Page 12 - DMGT512_FINANCIAL_INSTITUTIONS_AND_SERVICES

Unit 1: Financial System

Treasury bills are considered liquid assets as they can be easily sold in the secondary market and Notes
converted to cash. Treasury bonds are medium and long-term government securities and are
issued in maturities ranging from 2 years to 20 years. Treasury bills and bonds are guaranteed
by the Government and are the safest of all investments, as they are default risk free. Treasury
bills and bonds are tradable securities which are sold by auction to Primary Dealers, who in turn
market the securities to the public.

Notes The yields on Treasury bills and bonds are market determined and the market is
both active and liquid.

Repurchase Agreements

Repurchase agreements (Repo) are arrangements involving transaction between two parties
that agree to sell and repurchase the same security. Under repurchase agreement, the seller sells
the specified securities to the buyer with an agreement to repurchase the same at a mutually
decided future date and price. Such kind of transaction between parties approved by RBI and in
securities (Treasury Bills, Central/State Govt. securities) as approved by RBI.

Task Find out the differences between the sale price and the repurchase price from the
financial system of India.

Commercial Paper

Commercial Papers (CPs) are short-term, non-collateralised (unsecured) debt securities issued
by private sector companies to raise funds for their own use, by banks and other financial
intermediaries. CPs are generally issued by creditworthy (high-rated) institutions in large
denominations and have additional bank guarantees of payment. CPs are usually sold at a
discount, although some are interest bearing.

Corporate Bonds and Debentures

Corporate bonds are medium or long-term securities of private sector companies which obligate
the issuer to pay interest and redeem the principal at maturity. Corporate bonds that are not
backed by a specific asset are called debentures.
Debentures are medium or long term, interest-bearing bonds issued by private sector companies,
banks and other financial institutions that are backed only by the general credit of the issuer.
Debentures are usually issued by large, well-established institutions. The holders of debentures
are considered creditors and are entitled to payment before shareholders in the event of the
liquidation of the issuing company.

1. Convertible Debentures are debentures issued with an option to debenture holders to
convert them into shares after a fixed period. A convertible debenture is a type of
debenture or commercial loan that gives the choice to the lender to take stock or shares
in the company, as an alternative to taking the repayment of a loan. It is any form of
debenture which can be converted into some other kind of security like shares or
Common Stocks.
Convertible debentures are either partially or fully convertible. In case of partially
convertible debentures, part of the instrument is redeemed and part of it is converted into

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