Dated Government Securities (G-Secs) are long-term government bonds or securities with a fixed or a floating interest rate (coupon). The central and state government issues these securities to mobilize funds and finance the fiscal deficit. The remuneration for buying these dated securities is the interest (also known as a coupon) either fixed/floating and based on the security’s face value.
Features of Dated G-Secs
- Dated G-Secs are available to commercial banks (in SLR form) and other financial institutions
- RBI’s public debt office performs issuing of securities, paying interest, and redemption of securities
Types of Dated Government Securities
- Fixed-Rate Bonds
In these bonds or securities, the coupon rate is fixed till the maturity date.
- Floating Rate Bonds
Securities with variable coupon rates which resets at predetermined intervals are the Floating Rate Bonds. It allows issuers and investors to share the risks aligned with the volatility of the interest rate.
- Capital Indexed Bonds
Bonds in which the interest rate is a fixed percentage over the wholesale price index are called Capital Indexed Bonds. The principal redemption of these bonds is linked to accepted index inflation. It aims to protect the investor’s principal amount from inflation.
- Inflation-Indexed Bonds (IIBs)
These bonds protect both the invested amount and interest paid against inflation.
These adjust inflation by multiplying the principal with the index ratio (IR). By paying the fixed coupon rate on the principal after adjusting inflation, the coupon matches against inflation. The inflation index used may be the Wholesale Price Index (WPI) or the Consumer Price Index (CPI).
- Sovereign Gold Bonds (SGBs)
SGBs are the securities issued by the government with gold as their underlying asset and denominated in grams of gold. Read here to know more about the SGBs.
- Special Securities
These are securities issued by the Government of India to entities like Fertilizer Companies, Oli Marketing Companies, the Food Corporation of India, etc. It acts as compensation in place of cash subsidies. Generally, these securities are long-dated and have high coupon rates. These companies may divest these securities to banks and insurance companies in the secondary market to raise funds.
- STRIPS (Separate Trading of Registered Interest and Principal of Securities)
Instruments through which each semi-annual coupon payment and the final principal payment are converted into a separate tradeable zero-coupon bond are known as STRIPS.
Let’s understand this with an example – Rs. 100 of the 12% GS XXXX is stripped. Now each cash flow of interest payment (Rs. 6 for every half year) will become a coupon’s STRIP and the principal payment of Rs. 100 will become a principal STRIP.
The government issues dated G-Secs to raise funds. These are assumed to be risk-free and hence, can help in portfolio diversification. So, pick the desired securities from the wide range available based on the risk factor of your portfolio.