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Have you ever heard from your friends that the US’s Bond Yield is going up, because of which there is a correction going on in the Bond Markets?
Have you ever heard that there are some issues with the Templeton’s Fixed Income funds because of which people are withdrawing their funds from various bond schemes?
The answer is Yes. Most of us have heard them, but rarely do we understand their actual significance. If we understand the debt markets and its working, we would be able to comprehend the above questions better.
What are Debt Markets?
A debt market is a market where fixed income or debt instruments can be traded. Here, capital can be transferred from one party to another. Lenders who have excess capital can lend their capital to businesses who need the capital to finance projects, investments, etc.
Debt instruments are assets that give a fixed payment to their holder, usually with interest.
Let’s try and understand this with an example:
Suppose you have a Fixed Deposit (F.D.) Of ₹100 in SBI at an interest rate of 6% p.a. for 3 years. So, you will get ₹6 at the end of year 1, ₹6 at the end of year 2 and ₹106 (6+100) at the end of year 3. (assuming its simple interest)
If you buy a bond, its mechanism is the same as a Fixed Deposit, however there are some key differences.
The interest which you receive in a bond is called the Coupon, and the interest rate is called the Coupon Rate.
In this case, ₹6 will be the Coupon, and 6% is the Coupon Rate.
Apart from this, Fixed Deposits do not trade in the market whereas most of the other debt securities like bonds, Commercial Papers, etc., are tradable securities.