Tuesday, January 27, 2015


Currency Matters


Your Guide to Money Matters
For a common person, money simply means currency and coins. This is so because in India, the payment system, which includes credit cards and electronic cash, still revolves mainly around currency and coins, especially for retail transactions. Here is an attempt to answer some of the Frequently Asked Questions on Indian Currency.
A) Some Basics
I. Coins
Coins in India are presently being issued in denominations of 50 paise, one rupee, two rupees, five rupees and ten rupees. Coins up to 50 paise are called 'small coins' and coins of Rupee one and above are called 'Rupee Coins'. Coins in the denomination of 1 paise, 2 paise, 3 paise, 5 paise, 10 paise, 20 paise and 25 paise have been withdrawn from circulation with effect from June 30, 2011 and are, therefore, no more legal tender.
II. Currency:
Banknotes in India are currently being issued in the denomination of ` 10, ` 20, `50, ` 100 ` 500, and `1000. These notes are called banknotes as they are issued by the Reserve Bank of India (Reserve Bank). The printing of notes in the denominations of` 1, ` 2 and ` 5 has been discontinued as these denominations have been coinised. However, such banknotes issued earlier can still be found in circulation and these banknotes continue to be legal tender.
What is the Indian currency called?
The Indian currency is called the Indian Rupee (INR) and the coins are called paise. One Rupee consists of 100 paise. The symbol of the Indian Rupee is `. The design resembles both the Devanagari letter "`" (ra) and the Latin capital letter "R", with a double horizontal line at the top.
Can banknotes and coins be issued only in these denominations?
Not necessarily. The Reserve Bank can also issue banknotes in the denominations of five thousand rupees and ten thousand rupees, or any other denomination that the Central Government may specify. However, there cannot be banknotes in denominations higher than ten thousand rupees in terms of the current provisions of the Reserve Bank of India Act, 1934. Coins can be issued up to the denomination of Rs.1000 in terms of The Coinage Act, 2011.
Demonetization of higher denomination banknotes.
` 1000 and ` 10000 banknotes, which were then in circulation were demonetized in January 1946, primarily to curb unaccounted money. The higher denomination banknotes in ` 1000, ` 5000 and ` 10000 were reintroduced in the year 1954, and these banknotes (` 1000, ` 5000 and ` 10000) were again demonetized in January 1978.
What is legal tender?
The coins issued under the authority of Section 6 of The Coinage Act, 2011, shall be legal tender in payment or on account i.e. provided that a coin has not been defaced and has not lost weight so as to be less than such weight as may be prescribed in its
case: - (a) coin of any denomination not lower than one rupee shall be legal tender for any sum, (b) half rupee coin shall be legal tender for any sum not exceeding ten rupees,
Every banknote issued by Reserve Bank of India (` 2, ` 5, ` 10, ` 20, ` 50, ` 100, ` 500 and ` 1000) shall be legal tender at any place in India in payment or on account for the amount expressed therein, and shall be guaranteed by the Central Government, subject to provisions of sub-section (2) Section 26 of RBI Act, 1934.
What is the meaning of "I promise to pay" clause?
As per Section 26 of Reserve Bank of India Act, 1934, the Bank is liable to pay the value of banknote. This is payable on demand by RBI, being the issuer. The Bank's obligation to pay the value of banknote does not arise out of a contract but out of statutory provisions.
The promissory clause printed on the banknotes i.e., "I promise to pay the bearer the sum of Rupees …is a statement which means that the banknote is a legal tender for the specified amount. The obligation on the part of the Bank is to exchange a banknote with bank notes of lower value or other coins which are legal tender under the Indian Coinage Act, 2011, of an equivalent amount.
Why is One Rupee liability of the Government of India?
The One Rupee notes issued under the Currency Ordinance, 1940 are also legal tender and included in the expression Rupee coin for all the purposes of the Reserve Bank of India Act, 1934. Since the rupee coins issued by Government constitute the liabilities of the Government, one rupee is also liability of the Government of India.
B) Currency Management.
What is the role of the Reserve Bank of India in currency management?
The Reserve Bank derives its role in currency management from the Reserve Bank of India Act, 1934.The Reserve Bank manages currency in India. The Government, on the advice of the Reserve Bank, decides on various denominations of banknotes to be issued. The Reserve Bank also co-ordinates with the Government in the designing of banknotes, including the security features. The Reserve Bank estimates the quantity of banknotes that are likely to be needed denomination-wise and accordingly, places indent with the various printing presses. The aim of the Reserve Bank is to provide good quality notes to members of public. Towards this aim, the banknotes received back from circulation are examined and those fit for circulation are reissued and the others (soiled and mutilated) are destroyed so as to maintain the quality of banknotes in circulation.
What is the role of Government of India?
In terms of Section 25 of RBI Act, 1934 the design of banknotes is required to be approved by the Central Government on the recommendations of the Central Board of the Reserve Bank of India. The responsibility for coinage vests with the Government of India on the basis of the Coinage Act, 2011 as amended from time to time. The Government of India is also responsible for the designing and minting of coins in various denominations.
