and both can be held in demat form.
• Learn the issuer difference between CP and CD from the workbook, as it is a common question.
• Government securities are issued by the government and carry practically no default (credit) risk, but they are still exposed to interest rate risk.
• Know each type of G-Sec by its feature: dated securities, treasury bills and the like.
• SGL is an account with the RBI's Public Debt Office for holding G-Secs, open to eligible entities. CSGL is held through a custodian. G-Secs may also be held in demat form with a depository through a depository participant.
• A CSGL is a constituents' subsidiary general ledger account maintained by an eligible custodian (a CSGL account holder such as a bank, PD or CCIL), which itself has an SGL account with the RBI. The custodian maintains the constituents' holdings in its books. The holdings belong to the constituents, not to the custodian. Confirm the exact wording in the NISM workbook.
• Check who the account holder is before answering: investor, custodian or institution.
• Settlement of debt trades follows the rules of the exchange or the relevant system, so read the settlement cycle in the workbook.
• Do not carry equity settlement rules over to debt or G-Secs without checking.
• With 25% negative marking, skip questions where you cannot rule out two options.

Common mistakes

• Treating a debenture holder as a part-owner of the company. Fix: A debenture holder is a lender. Ownership belongs to shareholders.
• Saying CDs are issued by companies. Fix: Link CD to banks and CP to companies and other eligible issuers.
• Using an old, lower figure such as ₹1 lakh as the minimum size for CP or CD Fix: The current RBI directions (2024) set ₹5 lakh for both CP and CD. Confirm the figure in your latest NISM workbook.
• Saying CDs can be issued by any bank Fix: Remember that scheduled commercial banks issue CDs. Regional rural banks and local area banks are excluded.
• Saying T-bills pay a half-yearly coupon. Fix: Remember T-bills are zero-coupon. They are issued at a discount and redeemed at face value.
• Thinking SDLs are issued by the Central Government. Fix: SDLs are issued by State Governments. Link the S in SDL to State.
• Thinking retail investors can open an SGL account directly with the RBI Fix: Remember SGL is for eligible entities. Retail investors use a demat account or a CSGL arrangement through an intermediary.
• Treating SGL and CSGL as the same thing Fix: SGL is the account with the RBI. CSGL is the sub-account the SGL holder keeps for its clients.
• Mixing up DVP-2 and DVP-3. Fix: DVP-1 is all gross, DVP-3 is all net, and DVP-2 is the middle case: securities gross, funds net.
• Paying interest to the buyer after the record date. Fix: Interest and redemption go to the holder on the record date, as shown in the depository's records.

Exam tips

• Link each instrument to its issuer and tenor. Many questions are solved by this alone.
• Watch for options that give debt holders voting rights. Reject them.
• Know that CP and CDs are held in dematerialised form, as the question may ask about the form of holding.
• Read for words like secured, convertible and discount, which separate close options.
• Build a small two-column table in your head: issuer, minimum size, tenure, form. Most questions come from it.
• Watch the words 'minimum' and 'maximum'. Examiners swap them to create trap options.
• If an option says physical form only for CP or CD, treat it as suspect.
• Negative marking is 25% of the marks assigned to a question, so skip a question when you cannot narrow it to two options.