Capital Markets: Challenges and Developments

[pib] GoI Floating Rate Bonds

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Floating Rate Bonds

Mains level : Not Much

The Government of India has announced the Sale (Re-issue) of Floating Rate Bonds, 2028’.

What are Bonds?

  • Bonds are investment securities where an investor lends money to a company or a government for a set period of time, in exchange for regular interest payments.
  • Generally, bonds come with a fixed coupon or interest rate. For example, you can buy a bond of Rs 10,000 with a coupon rate of 5%.
  • Once the bond reaches maturity, the bond issuer returns the investor’s money.
  • Fixed income is a term often used to describe bonds, since your investment earns fixed payments over the life of the bond.

Why are bonds launched?

  • Companies sell bonds to finance ongoing operations, new projects or acquisitions.
  • Governments sell bonds for funding purposes, and also to supplement revenue from taxes.

What are Floating Rate Bonds?

  • A floating rate bond is a debt instrument that does not have a fixed coupon rate, but its interest rate fluctuates based on the benchmark the bond is drawn.
  • Benchmarks are market instruments that influence the overall economy.
  • For example, repo rate or reverse repo rate can be set as benchmarks for a floating rate bond.

How do floating rate bonds work?

  • Floating rate bonds make up a significant part of the Indian bond market and are majorly issued by the government.
  • For example, the RBI issued a floating rate bond in 2020 with interest payable every six months. After six months, the interest rate is re-fixed by the RBI.

 

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