Some debt market basics….largely meant for the MBA (finance) students:

What is a Negotiated Market?

deals that have been done by negotiation, executed -but REPORTED on the trading system – for approval of the exchange is called a negotiated market deal.

What is a when-issued market?

it refers to the security being permitted for trading in the market BEFORE its actual date of issue but after the announcement date.

What are STRIPS?

it is an acronym for Separate Trading of Registered Interest and Principal of Securities. Certain selected dated government securities (gsecs) that can be (and have been separated at the request of the govt.) – under terms prescribed by the Reserve Bank of India. It is not yet available in India (if any reader knows better, please enlighten, I am myself very dated in the debt market – even when I knew it, it was just academic, nothing practical have I done in debt markets).

It would obviously work as follows: a 10 year G-sec will have 20 interest strips (Gsecs pay interest bi-annually) and one principal strip. Thus if I know that it is a 2012 issued G sec and I need to put money away for 3 years, I should, buy the interest strips for 2015 – thus I create a short term instrument out of a long term instrument.

Since there is no default risk, just the interest anticipation is built into the price. The principal strip itself will now act like a zcb (zero coupon bond). If we have enough zcbs we could plot the Gsec yield curve far more accurately than what is being done presently.

Once it is popular corporate bonds could also be issued like this – and if the taxation on such bonds is clear there could be a fantastic secondary market for bonds. But our regulators will not do it, at least not in my life time.

Transparency, after all is only for the smaller people, not for regulators.