Who decides on the figure to be printed on a new note?
The Government of India in consultation with the Reserve Bank of India decided on the design of banknotes.
What happens to the old design notes when a new design is introduced?
Both old and new design notes usually circulate together for a while. The old design notes are then gradually withdrawn from circulation when they become unfit to be re-issued.
Are old notes issued by the Reserve Bank of India worthless?
No. The Reserve Bank of India does not withdraw the legal tender character of notes issued in the past. All RBI notes retain their face value till any specific communication from RBI to the contrary. These notes can be exchanged at any bank branch. However, the above does not apply to the higher denomination banknotes of ` 1000, ` 5000 and `10000 that were demonetized in 1978.
What was the highest denomination note ever printed?
The highest denomination note ever printed by the Reserve Bank of India was the ` 10000 note in 1938 and again in 1954. These notes were demonetized in 1946 and again in 1978.
What is the role of RBI in issue of coins?
The role of RBI is limited to distribution of coins that are supplied by Government of India. The responsibility for coinage vests with the Government of India on the basis of the Coinage Act, 2011, as amended from time to time.
Who is responsible for changing the design of coins from time to time?
The Government of India is responsible for the designing and minting of coins in various denominations.
What is currency paper made of?
Currency paper is composed of cotton and cotton rag.
Who decides on the volume and value of banknotes to be printed and on what basis?
The Reserve Bank based on the demand requirement indicates the volume and value of banknotes to be printed each year to the Government of India which get finalized after mutual consultation. The quantum of banknotes to be printed, broadly depends on the requirement for meeting the demand for banknotes, GDP growth, replacement of soiled banknotes, reserve stock requirements, etc.
Who decides on the quantity of coins to be minted?
The Government of India decides on the quantity of coins to be minted on the basis of indents received from the Reserve Bank.
How does the Reserve Bank estimate the demand for banknotes?
The Reserve Bank estimates the demand for banknotes on the basis of the growth rate of the economy, inflation rate, the replacement demand and reserve stock requirements by using statistical models/techniques.
Where are notes and coins produced?
Notes are printed at four printing presses located at Nashik, Dewas, Mysore and Salboni. Coins are minted at the four mints at Mumbai, Noida, Kolkata and Hyderabad.
How does the Reserve Bank reach the currency to people?
The Reserve Bank presently manages the currency operations through its 19 Issue offices located at Ahmedabad, Bangalore, Belapur, Bhopal, Bhubaneswar, Chandigarh, Chennai, Guwahati, Hyderabad, Jaipur, Jammu, Kanpur, Kolkata, Lucknow, Mumbai, Nagpur, New Delhi, Patna, Thiruvananthapuram, a currency chest at Kochi and a wide net work of currency chests. These offices receive fresh banknotes from the banknote printing presses. The Issue Offices of RBI send fresh banknote remittances to the designated branches of commercial banks.
The Reserve Bank offices located at Hyderabad, Kolkata, Mumbai and New Delhi (Mint linked Offices) initially receive the coins from the mints. These offices then send them to the other offices of the Reserve Bank who in turn send the same to currency chests and small coin depots. The banknotes and rupee coins are stocked at the currency chests and small coins at the small coin depots. The bank branches receive the banknotes and coins from the Currency Chests and Small Coin Depots for further distribution among the public.
What is a currency chest?
To facilitate the distribution of banknotes and rupee coins, the Reserve Bank has authorised select branches of scheduled banks to establish currency chests. These are actually storehouses where banknotes and rupee coins are stocked on behalf of the Reserve Bank. As on December 31, 2013, there were 4209 currency chests. The currency chest branches are expected to distribute banknotes and rupee coins to other bank branches in their area of operation.
What is a small coin depot?
Some bank branches are authorised to establish Small Coin Depots to stock small coins i.e. coins below Rupee one. The Small Coin Depots also distribute small coins to other bank branches in their area of operation. As on December 31, 2013, there were 3966 small coin depots.
What happens when the banknotes and coins return from circulation?
Banknotes returned from circulation are deposited at the Issue offices of the Reserve Bank. The Reserve Bank subjects these to processing, authenticates banknotes for their genuineness, segregates them into notes fit for reissue and those which are unfit, for cancellation. The banknotes which are fit for reissue are sent back in circulation and those which are unfit for reissue are destroyed by way of shredding after completion of examination process. Coins do not come back from circulation, except those which are withdrawn.
From where can the general public obtain banknotes and coins?
Presently, banknotes and coins can be obtained in exchange at RBI offices and all branches of banks. This function is being delegated by RBI to commercial banks.
C) Soiled and Mutilated Banknotes
What are soiled, mutilated and imperfect banknotes?
(i) "soiled note:" means a note which, has become dirty due to usage and also includes a two piece note pasted together wherein both the pieces presented belong to the same note, and form the entire note.
