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WHAT
ARE GOVERNMENT SECURITIES
Government securities or gilt-edged securities
(G-sec) are sovereign securities that are issued by Reserve Bank of
India on behalf of the Government
of India.
ADVANTAGES OF INVESTING IN GOVERNMENT SECURITIES
Government
securities offer one of the safest investment options to individual investors.
The payment of interest as well as repayment of the principal amount is
guaranteed by the Central Government. The following are the benefits of
investing in government securities:
-
Govt.
Securities have zero default risk. The
interest as well as principal repayment
is guaranteed by the Central Government.
-
It gives
regular and assured income in the form
of half yearly interest payments.
-
The
interest income from government
securities up to Rs. 3000/- p.a. is
exempted from tax under Sec. 80 L of IT
act. This exemption is over and above
the limits of Rs. 9000/- p.a. under the
section. Besides, there is no TDS on
interest income from G-secs.
-
These
securities are highly liquid, and can be
sold at any time in whole or parts. For
example a person holds a government
security of Rs. 50000 face value, he can
sell part of it, say Rs. 10000/- and
continue to hold the remaining amount.
-
G-securities
can also be held in dematerialised form
like shares.
-
There is
total transparency in the transactions.
-
The
returns on government securities are
generally better than fixed deposits,
especially at the longer end.
-
Returns
on bank fixed deposits flatten after a
period of three years. If the investor
wishes to invest for a longer period, he
faces a reinvestment risk as the
interest rates may fall at the time of
his reinvestment. However in government
securities the return is assured if held
till maturity.
-
In
comparison Gilt Funds the Govt
Securities give options of different
maturity period and assured returns over
the period which is not available with
Gilts Funds.
HOLDING GOVERNMENT SECURITIES
Government
securities can be held by individuals in demat form, in the same manner as they
hold shares in a demat account. To be able to purchase a government security an
individual must have a demat account with any depository participant of
National Securities Depository Ltd. (NSDL). If the individual already has a
demat account with any NSDL depository participant for shares, the same account
can be used for holding government securities also.
NOMENCLATURE OF GOVERNMENT SECURITIES
Its
interest/coupon rate and year of maturity define a Government Security. For
example 11.50% GOI 2011. Herein the different terms are:
-
11.50% is the annual
interest/coupon rate (payable half yearly).
-
GOI stands for Government
of India.
-
2011 is the year of
maturity.
-
Interest payment dates are
24th May and 24th November, every year.
PRICING OF GOVERNMENT SECURITIES
Pricing of a
Government Security/Bond is inversely related to its yield. As the yield
increases, the price decreases, whereas if the yield falls, there is an
increase in the price of the Government Security/bond. In a falling interest rate regime, G.SEC.
with a higher coupon sell at a premium, which lowers the YTM and vice-versa.
Example :-
11.50% GOI 2011
Security – You will not get this security at face value of Rs.100. The actual traded price of a security would
depend upon factors like liquidity and interest rate scenario. If the traded price is higher than face
value, then it would mean its coupon is higher than the going interest rates
and vice-versa. As a result, the actual
yield would the yield to maturity i.e. (YTM).
PRICING OF GOVERNMENT SECURITIES
G-Sec transactions are
settled on a cum-interest basis i.e. when investors purchase Govt. securities,
they pay a price, which includes two components
-
Principal cost or the market value per Rs 100 face value.
-
Accrued interest, which is the interest for the no. of days for which
the seller of the security has been holding it since the last interest payment
date.
-
The
rates quoted by State Bank of
Patiala include both the components (for the sake of simplicity).
WHAT IS YTM ?
YTM is the
discount rate that equates the present value of all the cash inflows to the
cost price of the Govt. Security, which is actually the internal rate of return
of the Govt. security. This is the return from the security at the current
price if it is retained till maturity.
The formula for calculating the approximate
YTM is
(C+(F-P)/N/(F+P)/2) X 100
Where C is
the annual coupon rate
F is the face value to the
security
P is the price of
the bond
HOW TO PURCHASE GOVERNMENT SECURITIES
-
Open a demat account with
any depository participant of NSDL in case you already do not have a demat
account.
-
Contact the nearest
designated SBP branch as per the address overleaf.
-
Obtain rates for purchase
of government securities from the designated SBP branch.
-
Decide the government
security to be purchased from the rates given as above.
-
Obtain application form
for purchase of government security from any of the designated branches and
submit it duly filled along with cheque/DD.
-
Amount for purchase of
government security is payable by cheque/DD. The cheque/DD should be made
payable to State Bank of
Patiala.
-
Submit the application
form alongwith cheque/DD at the designated branch of State Bank of
Patiala and obtain receipt.
-
State Bank of
Patiala would ensure credit of the government security to the demat account of
the investor.
HOW TO SELL
GOVERNMENT SECURITY
-
Contact the nearest
designated State Bank of
Patiala branch.
-
Obtain rates for sale of
government security.
-
Give instruction for debit
of your demat account to your Depository Participant.
-
Fill the application form
for sale of government security and attach copy of demat debit instructions
given to your Depository Participant.
-
Submit application form to
the designated State Bank of
Patiala branch and obtain receipt.
-
State Bank of
Patiala would remit the money payable by cheque/DD/ credit to your account at
our designated branch as per your choice.
FOR FURTHER
INFORMATION/ INVESTMENT CONTACT:
At Corporate Office
Asst.
General Manager (Treasury)
Funds
Management Department, Head
Office, State Bank of
Patiala
Patiala – 147001 Ph-
0175 – 215540 Fax –
0175 – 215490
At Mumbai
Chief
Manager (Investment)
State
Bank of
Patiala, Atlanta
Building, 1st Floor,
Nariman
Point, Mumbai-400021
Ph- 022
– 2338398,2044221 Fax 022
– 2338397
At
Delhi
Chief
Manager (Investment)
Investment
Cell,State
Bank of
Patiala,
8th
Floor,
Chanderlok
Building,Janpath,
New Delhi 110001
Ph 011-
3313673, 3312095 Fax
011-3730642
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