Syllabus Section: Economy / GS Paper III
PARTICIPATORY NOTES (P NOTES):
• P-Notes are Offshore Derivative Instruments (ODIs)
• Participatory Notes (P-Notes) are instruments used by foreign funds and investors not registered with the Securities and Exchange Board of India (SEBI) to invest in Indian securities.
• They are generally issued overseas by registered foreign institutional investors (FII)) and domestic institutional investors.
WAYS AND MEANS ADVANCE:
• It is a facility for both the Centre and states to borrow from the RBI to enable it to meet temporary mismatches between revenue and expenditure.
• Section 17(5) of the RBI Act, 1934 authorizes the central bank to lend to the Centre and state governments subject to their being repayable “not later than three months from the date of the making of the advance”.
• The government has to pay an interest rate equal to the repo rate, while the tenure is three months.
FUND OF FUNDS (FOF):
• A Fund of Funds (FoF) is a scheme that invests in units of other Mutual Fund (MF) schemes.ie FoF is a MF scheme that does not invest directly in stocks or securities but in other Mutual Fund schemes.
• The biggest advantage of the FOF is, it gives the investor an opportunity to invest in different schemes managed by different fund managers.
• With a single FoF, the investor will be able to benefit from the diverse investment approach.
TERMS RELATED TO BONDS:
1. Face Value of Bond: In bond investing, face value, or par value, is commonly referred to the amount paid to a bondholder at the maturity date, given the issuer doesn’t default. The face value is also known as the repayment amount.
2. Coupon: A coupon payment on a bond is a periodic interest payment that the bondholder receives during the time between when the bond is issued and when it matures.
3. Maturity Date: Maturity date is the date when the principal (face value) is paid back. The final coupon and the face value of a debt security is repaid to the investor on the maturity date.
• Bond price is the present discounted value of future cash stream generated by a bond.
• It refers to the sum of the present values of all likely coupon payments plus the present value of the par value at maturity.
• To calculate the bond price, one has to simply discount the known future cash flows.
• The price of a bond and its yield-to-maturity are negatively correlated to each other.
• When the yield-to-maturity is higher than the coupon rate, the price of a bond is less than the face value and vice-versa.
• Usually bonds are issued at coupon rates close to the prevailing interest rate, so that they can be sold close to their face values.
BONDS & EQUITIES:
• Bonds and equities are two important instruments issued by corporate to mobilize funds.
• Bonds are debt, whereas stocks are equity. By purchasing equity (stock), an investor becomes an owner in the issuing entity.
• By purchasing a debt instrument like bond, an investor becomes a creditor to the corporation (or government).
• The primary advantage of being a creditor (by purchasing bonds) is that he has a higher claim on assets than shareholders do.
• In the case of bankruptcy, a bondholder will get his money back before a shareholder.
• They are rupee-denominated bonds i.e. the funds would be raised from overseas market in Indian rupees.
• Any corporate, body corporate and Indian bank is eligible to issue Rupee denominated bonds overseas.
• The first Masala bond was issued in 2014 by International Finance Corporation (IFC) for the infrastructure projects in India.
• Money raised through such bonds cannot be used for real estate activities other than for development of integrated township or affordable housing projects.
• Masala bonds are regulated under the External Commercial Borrowings (ECB) Policy of RBI.
• Other countries also have similar local currency denominated bonds such as Dim sum bonds (denominated in Chinese Renminbi), Samurai bonds (denominated in Japanese Yen) and Komodo bonds (denominated in Indonesian Rupiah) etc.
PLAIN VANILLA BONDS:
• A plain vanilla bond is a bond without any unusual features; These are a type of unsecured, perpetual bonds that banks issue to shore up their core capital base to meet the Basel-III norms.
• It is one of the simplest forms of bond with a fixed coupon and a defined maturity and is usually issued and redeemed at the face value. It is also known as a straight bond or a bullet bond.
• These are the most basic or standard version of financial instruments, usually options, bonds, futures and swaps etc.
• Shares of foreign stocks offered in foreign markets are comprehensively referred as Depositary receipts.
• ADRs and GDRs are two types of depositary receipts with other types including European depositary receipts (EDRs), Luxembourg depositary receipt (LDRs), and Indian depository receipts (IDRs).
• ADRs are shares of a single foreign company issued in the U.S.
• An American depository house acquires shares from Indian shareholders and subsequently issues ADRs to US investor (in dollar terms) according to conversion ratios that vary from stock to stock
• GDRs are shares of a single foreign company issued in more than one country as part of a GDR program.
• Companies can issue depositary receipts in individual countries or they may choose to issue their shares in multiple foreign markets at once through a GDR.
• IDRs are similar to ADRs and GDRs. Here, a foreign company lists its shares in Indian stock exchange.