(ii) Mutilated banknote is a banknote, of which a portion is missing or which is composed of more than two pieces.
(iii) Imperfect banknote means any banknote, which is wholly or partially, obliterated, shrunk, washed, altered or indecipherable but does not include a mutilated banknote.
Can soiled and mutilated banknotes be exchanged for value?
Yes. Such banknotes can be exchanged for value.
Where are soiled/mutilated banknotes accepted for exchange?
All banks are authorized to accept soiled banknotes for full value. They are expected to extend the facility of exchange of soiled notes even to non-customers. All branches of commercial banks are authorised to adjudicate mutilated banknotes and pay value for these, in terms of the Reserve Bank of India (Note Refund) Rules, 2009
How much value would one get in exchange of soiled banknotes?
Soiled banknotes are exchanged for full value.
How much value would one get in exchange of mutilated banknotes?
A mutilated banknote can be exchanged for full value if,
(i) For denominations of ` 1, ` 2, ` 5, ` 10 and ` 20, the area of the single largest undivided piece of the note presented is more than 50 percent of the area of respective denomination, rounded off to the next complete square centimeter.
(ii) For denominations of ` 50, ` 100, ` 500 and ` 1000, the area of the single largest undivided piece of the note presented is more than 65 percent of the area of respective denomination, rounded off to the next complete square centimeter.
Banknotes in denominations of ` 1, ` 2, ` 5, ` 10 and ` 20, cannot be exchanged for half value.
A mutilated banknote in denominations of ` 50, ` 100, ` 500 or ` 1000, can be exchanged for half value if,
The undivided area of the single largest piece of the note presented is equal to or more than 40 percent and less than or equal to 65 percent of the area of respective denomination, rounded off to the next complete square centimeter.
How much value would one get in exchange of imperfect banknotes?
The value of an imperfect note may be paid for full value / half value under rules as specified for mutilated notes if,
(i) the matter, which is printed on the note has not become totally illegible, and
(ii) it can be established that it is a genuine note.
What types of banknotes are not eligible for payment under the Note Refund Rules?
The following banknotes are not payable under the Reserve Bank of India (Note Refund) Rules 2009.
A banknote for which:
  • the area of single largest undivided piece of note presented is less than or equal to 50% of area of the note for denominations of 1, ` 2, ` 5, ` 10 and ` 20.
  • the area of the single largest undivided piece of the note is less than 40 percent for denominations of ` 50, ` 100, ` 500 or` 1000.
A banknote which:
  • cannot be identified with certainty as a genuine note for which the Bank is liable under the Act,
  • has been made imperfect or mutilated, thereby causing the note to appear to be of a higher denomination, or has been deliberately cut, torn, defaced, altered or dealt with in any other manner, not necessarily by the claimants, enabling the use of the same for making of a false claim under these rules or otherwise to defraud the Bank or the public,
  • carries any extrinsic words or visible representations intended to convey or capable of conveying any message of a political or religious character or furthering the interest of any person or entity,
has been imported into India by the claimant from any place outside India in contravention of the provision of any law.
Is the serial number used when assessing the value of a damaged banknotes
The presence or absence of a serial number or other specific feature is not a determining factor when assessing damaged banknotes for value.
What if a banknote is found to be non-payable?
Non-payable banknotes are retained by the receiving banks and sent to the Reserve Bank where they are destroyed.
Can Indian banknotes be obtained with specific serial numbers?
Issuing banknotes with specific numbers may not be possible.
How many languages appear in the language panel of Indian banknotes?
There are fifteen languages appearing in the language panel of banknotes in addition to Hindi prominently displayed in the centre of the note and English on the reverse of the banknote.
D) Banknotes since Independence.
i. Ashoka Pillar Banknotes:
The first banknote issued by independent India was the one rupee note issued in 1949. While retaining the same designs the new banknotes were issued with the symbol of Lion Capital of Ashoka Pillar at Sarnath in the watermark window in place of the portrait of King George.
The name of the issuer, the denomination and the guarantee clause were printed in Hindi on the new banknotes from the year 1951. The banknotes in the denomination of `1000, `5000 and `10000 were issued in the year 1954. Banknotes in Ashoka Pillar watermark Series, in `10 denomination were issued between 1967 and 1992, ` 20 denomination in 1972 and 1975, ` 50 in 1975 and 1981, and `100 between 1967-1979. The banknotes issued during the above period, contained the symbols representing science and technology, progress, orientation to Indian Art forms. In the year 1980, the legend "Satyameva Jayate", i.e., truth alone shall prevail was incorporated under the national emblem for the first time. In October 1987, `500, banknote was introduced in October 1987 with the portrait of Mahatma Gandhi and the Ashoka Pillar watermark.
ii. Mahatma Gandhi (MG) Series 1996
