Economic and Business Environment · Indian Financial Markets

Capital Market Instruments and the Debt Market in India

Updated 11 October 2026 · Fact-checked

Capital market instruments are long-term securities used to raise funds: equity shares, preference shares, debentures, bonds and government securities. Equity gives ownership; debt instruments give a fixed return and a creditor's claim. The debt market is where bonds, debentures and G-secs are issued and traded. To answer questions, state the meaning, features and an example, then compare.

Understand Capital Market Instruments and Debt Market

A capital market is where long-term funds, usually for more than one year, are raised and invested. The tools used are called instruments or securities. They fall into two groups: ownership (equity) and borrowing (debt).

Equity shares make you a part-owner of a company. You get dividends only if the company declares them, and you carry the highest risk. If the company is wound up, you are paid last. In return you get voting rights and a share in growth. Preference shares sit between equity and debt. They get a fixed dividend and are paid before equity holders in dividends and on winding up, but they usually have no voting rights on ordinary matters.

Debentures and bonds are borrowing instruments. The holder is a lender, not an owner. The issuer pays interest at a stated rate (the coupon) and repays the principal on maturity. Interest is a charge on the company's profits and must be paid even when there is a loss. Debentures can be secured (backed by an asset) or unsecured, and some can be converted into equity shares. In everyday use, the word bond is used for debt issued by the government, public sector bodies and large companies, and debenture is the usual term in company law.

Government securities (G-secs) are debt issued by the Central or State Governments to meet borrowing needs. Central Government securities include dated securities, which are long-term and pay periodic interest, while Treasury Bills are short-term and belong to the money market. State government securities are called State Development Loans (SDLs). G-secs carry very low default risk because the government backs them. The RBI manages the issue of these securities as the government's debt manager.

The debt market is the market for these debt instruments. It has a government securities segment and a corporate bond market. Corporate bonds are issued by companies, banks and financial institutions, and are regulated by SEBI. Trading takes place both in the primary market (new issues) and the secondary market (existing securities). Banks, insurance companies, mutual funds and provident funds are the major investors. Bond prices move opposite to interest rates: when market interest rates rise, prices of existing bonds fall.

Key rules to remember

Annual interest on a debenture or bond: Interest = Face value × Coupon rate; Example: ₹1,000 face value at 8% coupon gives ₹80 a year. It is based on face value, not market price.
Current yield: Current yield = (Annual interest ÷ Market price) × 100; Shows the return on what you pay today. A bond bought below face value has a current yield above its coupon rate.
Price and interest rate link: Market interest rates ↑ ⇒ bond prices ↓ (and the reverse); Applies to existing fixed-rate bonds. Use it to explain why bond prices change.
Order of claim on winding up: Secured creditors and debenture holders → unsecured creditors → preference shareholders → equity shareholders; A simplified order for exam answers. Debt holders are paid before owners.

How to solve Capital Market Instruments and Debt Market questions

Most questions ask you to define, compare or explain the working of an instrument or market. Use this method to organise any answer.

1Read the question and identify the type: define, differentiate, explain features, or discuss the market.
2Start with a one-line definition of the instrument or market in simple words.
3Classify it as ownership (equity) or borrowing (debt), and say who the holder is: owner or lender.
4List the main features: return, risk, voting rights, repayment, security and claim on winding up.
5If asked to differentiate, use at least four points and give both sides for each point.
6Add the Indian context: G-secs and the RBI, corporate bonds and SEBI, or an example such as a bond issued by a public sector company.
7Finish with a one-line conclusion on when each instrument suits an investor or an issuer.

Quickest way: Own or Lend: the four-point check

When to use it: Use when you have little time or a short-answer or comparison question.

Decide: owner (equity) or lender (debt).
Write return: dividend that varies, or fixed interest.
Write risk and claim: equity is highest risk and paid last, debt is lower risk and paid first.
Write control: equity has voting rights, debt holders have none.
Add one Indian example: a G-sec for safety, a corporate bond for higher yield.

