FAQ Page 1 - ربی - Reserve Bank of India
External Commercial Borrowings (ECB) and Trade Credits
G. END-USES
Government Securities Market in India – A Primer
27.1 Duration (also known as Macaulay Duration) of a bond is a measure of the time taken to recover the initial investment in present value terms. In simplest form, duration refers to the payback period of a bond to break even, i.e., the time taken for a bond to repay its own purchase price. Duration is expressed in number of years. A step by step approach for working out duration is given in the Box IV below.
Calculation for Duration First, each of the future cash flows is discounted to its respective present value for each period. Since the coupons are paid out every six months, a single period is equal to six months and a bond with two years maturity will have four time periods. Second, the present values of future cash flows are multiplied with their respective time periods (these are the weights). That is the PV of the first coupon is multiplied by 1, PV of second coupon by 2 and so on. Third, the above weighted PVs of all cash flows is added and the sum is divided by the current price (total of the PVs in step 1) of the bond. The resultant value is the duration in no. of periods. Since one period equals to six months, to get the duration in no. of year, divide it by two. This is the time period within which the bond is expected to pay back its own value if held till maturity. Illustration: Taking a bond having 2 years maturity, and 10% coupon, and current price of ₹101.79, the cash flows will be (prevailing 2 year yield being 9%):
Duration in number of periods = 379.28/101.79 = 3.73 Duration in years = 3.73/2 = 1.86 years |
More formally, duration refers to:
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The weighted average term (time from now to payment) of a bond's cash flows or of any series of linked cash flows.
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The higher the coupon rate of a bond, the shorter the duration (if the term of the bond is kept constant).
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Duration is always less than or equal to the overall life (to maturity) of the bond.
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Only a zero coupon bond (a bond with no coupons) will have duration equal to its maturity.
What is Modified Duration?
27.2 Modified duration (MD) is a modified version of Macaulay Duration. It refers to the change in value of the security to one per cent change in interest rates (Yield). The formula is
Illustration
In the above example given in Box IV, MD = 1.86/(1+0.09/2) = 1.78
Duration is useful primarily as a measure of the sensitivity of a bond's market price to interest rate (i.e., yield) movements. It is approximately equal to the percentage change in price for one percent change in yield. For example the duration is the approximate percentage by which the value of the bond will fall for a 1% per annum increase in market interest rate. So, a 15-year bond with a duration of 7 years would fall approximately 7% in value if the interest rate increased by 1% per annum. In other words, duration is the elasticity of the bond's price with respect to interest rates. This ignores convexity explained in para 24.7
What is PV 01?
27.3 PV01 describes the actual change in price of a bond if the yield changes by one basis point (equal to one hundredth of a percentage point). It is the present value impact of 1 basis point (0.01%) (1%=100 bps) movement in interest rate. It is often used as a price alternative to duration (a time measure). Higher the PV01, the higher would be the volatility (sensitivity of price to change in yield).
Illustration
From the modified duration (given in the illustration under 27.2), we know that the security value will change by 1.78% for a change of 100 basis point (1%) change in the yield. In value terms that is equal to 1.78*(101.79/100) = ₹ 1.81.
Hence the PV01 = 1.81/100 = ₹0.018, which is 1.8 paise. Thus, if the yield of a bond with a Modified Duration of 1.78 years moves from say 9% to 9.05% (5 basis points), the price of the bond moves from ₹101.79 to ₹101.70 (reduction of 9 paise, i.e., 5x1.8 paise).
What is Convexity?
27.4 Calculation of change in price for change in yields based on duration works only for small changes in yields. This is because the relationship between bond price and yield is not strictly linear. Over large variations in yields, the relationship is curvilinear i.e., the reduction in option free bond price is less than the change calculated based only on duration for yield increase, and increase in option free bond price will be more than the change calculated based only on duration for yield decrease. This is measured by a concept called convexity, which is the change in duration of a bond due to change in the yield of the bond.
All you wanted to know about NBFCs
B. Entities Regulated by RBI and applicable regulations
Reserve Bank of India has deregulated interest rates to be charged to borrowers by NBFCs. The rate of interest to be charged by the company is governed by the terms and conditions of the loan agreement entered into between the borrower and the NBFCs. However, the NBFCs have to be transparent and the rate of interest and manner of arriving at the rate of interest to different categories of borrowers should be disclosed to the borrower or customer in the application form and communicated explicitly in the sanction letter and on their websites, Key Facts Statement, etc., to enable the borrower to take an informed decision.
Foreign Investment in India
Indian Currency
C) Different Types of Bank Notes and Security Features of banknotes
In addition to the security features listed above, banknotes issued after introduction of MG series-2005 have the year of printing on the reverse of the banknotes which is not present in the pre-2005 series.
Core Investment Companies
D. Miscellaneous:
Ans: Adjusted net worth (ANW) is a concept akin to capital requirement wherein the ANW should not be less than 30% of the risk weighted assets (RWA). In cases where asset size is aggregated, all the CICs within the group will be registered as CIC and ANW will be applicable individually.
Coordinated Portfolio Investment Survey – India
Updated: دسمبر 01, 2023
Special instructions for banks
Ans: No, it should not be included, as it will be considered as resident to resident transaction.
Annual Return on Foreign Liabilities and Assets (FLA) under FEMA 1999
Some Useful Definitions
Ans: If the Indian entity has issued the shares to non-resident entities under the FDI scheme in India, then it is a FDI and should be reported under the Foreign Direct Investment in India (Liabilities) of the return.
FAQs on Non-Banking Financial Companies
Credit Rating
- The NBFCs in the category of equipment leasing and hire purchase finance companies having Rating of less than the Investment Grade as mentioned below are no longer entitled to accept fresh public deposits :
Name of rating agencies | Level of minimum investment |
EL/HP Cos. | LC/ICs |
CRISIL | A- (A MINUS) |
ICRA | A- (A MINUS) |
CARE | BBB (FD) |
DCR India | BBB- (BBB minus) |
The Loan and Investment Companies having Rating of less than `A are no longer entitled to accept fresh deposits.
It may be added that A- is not equivalent to A; AA- is not equivalent to AA and AAA- is not equivalent to AAA.
Retail Direct Scheme
Investment and Account holdings related queries
The returns on Government securities are dependent on various features of the securities. You may refer to ‘Government Securities Market- A primer’, published on RBI website, to understand the factors affecting the returns on government securities.