G-SECS

(a) G-secs carry the lowest risk of all investments. After all, the chances of the government not paying back your money are almost zero. It is thus the safest investment one can make.

(b) G-Secs are different in the manner in which they are structured, and how their effective interest rates are calculated.

2. Calculation of G-secs Yields

• G-sec yields change over time, often several times during a single day. This happens because of the manner in which G-secs are structured.
• Every G-sec has a face value, coupon payment, and price. The price of the bond may or may not be equal to the face value of the bond.

Example: Suppose the government floats a 10-year G-sec with a face value of Rs 100 and a coupon payment of Rs 5. If one were to buy this single G-sec from the government, it would mean that one would give Rs 100 to the government today and the government would promise to –

(1) Return the sum of Rs 100 at the end of tenure (10 years)

(2) Pay Rs 5 each year until the end of this tenure.

•  If G-sec yields (say for a 10-year bond) are going up, it would imply that lenders are demanding even more from private sector firms or individuals; that’s because anyone else is riskier when compared to the government.
• If G-sec yields start increasing, lending to the government is becoming riskier.
• If a government’s finances are sorted, more and more people want to lend money to such a G-sec. This, in turn, leads to bond prices going up and yields coming down.