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NISM Certifications · NISM-Series-VI: Depository Operations · Special Services - Debt Instruments and Government Securities

A DP is explaining to a client the difference between a Government Security and a corporate bond held in demat. Which statement is correct?

Government securities are sovereign obligations and are regarded as carrying practically no credit or default risk, although they still face interest rate risk. Corporate bonds depend on the issuer's creditworthiness and are not guaranteed by the Central Government.

  1. AG-Secs carry practically no credit risk as they are sovereign obligationsCorrect
  2. BG-Secs carry the highest default risk among debt instruments
  3. CCorporate bonds are always guaranteed by the Central Government
  4. DG-Secs cannot be traded on exchanges in any form

Explanation

Government securities are backed by the sovereign and are regarded as having practically no default or credit risk. They still carry interest rate risk. Corporate bonds carry the issuer's credit risk and have no government guarantee unless specified.

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