The banknotes in MG Series – 1996 were issued in the denominations of ` 5, (introduced in November 2001) ` 10 (June 1996), `20 (August 2001), ` 50 (March 1997), `100 (June 1996), ` 500 (October 1997) and `1000 (November 2000). All the banknotes of this series bear the portrait of Mahatma Gandhi on the obverse (front) side, in place of symbol of Lion Capital of Ashoka Pillar, which has also been retained and shifted to the left side next to the watermark window. This means that these banknotes contain Mahatma Gandhi watermark as well as Mahatma Gandhi's portrait.
iii MG series – 2005 banknotes
MG series 2005 banknotes are issued in the denomination of `10, `20, `50, `100, `500 and `1000 and contain some additional / new security features as compared to the 1996 MG series. The `50 and `100 banknotes were issued in August 2005, followed by `500 and `1000 denominations in October 2005 and `10 and `20 in April 2006 and August 2006, respectively.
The security features in MG Series 2005 banknotes are as under:
  1. Security Thread: The silver coloured machine-readable security threadin ` 10, ` 20 and ` 50 denomination banknotes is windowed on front side and fully embedded on reverse side. The thread fluoresces in yellow on both sides under ultraviolet light. The thread appears as a continuous line from behind when held up against light. `100, `500 and `1000 denomination banknotes have machine-readable windowed security thread with colour shift from green to blue when viewed from different angles. It fluoresces in yellow on the reverse and the text will fluoresce on the obverse under ultraviolet light. Other than on `1000 banknotes, the security thread contains the words 'Bharat' in the Devanagari script and 'RBI' appearing alternately. The security thread of the ` 1000 banknote contains the inscription 'Bharat' in the Devanagari script, '1000' and 'RBI'.
  2. Intaglio Printing: The portrait of Mahatma Gandhi, Reserve Bank seal, Guarantee and promise clause, Ashoka Pillar emblem, RBI’s Governor's signature and the identification mark for the visually impaired persons are printed in improved intaglio.
  3. See through register: On the left side of the note next to the watermark window, half the numeral of each denomination (10, 20, 50, 100, 500 and 1000) is printed on the obverse (front) and half on the reverse. The accurate back to back registration makes the numeral appear as one when viewed against light.
  4. Water Mark and electrotype watermark: The banknotes contain the portrait of Mahatma Gandhi in the watermark window with a light and shade effect and multi-directional lines. An electrotype mark showing the denominational numeral 10, 20, 50, 100, 500 and 1000 respectively in each denomination banknote also appear in the watermark widow and these can be viewed better when the banknote is held against light.
  5. Optically Variable Ink (OVI): The numeral 500 & 1000 on the ` 500 and ` 1000 banknotes are printed in Optically Variable Ink viz., a colour-shifting ink. The colour of these numerals appears green when the banknotes are held flat but would change to blue when the banknotes are held at an angle.
  6. Fluorescence: The number panels of the banknotes are printed in fluorescent ink. The banknotes also have dual coloured optical fibres. Both can be seen when the banknotes are exposed to ultra-violet lamp.
  7. Latent Image: In the banknotes of ` 20 and above, the vertical band next to the (right side) Mahatma Gandhi’s portrait contains a latent image, showing the denominational value 20, 50, 100, 500 or 1000 as the case may be. The value can be seen only when the banknote is held horizontally and light allowed to fall on it at 45°; otherwise this feature appears only as a vertical band.
  8. Micro letterings: This feature appears between the vertical band and Mahatma Gandhi portrait. It contains the word ‘RBI’ in ` 10. Notes of ` 20 and above also contain the denominational value of the banknotes. This feature can be seen better under a magnifying glass.
How can one distinguish the MG series-2005 banknotes?
In addition to the security features listed above, the MG series -2005 banknotes have the year of printing on the reverse of the banknotes which is not present in the pre-2005 series.
What is the need for printing different series of banknotes?
Central banks the world over change the design of their banknotes and introduce new security features primarily to make counterfeiting difficult and to stay ahead of counterfeiters. India also follows the same policy.
E) Current Issues
Why are ` 1, ` 2, ` 5 banknotes not being printed?
Even though volume-wise, the share of such small denomination banknotes in the total banknotes in circulation was high, in value terms they constituted a very small percentage with average life of less than one year. The cost of printing and servicing these banknotes being not commensurate with their life, printing of these banknotes was discontinued and these denominations were coinised. However, ` 5 banknotes were re-introduced in 2001 to bridge the gap between demand and supply of coins in this denomination. The printing of ` 5 banknotes has been discontinued from the year 2005.
Has Reserve Bank of India considered producing a plastic banknote?
The Reserve Bank, in consultation with Government of India, has decided to introduce one billion pieces of ` 10 banknotes on plastic substrate on trial basis.
What is a "star series" banknote?
Fresh banknotes issued by Reserve Bank of India till August 2006 were serially numbered. Each of these banknote bears a distinctive serial number along with a prefix consisting of numerals and letter/s. The banknotes are issued in packets containing 100 pieces.
The Bank has also adopted the "STAR series" numbering system for replacement of defectively printed banknotes. The Star series banknotes are exactly similar to the existing Mahatma Gandhi Series banknotes, but have an additional character viz., a *(star) in the number panel in the space between the prefix and the number as indicated below:


