Overview of Fixed Income Securities

Fixed Income Securities are debt instruments that promise a series of fixed cash flows – typically periodic coupon payments and the return of principal at maturity. They are issued by governments, corporations, and financial institutions to raise capital.

For a PMS distributor, understanding these instruments is crucial because they form the low‑risk core of many client portfolios, providing predictable income and capital preservation.

In the NISM exam, you will often be asked to identify a security as fixed income based on its cash‑flow profile, or to select the appropriate valuation method. Remember that the defining trait is the contractual obligation to pay a predetermined amount.

• Cash‑flow certainty – coupons are fixed unless the instrument is floating‑rate.
• Legal claim – bondholders rank ahead of shareholders in liquidation.

Every fixed income instrument shares a set of core attributes: Face Value (Par), Coupon Rate, Maturity Date, and Credit Rating. The face value is the amount repaid at maturity, while the coupon rate determines the periodic interest paid.

Credit rating, assigned by agencies recognised by SEBI (e.g., CRISIL, ICRA), signals the issuer’s creditworthiness. Higher ratings (AAA) imply lower default risk but also lower yields, whereas lower ratings (BBB‑) offer higher yields at greater risk.

Liquidity – the ease of buying or selling the security in the market – influences transaction costs and price stability. In the exam, a question may link a low‑liquidity bond to higher bid‑ask spreads.

• Re‑investment risk – uncertainty about the rate at which coupon payments can be reinvested.
• Interest‑rate risk – price sensitivity to changes in market rates, measured by duration (conceptual, not formulaic for this sub‑topic).

Indian markets offer a variety of debt instruments, each catering to different investor needs and risk appetites. The major categories include Government Securities, Treasury Bills, Non‑Convertible Debentures (NCDs), Corporate Bonds, and Fixed‑Rate Debentures issued by financial institutions.

Government Securities (G‑Sec) are sovereign bonds with the highest credit quality and are issued by the RBI on behalf of the Government of India. Treasury Bills (T‑Bills) are short‑term discount instruments with maturities up to one year.

Non‑Convertible Debentures are corporate‑issued, non‑convertible into equity, and often carry a higher coupon. Corporate Bonds are long‑term debt instruments issued by companies, typically with a rating attached. Fixed‑Rate Debentures are similar but may be issued by NBFCs and have specific covenants.

• Each instrument differs in maturity range, coupon structure, and regulatory treatment.
• Understanding these differences helps you match client risk profiles with suitable products.

The market price of a bond fluctuates with changes in prevailing interest rates, credit perception, and time to maturity. When the price is below face value, the bond trades at a discount; above face value, it trades at a premium.

Two elementary yield measures are frequently tested: Current Yield and an approximate Yield to Maturity (YTM). Current Yield uses the annual coupon payment and the current market price, while YTM accounts for all cash flows until maturity.

For the NISM exam, you must be able to compute Current Yield quickly, and recognise the YTM approximation formula as a shortcut when detailed cash‑flow tables are not provided.

Interest‑rate risk is the primary risk; when market rates rise, existing bond prices fall. Duration (not covered in detail here) quantifies this sensitivity.

Credit risk reflects the possibility of issuer default. Higher credit ratings mitigate this risk but usually offer lower yields.

Re‑investment risk arises when coupons are received and must be reinvested at lower rates than the original bond’s coupon. Finally, Liquidity risk is higher for non‑government securities, potentially leading to wider bid‑ask spreads.

• Exam tip: Match the dominant risk to the instrument type – e.g., Treasury Bills have negligible credit risk but still face interest‑rate risk.

SEBI governs the issuance and trading of debt securities. Key requirements include registration of the issue with SEBI, mandatory disclosure of offer documents, and adherence to the Securities Contracts (Regulation) Act for listed bonds.

Credit rating agencies recognised by SEBI must assign ratings before public issuance. PMS distributors must ensure that any recommended bond complies with SEBI’s suitability norms and that the client’s risk profile is documented.

For the exam, remember the two pillars: (1) SEBI registration and disclosure, and (2) mandatory rating for listed corporate bonds. Failure to meet either can lead to regulatory action.