Importance of Debt Market in Capital Market
Debt comprises of money borrowed by an outside party for a certain period of time to meet any requirement. Obviously the person lending the money expects a return on the same, and this is paid out in the form of interest.
There are a few parameters which you would need to look at while judging what option to pick from the basket of products available. These would be yield, taxation, duration, lock in period to name a few.
The underlying securities in which the fund would be invested are issued either by the government or by companies. The risk of default is obviously lower in government securities, though their returns would also be a bit lower.
- Efficient mobilization and allocation of resources in the economy
- Financing the development activities of the Government Transmitting signals for implementation of the monetary policy
- Facilitating liquidity management in tune with overall short term and long term objectives.
Since the Government securities are issued to meet the short term and long term financial needs of the government, they are not only used as instruments for raising debt, but have emerged as key instruments for internal debt management, monetary management and short term liquidity management. The returns earned on the government securities are normally taken as the benchmark rates of returns and are referred to as the risk free return in financial theory. The Risk Free rate obtained from the G-sec rates are often used to price the other non-govt. securities in the financial markets.