I reached the venue around 8 am. They opened the main door exactly at 8.30 am. I was 18th in my panel thats why my interview started around 12.30 pm. My interview duration was 15 minutes.
There were 5 persons M1, M2, M3, M4, L5 (4 male, 1 female). I asked for permission and wished them good afternoon(first mam then sir). They welcomed me with smile. They asked me to put my file on the table.

M1 - So, Ankita what are ur qualifications?
Me - Replied that I have done Btech in CSE.
M1 - How can ur Btech will be helpful for bank?
Me - Replied.
M2 - What is Artificial Intelligence?
Me - explained a little only  :(
M3 - What is mobile banking?
Me - replied
M3 - Which technology is used in mobile technology is used in it? What are the risks involved?
Me - replied
M1 - What is CASA?
Me - replied
M1 - If a bank has high CASA percentage tehn it is good for bank or bad and why?
Me - First I misunderstood the question and replied something else then M4 asked me to listen once again the question and repeated the question once again.
Then I replied and M4 was really happy with my answer. 
M4 - Have u read newspaper?
Me - yes sir
M4 - Who have received Ashoka Chakra and why this award is given?
Me - I forgot the names but I told them how they were killed and what is this award for. M4 was very supportive.
L5 - Who have received Bharata Ratna?
Me - replied
L5 - tell me something about Madan Mohan Malviya
Me  - replied
L5 - Who is ur role model and why?
Me - replied
M3 - What is GPRS?
Me - I forgot its full for but replied what is it.
M1 - What is intangible asset?
Me - Gave definition but I was not able to give example.
M2 - What other news you have read?
Me - Told about the nuclear deal.
M2 - He told me the other fact except the insurance in nuclear deal for which it was not done in 2006.
Me - Told about US demand. He then asked me another reason. I said sorry sir I dont know. Then M2 told M1 that only first reason is in news thats why she know only that. M1 asked me to read the other reason at home with smile.
L5 - Best moments in ur life?
Me - Replied
M2 - Do you have a certificate for Best Employee Award?(I told them that I was awarded as the Best Girl Of my school, also Best Employee Award)
Me - Told that they gave me incetive and he was satisfied.

