TYPES OF GOVERNMENT SECURITIES:

TYPES OF GOVERNMENT SECURITIES:

·         Basic two types on the basis of coupon payment

• Discount securities


• Pay only contractually fixed amount at maturity (Maturity value or face value)


• E.g., Treasury bills


• Coupon securities


• Pay interest on every six months plus principle at maturity


• Maturity 2-10 years, e.g., Treasury notes; maturity more than 10 years, e.g., Treasury bonds

·         Bearer and book entry securities

• Securities for which possession is primary evidence for ownership are bearer securities


• Book entry securities


• Only depository institutions are eligible to hold a securities account at Fed


• Dealers, brokers and their client can access the system indirectly by keeping a securities account at a depository at the Fed

Securities Account at a Bank → Bank computer keeps record of ownership of account holder

   ↓

                                        Account at Fed → Fed’s computer keeps record of Bank’s ownership of securities

·         Treasury inflation protected securities (TIPS) and Treasury inflation indexed securities (TIIS)

• Adjust for inflation


• Coupon rate set at fixed rate


• Rate determined in an auction process


• Coupon rate is called real rate because it is the rate that investors earns above inflation rate


• Inflation rate is decided by government


• Inflation is adjusted for coupon rate as well as for principle


• First issue in USA in 1997

PRIMARY MARKET

• New issue of government securities are sold at auction


• Auctions are organized by the central bank


• Amount, maturity, denomination of each new issue are announced at least one week before each issue


• Money raised is used to


• Pay off old issues that matures


• Finance current deficit of government budget


• Auction procedures


• Sealed bids are announced


• Two types of bids


• Competitive bid


• Price is specified


• Above certain prescribed size


• Bidders:


• Dealers: who expect to resell at profit


• Institutional Investors: who believe to get at cheaper price by bidding


• Non-competitive bid


• Price is not specified


• Bidder are less sophisticated small investors


• Successful competitive bidder pay the price as per their bid; low bidder get nothing


• Weighted average price of successful bidding is calculated that will be the price for non-competitive bidder


• Example: ……. explain with supposed data

SECONDARY MARKET

• Highly liquid market


• Low bid-ask spread


• Routine trade


• Decentralized/over the counter dealer market


• Principle participants are dealers, brokers and clearing banks


• Dealers make the market


• Quote bid-ask prices


• Primary and secondary dealers

Primary Dealers:

• Recognized by central bank as potential trading partner


• Large institutional trades with primary dealers


• Have information benefit


• Inside market: market in which primary dealers trade with one another


• Customer: secondary dealers; corporations; financial institutions and individuals

Secondary Dealers:

• Brokers who bring buyer and seller together

GOVERNMENT SECURITIES MARKET IN NEPAL

1.       Regulatory framework

·         National Debt Act, 2059: Provided NRB the authority for the issuance and secondary market management for government securities

·         National Debt Regulation: Issued under National Debt Act, 2059

·         Government Securities Secondary Market Management Byelaws, 2062: Issued by Securities Board of Nepal

·         Government Securities Secondary Trading Byelaws, 2062: Prepared by Nepal Stock Exchange Ltd. and approved by Securities Board of Nepal

2.       Issuer:

NRB on behalf of the government issues the government securities. The government has provided this authority to the NRB by provisioning in the National Debt Act.

3.       Types of Government Bonds in Nepal

·         National Saving Bonds

·         Citizen Saving Bonds

·         Development Bonds

·         Special Bonds

4.       Issue Process:

Process of issuing government bonds in Nepal involves the following steps

i)         Government assess the budgetary requirement and directs NRB to issue bonds

ii)       NRB with consultation with the government determines the types and amount of issue, interest rates to be paid, maturity of the bonds etc.

iii)      Once the NRB determines the bond to be issued, publishes notice to call for application from the individuals and institutions

iv)     As per the notice published by NRB, those willing to buy the bond, can submit the application forms and other required matters as prescribed at the counter of NRB, its branches, commercial banks, financial companies and other financial institutions prescribed by NRB

As per the previous practices; only Nepalese Citizen were eligible to buy Citizen Saving Bonds and National Saving Bonds while only institutions were allowed to buy Development Bonds

v)       NRB then collects the application forms and allot the bonds to the applicants

5.       Secondary Market Management:

Secondary transaction of government bonds occurs at the counter of market makers licensed by the NRB. Since December 2006, secondary trading of certain types of government bonds has been started in the stock exchange. For the trading of government bond, SEBON has licensed five stock brokers and two market makers. The trading of government bond in the stock exchange is regulated by Government Securities Secondary Market Management Byelaws, 2062 and Government Securities Secondary Trading Byelaws, 2062, issued by Securities Board of Nepal (SEBON)

6.       Status

Status of Issue

Table: Government Bonds Listed in the Stock Exchange