Learn · Bonds and fixed income
G-Secs and bonds: price, yield and duration in plain words.
A bond is a loan you can trade: the issuer borrows, pays interest (the coupon) and repays the face value at maturity. In India the deepest bond market is in government securities, or G-Secs, which RBI issues on behalf of the Government of India. Banks hold them for income, for their statutory liquidity requirement and as liquid assets, so every bank treasury trades them.
The main types
- Treasury bills: short-term, issued at a discount and repaid at face value, with no coupon (91, 182 and 364-day bills).
- Dated G-Secs: longer-term central government bonds paying a fixed coupon every half-year.
- State Development Loans (SDLs): bonds issued by state governments.
- Corporate bonds: issued by companies, carrying their credit risk on top of the rate.
Price and yield move in opposite directions
A bond’s price is the present value of its future coupons and face value, discounted at the market yield. If yields rise, those fixed cash flows are worth less today, so the price falls; if yields fall, the price rises. G-Secs are quoted as a price per 100 of face value, and the yield to maturity (YTM) is the single rate that makes the discounted cash flows equal that price.
How G-Secs trade and settle
Banks and other institutions trade G-Secs mainly on RBI’s NDS-OM, an anonymous screen-based order-matching system. Outright trades settle T+1, with CCIL as the central counterparty and delivery against payment, so securities and money move together. Individuals can buy G-Secs directly through RBI Retail Direct.
Duration: how much the price moves
Modified duration estimates the percentage change in price for a 1% change in yield. A bond with a modified duration of 2.66 loses about 2.66% of its price if yields rise by 1%. DV01 (or PV01) is the money change for a one basis point (0.01%) move, which dealers use to size hedges and limits.
A worked example: price a three-year bond
A three-year bond pays a 7.00% coupon half-yearly (3.50 per 100 every six months). The market yield is 7.50% (illustrative).
| Step | Working | Result |
|---|---|---|
| Half-yearly yield and number of periods | 7.50% ÷ 2; 3 years × 2 | 3.75%, 6 periods |
| Price: discount each cash flow | 3.50 for 6 periods + 100 at the end, each ÷ 1.0375t | 98.68 per 100 |
| Modified duration | Weighted average time of the cash flows, adjusted for the yield | about 2.66 |
| If the yield rises by 0.10% | 2.66 × 0.10% × 98.68 | price falls by about 0.26, to about 98.42 |
The bond trades below 100 because its coupon (7.00%) is below the market yield (7.50%). Had the yield been exactly 7.00%, the price would be 100. A treasury dealer judging a quote checks exactly this: whether the price and the yield agree, and how much the position loses for each basis point.
Key terms
- Coupon: The fixed interest a bond pays, as a percentage of face value.
- YTM: Yield to maturity: the return if the bond is held to maturity and every payment is made.
- Accrued interest: Coupon earned since the last payment date, paid by the buyer on top of the clean price.
- Clean and dirty price: The quoted price without accrued interest, and the price including it.
- NDS-OM: RBI’s anonymous order-matching system for secondary trading in G-Secs.
Practise it in TrezCap
Reading is the start. In TrezCap you do the job in FinTreasury Bank, our virtual bank: the platform calculates every figure, you take the decision and see the consequence. Free to try.
Value a bond, and judge the quote
Price the bond, find its yield and decide whether the quote is fair.
Open in TrezCap →Bond and fixed income simulations
Pricing, curves, duration and DV01 hedges, swap valuation.
See the page →Questions
Why do bond prices fall when yields rise?
A bond's coupons and face value are fixed. When market yields rise, those fixed cash flows are discounted at a higher rate, so they are worth less today and the price falls.
What is the settlement cycle for G-Secs in India?
Outright secondary-market trades in government securities settle T+1, through CCIL as the central counterparty on a delivery-versus-payment basis.
What is the difference between a T-bill and a dated G-Sec?
A treasury bill is short-term (91, 182 or 364 days), issued at a discount and pays no coupon. A dated G-Sec is longer-term and pays a fixed coupon every half-year.
What does modified duration tell you?
The approximate percentage change in a bond's price for a 1% change in its yield. Higher duration means more price risk.
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