Then they offered me a candy and wished me Best of Luck for my future. :))

Shares, Bonds, Debentures, capital market, money market -- defnititons


The capital of a company is divided into shares. Each share forms a unit of ownership and is offered for sale so as to raise capital for the company.

Definition: The capital of a company is divided into shares. Each share forms a unit of ownership of a company and is offered for sale so as to raise capital for the company.

Description: Shares can be broadly divided into two categories - equity and preference shares. Equity shares give their holders the power to share the earnings/profits in the company as well as a vote in the AGMs of the company. Such a shareholder has to share the profits and also bear the losses incurred by the company.

On the other hand, preference shares earn their holders only dividends, which are fixed, giving no voting rights. Equity shareholders are regarded as the real owners of the company. When the shares are offered for sale directly by the company for the first time, they are offered in the primary market, whereas the trading of shares takes place in the secondary market.


debt investment in which an investor loans money to an entity (corporate or governmental) that borrows the funds for a defined period of time at a fixed interest rate. Bonds are used by companies, municipalities, states and U.S. and foreign governments to finance a variety of projects and activities.
Bonds are commonly referred to as fixed-income securities and are one of the three main asset classes, along with stocks and cash equivalents.
The indebted entity (issuer) issues a bond that states the interest rate (coupon) that will be paid and when the loaned funds (bond principal) are to be returned (maturity date). Interest on bonds is usually paid every six months (semi-annually). The main categories of bonds are corporate bondsmunicipal bonds, and U.S. Treasury bonds, notes and bills, which are collectively referred to as simply "Treasuries."
Two features of a bond - credit quality and duration - are the principal determinants of a bond's interest rate. Bond maturities range from a 90-day Treasury bill to a 30-year government bond. Corporate and municipals are typically in the three to 10-year range.
5 Basic Things To Know About Bonds
By Eric FontinelleAAA | 
Want to improve your portfolio's risk/return profile? Adding bonds creates a more balanced portfolio, strengthening diversification and calming volatility. You can get your start in bond investing by learning a few basic bond market terms.
On the surface, the bond market may seem unfamiliar, even to experienced stock investors. Many investors make only passing ventures into bonds because they are confused by the apparent complexity of the market. Bonds are actually very simple debt instruments, if you understand the terminology. Let's take a look at that terminology now.
TutorialBond Basics

1. Basic Bond Characteristics
A bond is simply a type of loan taken out by companies. Investors lend a company money when they buy its bonds. In exchange, the company pays an interest "coupon" at predetermined intervals (usually annually or semiannually) and returns the principal on the maturity date, ending the loan.

Unlike stocks, bonds can vary significantly based on the terms of the bond'sindenture, a legal document outlining the characteristics of the bond. Because each bond issue is different, it is important to understand the precise terms before investing. In particular, there are six important features to look for when considering a bond.
The maturity date of a bond is the date when the principal, or par, amount of the bond will be paid to investors, and the company's bond obligation will end.
A bond can be secured or unsecured. Unsecured bonds are called debentures; their interest payments and return of principal are guaranteed only by the credit of the issuing company. If the company fails, you may get little of your investment back. On the other hand, a secured bond is a bond in which specific assets are pledged to bondholders if the company cannot repay the obligation.
Liquidation Preference
When a firm goes bankrupt, it pays money back to investors in a particular order as it liquidates. After a firm has sold off all of its assets, it begins to pay out to investors. Senior debt is paid first, then junior (subordinated) debt, and stockholders get whatever is left over. (To learn more, read An Overview of Corporate Bankruptcy.)