Common mistakes in Capital Market Instruments and Debt Market

Calling debenture holders owners of the company.
Both shares and debentures are issued by companies and sold to the public, so they look alike.
Fix: Remember that debenture holders are creditors. They get interest and have no voting rights.
Saying that dividend on equity shares is fixed.
Students mix up equity with preference shares or debentures.
Fix: Equity dividend depends on profits and the board's decision. Only preference shares carry a fixed rate of dividend.
Placing Treasury Bills in the capital market.
Both T-bills and dated G-secs are government securities.
Fix: Treasury Bills mature within a year and belong to the money market. Dated securities are long-term and belong to the capital market.
Saying that bond prices rise when interest rates rise.
Students think that higher rates mean higher value.
Fix: New bonds pay more, so existing lower-coupon bonds become less attractive and their price falls. Prices and rates move in opposite directions.
Writing that G-secs have no risk at all.
Textbooks stress that they are safe.
Fix: Say they have negligible default risk, but they still carry interest rate risk, since their market prices can change.
Giving a comparison of shares and debentures with fewer than four points or one-sided points.
Students rush and write only what they remember about one instrument.
Fix: Draw two columns in your mind and write a matching point for each side on return, risk, voting, repayment and claim.

Worked examples

Example 1

Differentiate between equity shares and debentures. (Written answer)

Show the solution

Basis 1, status: an equity shareholder is an owner of the company, while a debenture holder is a creditor.
Basis 2, return: equity gets a dividend that depends on profits and the board's decision, while debentures get interest at a fixed rate whether or not there is a profit.
Basis 3, voting: equity shareholders have voting rights, while debenture holders do not.
Basis 4, repayment: equity capital is not repaid during the life of the company in the normal course, while debentures are repaid on maturity as agreed.
Basis 5, risk and claim: equity carries the highest risk and is paid last on winding up, while debenture holders carry lower risk and are paid earlier, especially if secured.

Answer: Equity shares represent ownership with variable dividend, voting rights and the highest risk. Debentures represent a loan with fixed interest, no voting rights and a prior claim on winding up.

Example 2

A company issues 10,000 debentures of ₹1,000 each at a coupon rate of 9% per annum. (a) Find the total annual interest. (b) If one debenture trades at ₹900 in the market, find its current yield.

Show the solution

Total face value = 10,000 × ₹1,000 = ₹1,00,00,000.
(a) Annual interest = ₹1,00,00,000 × 9% = ₹9,00,000.
Interest per debenture = ₹1,000 × 9% = ₹90.
(b) Current yield = (₹90 ÷ ₹900) × 100 = 10%.
The yield is higher than the 9% coupon because the debenture trades below face value.

Answer: (a) Total annual interest is ₹9,00,000. (b) Current yield is 10%.

Exam tips

Differentiate questions are common. Practise a five-point comparison of shares and debentures, and of equity and preference shares, until you can write it quickly.
Keep a clear line between the money market (under one year, such as Treasury Bills) and the capital market (long-term, such as dated G-secs and bonds).
Link each instrument to its regulator or manager: SEBI for corporate securities and the RBI for G-secs as debt manager of the government.
In short numerical questions, write the formula first, then substitute values, and use face value for interest and market price for yield.
Use examples with Indian names or institutions to make written answers concrete.

Practice questions from Indian Financial Markets

Capital Market Instruments and Debt Market in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Capital Market Instruments and Debt Market: frequently asked questions

What is the difference between shares and debentures?

Shares represent ownership and give a variable dividend and voting rights. Debentures represent a loan to the company and give fixed interest with no voting rights. Debenture holders are paid before shareholders on winding up.

What are government securities in India?

Government securities are debt instruments issued by the Central or State Governments to borrow money. Dated securities are long-term, Treasury Bills are short-term, and State Development Loans are issued by states. They have very low default risk.

What is the corporate bond market in India?

It is the market where companies, banks and financial institutions issue and trade bonds and debentures to raise long-term funds. It is regulated by SEBI. It supports companies by offering an alternative to bank loans.

Are bonds and debentures the same thing?

Both are borrowing instruments that pay interest and return principal on maturity. In company law, debenture is the usual term for a company's debt, while bond is commonly used for debt of government bodies, public sector entities and large companies. For exam answers, treat them as similar and note the usage.