The price of the bond is inversely related to the interest rate movement. If interest rate rises, the price of the bond will fall and vice-versa.

Current yield calculates the bond’s coupon income as a proportion of the clean price paid for the bond

Current Yield  = (Coupon / Clean Price) x 100

= 8.2 / 103.25 x 100 

= 7.94%

Interest Rate Caps and Floor: An interest rate cap is a type of interest rate contract in which the buyer of the Cap contract receives payments at the end of each period in which the interest rate exceeds the agreed rate. Similarly, an interest rate floor is a contract in which the buyer receives payments at the end of each period in which the interest rate is below the agreed strike price

Interest rate floors establish a minimum interest rate that a lender will receive on a loan, protecting against falling interest rates.

A bond with a Put option gives the choice to the investor to redeem the bond as per his choice.

A bond having “Put” option may encourage the investors to submit the bond for redemption when interest rate rises.

For eg. A investor has invested in a bond with a Put option and the bond pays 7% interest. In case the interest rate rises to 8% in the economy, the investor will redeem these bonds and invest in new bonds which will give him a higher interest of 8%.

The Mumbai Interbank Outright Rate (MIBOR), based on overnight call money market transactions, is administered by FBIL with CCIL as the ‘Calculation Agent’. MIBOR is notified by RBI as a ‘significant benchmark’ as it is the most widely used rate in India for pricing and settlement of derivatives and other contracts.

In Primary issuance, the Auction Calendar comes out every half year just before the beginning of the half year and Retail customers are allowed to purchase upto 5% of the notified amount with non-competitive bidding process and all such retail participants are issued securities at the cut-off rate or price.

Medium Term Debt -  These are bonds maturing in 5 to 12 years. These are also referred to as intermediate bonds. Generally, the bulk of debt issuances take place in this segment.

State Governments issue bonds known as State Development Loans (SDLs).

Market borrowings of State Governments / Union Territories through semi-annual coupon paying dated securities are known as State Development Loans (SDLs).

Since it’s a semi-annual coupon bond, coupon received will be as follows:

Coupon amount = Face Value * Coupon Rate * (1/No of payments per year)

Coupon amount = 30000000 * 0.071 * 1/2

Coupon amount = 30000000 * 0.071 * 0.5

Coupon Amount = 10,65,000

Commercial banks invest in Government securities because of Statutory Liquidity Ratio (SLR) requirement. Banks have to also invest increasingly in G-Sec as they would use it as collateral to source liquidity from the market as well as from RBI whenever the need arises.