The coupon amount is the amount of interest paid to bondholders, normally on an annual or semiannual basis.
Tax Status
While the majority of corporate bonds are taxable investments, there are some government and municipal bonds that are tax exempt, meaning that income and capital gains realized on the bonds are not subject to the usual state and federal taxation. (To learn more, read The Basics of Municipal Bonds.)
Because investors do not have to pay taxes on returns, tax-exempt bonds will have lower interest than equivalent taxable bonds. An investor must calculate the tax-equivalent yield to compare the return with that of taxable instruments.
Some bonds can be paid off by an issuer before maturity. If a bond has a call provision, it may be paid off at earlier dates, at the option of the company, usually at a slight premium to par. (To learn more, read Callable Bonds: Leading A Double Life.)
2. Risks of Bonds
Credit/Default Risk
Credit or default risk is the risk that interest and principal payments due on the obligation will not be made as required. (To learn more, read Corporate Bonds: An Introduction To Credit Risk.)
Prepayment Risk
Prepayment risk is the risk that a given bond issue will be paid off earlier than expected, normally through a call provision. This can be bad news for investors, because the company only has an incentive to repay the obligation early when interest rates have declined substantially. Instead of continuing to hold a high interest investment, investors are left to reinvest funds in a lower interest rate environment.
Interest Rate Risk
Interest rate risk is the risk that interest rates will change significantly from what the investor expected. If interest rates significantly decline, the investor faces the possibility of prepayment. If interest rates increase, the investor will be stuck with an instrument yielding below market rates. The greater the time to maturity, the greater the interest rate risk an investor bears, because it is harder to predict market developments farther out into the future. (To learn more, readManaging Interest Rate Risk.)
3. Bond Ratings

