# Basics of Government bonds

The yields on Govt bonds have risen substantially this year and there’s a lot of interest from investors. But we also get a lot of questions from investors about how Govt bonds work.

Let’s understand the basics in this topic.

The Govt needs money to finance various activities such as health, infrastructure, defence & other obligations.

So, the Reserve Bank of India (RBI) issues bonds on behalf of the central and state governments to raise money to fund these activities.

### How are Govt securities sold?

The RBI conducts an auction where banks, primary dealers, mutual funds, and insurance companies bid on the bonds. A cut-off yield or price is then discovered at the auction based on which the bonds and T-bills are allotted.

• Bonds with less than 1 year of maturity are called Treasury Bills (T-bills)

• Bonds with more than 1 year of maturity are called G-Secs.

• Bonds issued by state governments are called State Development Loans (SDLs).

### How does a T-bill work?

T-bills are issued at discount and redeemed at par or face value. For example, a 91-day T-bill worth Rs 100 will be issued at Rs 98. After 91 days, the bill will mature, and you will get Rs 100.

Unlike bonds, T-bills don’t have any interest payments. The difference between the issue value and the maturity value is your return.

Here are the t-bills available for investing this week. One common question we get is, "will I get 6.5% for 91 days?

All returns are calculated on an annualized basis. As explained in this Varsity chapter.

Yield essentially measures the return on your investment on an annualized basis. After all, all investments should be measured by its returns on an annualized basis. So if you have made 3 bucks over 91 days on investment of Rs.97, then at this rate, how much would you have made every year?

The formula is –

Yield = [Discount Value]/[Bond Price] * [365/number of days to maturity]

= [3/97]*[365/91]

= 0.0309*4.010989

= 12.4052%

Once the T-bill matures, the money will be credited to your primary bank account.

How do G-secs and SDLs work?

Both G-Secs and SDLs are long-term bonds, and they are structured the same. Let’s first understand how to read a G-Sec/SDL symbol.

Let’s take the example of a G-Sec—7.10% GS 2029:

7.10% is the annual interest
GS is short for government security
2029 is the maturity year

It’s the same for SDLs:

8.64% MP 2033
8.64% is the annual interest
2033 is the maturity year

Here are the G-Secs available for investing this week.

If a bond doesn’t have an interest in the symbol, that means it’s a newly issued bond. The yield will be discovered in the auction and the interest will be the same as the yield for newly issued bonds.

### How is the interest paid?

The interest is paid out semi-annually. It will be credited to your primary bank account.

### At what price or yield will the bonds be allotted?

The yield or the price will be discovered through competitive bidding conducted by RBI where institutions participate. When you buy a G-Sec on Coin, you are buying it through the non-competitive bidding mechanism.

The bonds will be allotted based on the price/yield discovered in the RBI auction. Since the price is unknown, the exchanges block an amount in your trading account.

After the auction, the difference between the auction price and the amount blocked will be refunded.

### How do I buy the bonds without knowing the price?

The prices discovered in the auction will broadly be around the current. On Coin, we show an indicative yield to give you an idea based on the current G-Sec, T-Bill, and SDL prices from RBI and CCIL.

https://ccilindia.com/OMHome.aspx

### What’s the difference between yield and interest?

The interest of a bond is also called as “coupon”. When a bond is issued for the first time, the yield and the interest (coupon) will be the same.

Since all Govt bonds and SDLs are listed, their price changes. Yield or yield to maturity (YTM) is calculated to account for the price changes. You can use the “YIELD” formula in Excel or any other YTM calculator.

Here are the steps: Reserve Bank of India - Frequently Asked Questions

### How do I invest in Govt bonds and SDLs?

You can invest on Coin here.

### Can G-Secs, SDLs, and T-bills be pledged?

Only G-Secs can be pledged, and they are considered as cash component.

T-bills and SDLs cannot be pledged. See the list of G-Secs accepted for pledging here: What is pledging, and how does it work?

### Is there anything I can read to understand more?

You can check out this Varsity chapter;

### Taxation

T-bills

Since all T-bills mature within 1 year, STCG at your slab rate will apply.

Taxation on G-Secs and State Development Loans (SDLs)

1. Interest payments (coupons) from G-Secs and SDLs are taxed at your slab rate.

2. If the bond is sold within 12 months, Short Term Capital Gains (STCG) at your slab rate will be applicable.

3. If the bond is sold after 12 months, Long Term Capital Gains (LTCG) of 10% without indexation will apply. There’s no provision for indexation on Government Bonds.

### Where do I check the upcoming issues?

You can check the upcoming issues below;

11 Likes

Is there any way to know if there are new bonds being issued like the list on upcoming G-Sec.

Since the interest rates are rising will the bonds find a higher or lower price at the auction. Is there any relation to the rising interest rates or it all depends on the auction entirely.

So it will be just GS2027 for example?

If you mean a new G-Sec/SDL, as in if there is any way to know if a G-Sec/SDL is being issued for the very first time, RBI notfies the bonds for the upcoming auction sometime at the end of the week if I am not wrong.

Absolutely. The cut-off price discovered in the yield will react to interest rates changes.

I think on Coin it will show as NewGS2032 for example, if I’m remembering correctly.

1 Like

Can you also throw some light on difference between indicative yield vs allotted yield/weighted avg yield (WAY) as per auction?

link for auction result : Reserve Bank of India - Press Releases

Thank was looking to get into bonds myself

Since the price of the bonds being auctioned aren’t known in advance, we show an indicative yield, which is the last traded price of bonds. Allotted yield is the yield at which the bond will be allotted to you based on the auction. Both will be quite similar.

3 Likes

So during auction, lets say for example, the price was 98, so 98X(number of units allotted) will be deducted from my trading account.
Then while getting the money back after the bond’s time closes, will it be 98X(number of units allotted) or 100X(number of units allotted). as 100 is the base price.

Yep.

Hi @Bhuvan, I have invested in some t-bills for the first time and they will mature in Nov. Do I need to do anything upon them completing 1 year or it automatically gets sold and the amount is credited to my account?

Hi @Bhuvan Why some of the govt bonds shows decreased value after purchasing it ; say if i purchased a bond worth Rs 100 which is supposed to mature after 1 year ; in my account it shows as Rs 90

Nope. You don’t have to do anything from your end. Upon maturity, the T-Bills will be debited from your account and proceeds will be credited to the primary bank account within 15 days.

1 Like

That is the Last Traded Price (LTP). That is the price one will receive if one wishes to immediately sell the bond in the secondary market (eg. BSE/NSE).

Irrespective of any variation in a bond’s LTP in the secondary markets,
if a bond is held till maturity, then the bond is automatically debited/extinguished
and one receives the entire face-value of the bond upon maturity.

Can you confirm if it takes 15 days for money to get credited to bank account for treasury bills ?

Since if a person has to wait for 15 days on a 91 day Tbill then there’s a loss of 1 percent on annualised ROR.

1 Like

The credit usually happens in a few days. We mention 15 days just to account for any issues and holidays.

1 Like