Cost of Capital^47
issue. This also has an effect on the rate of interest offered on the issue. The methodology
and the rating symbols remain the same as in money market securities.
Types of Debt Securities
There are several types of debt securities available in the market. The range includes
Government Securities, debentures, deep discount bonds, zero coupon bonds, etc.
Government Securities
Government is one of the biggest borrowers from the capital and the money market.
We have already taken a look at the money market securities offered by the Government
as also the schemes run by it through the post office. Government Securities is the
generic term applied to various kinds of debentures and bonds offered by the Government
(centre or state) and quasi-governmental agencies.
The maturities of the Government securities range between 1-20 years and the return
on the securities range between 5 to 7 per cent. The rates have significantly come
down from the high yields of 14 per cent registered in 1996. Most of the Government
Securities are bought by the banks, financial institutions, provident fund trusts, insurance
companies.
There are two types of Government Securities that are offered:
Government of India Floating Rate Bonds Bonds which pay a floating rate depending
upon the base rate announced by the RBI.
Government Securities Regular debentures which pay a fixed rate of return and the
principal amount is returned on maturity. The last issue of government stock paid a
coupon rate of 6.50 per cent.
The present yield on Government Securities is in the range of 5.50 - 7.00 per cent
depending on the maturity.
Non-Convertible Debentures (NCDs)
NCDs are plain debenture securities issued by corporations. They are normally medium
term in nature, maturing between 1 to 8 years and generally have a repayment schedule
staggered over two to three years. They are secured by a collateral backing and credit
rated. Interest rate offered on medium term NCDs is usually lower than the market
rate so many times the companies offer a sop of equity warrants along with NCDs to
sweeten the issue. Interest rate on the short term NCDs is in line with the market rate
and depends upon the quality of the issuer.
Deep Discount Bond (DDB)
Usually long term with maturities exceeding 10 years, deep discount bonds are normally
issued by blue chip corporations or financial institutions. Like money market securities,
these bonds are issued at a discount to their face values. Because of long maturity