The most commonly cited bond rating agencies are Standard & Poor'sMoody'sand Fitch. These agencies rate a company's ability to repay its obligations. Ratings range from 'AAA' to 'Aaa' for "high grade" issues very likely to be repaid to 'D' for issues that are in currently in default. Bonds rated 'BBB' to 'Baa' or above are called "investment grade"; this means that they are unlikely to default and tend to remain stable investments. Bonds rated 'BB' to 'Ba' or below are called "junk bonds", which means that default is more likely, and they are thus more speculative and subject to price volatility.
Occasionally, firms will not have their bonds rated, in which case it is solely up to the investor to judge a firm's repayment ability. Because the ratings systems differ for each agency and change from time to time, it is prudent to research the rating definition for the bond issue you are considering. (To learn more, read The Debt Ratings Debate.)
4. Bond Yields
Bond yields are all measures of return. Yield to maturity is the measurement most often used, but it is important to understand several other yield measurements that are used in certain situations.
Yield to Maturity (YTM)
As said above, yield to maturity (YTM) is the most commonly cited yield measurement. It measures what the return on a bond is if it is held to maturity and all coupons are reinvested at the YTM rate. Because it is unlikely that coupons will be reinvested at the same rate, an investor's actual return will differ slightly. Calculating YTM by hand is a lengthy procedure, so it is best to use Excel's RATE or YIELDMAT (Excel 2007 only) functions for this computation. A simple function is also available on a financial calculator. (Keep reading on this subject in Microsoft Excel Features For The Financially Literate.)
Current Yield
Current yield can be used to compare the interest income provided by a bond to the dividend income provided by a stock. This is calculated by dividing the bond's annual coupon amount by the bond's current price. Keep in mind that this yield incorporates only the income portion of return, ignoring possible capital gains or losses. As such, this yield is most useful for investors concerned with current income only.
Nominal Yield
The nominal yield on a bond is simply the percentage of interest to be paid on the bond periodically. It is calculated by dividing the annual coupon payment by the par value of the bond. It is important to note that the nominal yield does not estimate return accurately unless the current bond price is the same as its par value. Therefore, nominal yield is used only for calculating other measures of return.
Yield to Call (YTC)
A callable bond always bears some probability of being called before the maturity date. Investors will realize a slightly higher yield if the called bonds are paid off at a premium. An investor in such a bond may wish to know what yield will be realized if the bond is called at a particular call date, to determine whether the prepayment risk is worthwhile. It is easiest to calculate this yield using Excel's YIELD or IRR functions, or with a financial calculator. (For more insight, see Callable Bonds: Leading A Double Life.)
Realized Yield
The realized yield of a bond should be calculated if an investor plans to hold a bond only for a certain period of time, rather than to maturity. In this case, the investor will sell the bond, and this projected future bond price must be estimated for the calculation. Because future prices are hard to predict, this yield measurement is only an estimation of return. This yield calculation is best performed using Excel's YIELD or IRR functions, or by using a financial calculator.
Although the bond market appears complex, it is really driven by the same risk/return tradeoffs as the stock market. An investor need only master these few basic terms and measurements to unmask the familiar market dynamics and become a competent bond investor. Once you've gotten a hang of the lingo, the rest is easy.
Any debt obligation backed strictly by the borrower's integrity, e.g. an unsecured bond. A debenture is documented in an indenture.
Copyright © 2012, Campbell R. Harvey. All Rights Reserved.
debt securityissued by a government or large company, that is not secured by an asset or lien, but rather by the all issuer's assets nototherwise secured. That is, a debenture carries no collateral and is considered unsecured; in case of bankruptcy, the debenture holder isconsidered a general creditor. A debenture can be traded, and the term is often interchangeable with a bond. Debentures issued bygovernments are considered risk-free. See also: Treasury security.
Farlex Financial Dictionary. © 2012 Farlex, Inc. All Rights Reserved
A corporate bond that is not secured by specific property. In the event that the issuer is liquidated, the holder of a debenture becomes ageneral creditor and therefore is less likely than the secured creditors to recover in full. Because of their high risk factor, debentures payhigher rates of interest than secured debt of the same issuer. See also subordinated debenture.
Wall Street Words: An A to Z Guide to Investment Terms for Today's Investor by David L. Scott. Copyright © 2003 by Houghton Mifflin Company. Published by Houghton Mifflin Company. All rights reserved.
A debenture is an unsecured bond. Most bonds issued by corporations are debentures, which are backed by their reputation rather than byany collateral, such as the company's buildings or its inventory.
Although debentures sound riskier than secured bonds, they aren't when they're issued by well-established companies with good creditratings.
Dictionary of Financial Terms. Copyright © 2008 Lightbulb Press, Inc. All Rights Reserved.
An unsecured note or bond.
The Complete Real Estate Encyclopedia by Denise L. Evans, JD & O. William Evans, JD. Copyright © 2007 by The McGraw-Hill Companies, Inc.
What Does Debenture Mean?
A debt instrument that is not secured by a physical asset or collateral. Debentures are backed only by the general creditworthiness andreputation of the issuer. Both corporations and governments frequently issue this type of bond to secure capital. Like other types of bonds,debentures are documented in an indenture.
Investopedia explains Debenture
Debentures have no collateral. Bond buyers generally purchase debentures when they believe that the bond issuer is unlikely to default onthe repayment. An example of a government debenture would be any government-issued Treasury bond (T-bond) or Treasury bill (T-bill);these generally are considered risk-free because governments, at worst, can print more money or raise taxes to pay these types of debts.
Related Terms: 
Markets for buying and selling equity and debt instruments. Capital markets channel savings and investment between suppliers of capital such as retail investors and institutional investors, and users of capital like businesses, government and individuals. Capital markets are vital to the functioning of an economy, since capital is a critical component for generating economic output. Capital markets include primary markets, where new stock and bond issues are sold to investors, and secondary markets, which trade existing securities. 
Capital markets typically involve issuing instruments such as stocks and bonds for the medium-term and long-term. In this respect, capital markets are distinct from money markets, which refer to markets for financial instruments with maturities not exceeding one year.
Capital markets have numerous participants including individual investors, institutional investors such as pension funds and mutual funds, municipalities and governments, companies and organizations and banks and financial institutions. Suppliers of capital generally want the maximum possible return at the lowest possible risk, while users of capital want to raise capital at the lowest possible cost.
The size of a nation’s capital markets is directly proportional to the size of its economy. The United States, the world’s largest economy, has the biggest and deepest capital markets. Capital markets are increasingly interconnected in a globalized economy, which means that ripples in one corner can cause major waves elsewhere. The drawback of this interconnection is best illustrated by the global credit crisis of 2007-09, which was triggered by the collapse in U.S. mortgage-backed securities. The effects of this meltdown were globally transmitted by capital markets since banks and institutions in Europe and Asia held trillions of dollars of these securities.
ne of the sections of a financial market where securities and financial instruments with short-term maturities are traded is called the money market.

Definition: One of the sections of a financial market where securities and financial instruments with short-term maturities are traded is called the money market. Financial assets like treasury bills, certificates of deposits, commercial paper and bankers' acceptance are some of the short-term debt securities traded in the money market.

Description: The instruments traded in the money market have a short-term maturity period ranging from 30 days to a year. Hence this market is the best source to invest in liquid assets.

The only demerit accompanying the money market is the disorganization. Unlike organized markets, e.g. capital markets, the money market is unregulated and informal. In addition, this market gives lesser returns to the investor. However, the money market is regarded as safe.



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