Types of Debt Products

Debt products are financial instruments that represent a loan from the investor to the issuer, promising periodic interest (coupon) and repayment of principal at maturity.

In the Indian context, they are issued by the Government of India, State Governments, Public Sector Undertakings (PSUs), banks and private corporations. The SEBI and RBI regulate these instruments to protect investors and ensure market integrity.

For the NISM exam, you must be able to recognise a product’s key attributes – who issues it, how long it lasts, whether it is secured or unsecured, and how its interest is taxed. Questions often present a scenario and ask you to pick the most suitable debt instrument.

Treasury Bills (T‑Bills) are short‑term (91, 182 or 364 days) zero‑coupon securities issued by the Reserve Bank of India on behalf of the Government. They are sold at a discount and redeemed at face value, the difference being the investor’s return.

Government Securities (G‑Secs) are long‑term bonds with maturities ranging from 5 to 40 years. They pay a fixed coupon semi‑annually and are considered the safest debt class because the sovereign backs them.

State Development Loans (SDLs) are issued by state governments to fund infrastructure projects. Their credit risk is slightly higher than central G‑Secs, and they carry a similar coupon structure.

Exam relevance: Questions may ask you to match a product with its typical tenure, issuer or risk level. Remember that T‑Bills are discount instruments, whereas G‑Secs and SDLs are coupon‑bearing.

Corporate Bonds are issued by private companies to raise long‑term capital. They can be secured (backed by assets) or unsecured (debentures). Coupon rates are higher than government bonds to compensate for added credit risk.

Non‑Convertible Debentures (NCDs) are a type of unsecured corporate bond that cannot be converted into equity. They usually have a fixed maturity of 3‑5 years and are listed on recognized stock exchanges.

Commercial Papers (CPs) are short‑term unsecured promissory notes issued by corporates for working‑capital needs, typically maturing in 7‑365 days. They are issued at a discount and do not carry a coupon.

Fixed Deposits (FDs) offered by banks are technically debt instruments where the bank borrows from the depositor. They have a fixed tenure and a guaranteed interest rate, making them popular among risk‑averse investors.

Exam tip: The NISM syllabus often groups CPs and T‑Bills together as short‑term discount instruments, while corporate bonds and NCDs belong to the long‑term coupon category.

Debt products are first classified by maturity: short‑term (≤1 year), medium‑term (1–5 years) and long‑term (>5 years). Short‑term instruments like T‑Bills and CPs are used for liquidity management, while long‑term bonds fund capital projects.

The second dimension is security. Secured debt is backed by specific assets (e.g., mortgage‑backed bonds), reducing credit risk. Unsecured debt, such as debentures, relies solely on the issuer’s creditworthiness.

Thirdly, products can be convertible or non‑convertible. Convertible bonds can be swapped for equity, offering upside potential, whereas non‑convertible instruments lock the investor into a fixed return.

For the exam, a matrix‑type question may present a product and ask you to identify its maturity bucket, security status and convertibility. Memorising the typical combinations helps avoid mistakes.

Interest earned on most debt products is taxable as "Income from Other Sources" under the Income Tax Act. The investor’s marginal tax rate (30% for individuals above the highest slab) applies, and Tax Deducted at Source (TDS) may be deducted at 10% if the interest exceeds INR 5,000 in a financial year.

Exceptions exist: interest on certain government securities (e.g., bonds issued by the central government) is exempt up to INR 10,000 per year for senior citizens. Fixed Deposits with banks attract TDS at 10% (or 5% for senior citizens) after the threshold.

For corporate bonds and NCDs, the interest is fully taxable, and the issuer must issue a TDS certificate (Form 16A). The NISM exam frequently tests the candidate’s ability to identify which product enjoys tax exemption and the applicable TDS rate.

Credit risk is the chance that the issuer defaults on interest or principal. Government securities have negligible credit risk, whereas corporate bonds and NCDs carry higher risk depending on the issuer’s credit rating.

Interest‑rate risk affects long‑term bonds more because their prices move inversely with market rates. Short‑term instruments like T‑Bills and CPs have minimal interest‑rate risk.

Liquidity risk refers to the ease of selling the instrument before maturity. Listed corporate bonds and NCDs have better liquidity than privately placed debentures.

In the NISM exam, a question may present a client’s risk tolerance and ask you to select the most appropriate debt product. Matching the risk profile with the product’s credit, interest‑rate and liquidity characteristics is key.