• Debt Securities: Debt securities are financial assets allowing the owners to a stream

of interest payments. Borrowers must repay the principal borrowed and are classified
into bonds and debentures.
Bonds:
 Bonds are a kind of corporate debt issued by companies.
o These are fixed-income instruments primarily issued by the state and center
governments, municipalities, and organizations for financing infrastructural
development and other projects.
o It is a category of debt that borrowers avail from individual investors for a
specified tenure.
o It is referred to as a loaning capital market instrument, and the bond issuer is
the borrower.
o Typically, bonds carry a fixed lock-in period, and on the maturity date, bond
issuers must repay the principal amount to the bondholders.
Characteristics of Bonds:
• Face Value
• Interest or Coupon Rate
• Tenure of Bonds
• Credit Quality
• Tradable Bonds in secondary market
Categories of Bonds
• Fixed interest bonds:Fixed-interest bonds are debt instruments that accrue consistent
coupon rates throughout their tenure. These predetermined interest rates benefit
investors with predictable returns on investment irrespective of alterations in market
conditions.
• Floating interest bonds: These bonds incur coupon rates, which are subject to market
fluctuations and elastic within their tenures.
• Inflation linked bonds: Inflations-linked bonds are special debt instruments designed
to curb the impact of economic inflation on the face value and interest return.
• Perpetual Bonds: Perpetual bonds are fixed-security investment options whereby
issuers do not have to return the principal amount to the purchaser.
• Types of bonds:
• Corporate Bonds: Companies or business companies issue corporate bonds to raise
capital for their business operations. They are riskier than treasury bonds because the
 creditworthiness of the issuing company backs them. Corporate bonds can have
varying maturities and interest rates, depending on the issuer's creditworthiness and
market conditions.
• High-yield Bonds
Companies issue high-yield bonds with lower credit ratings and are riskier than
investment-grade bonds. They offer a higher yield to compensate for the higher risk.
High-yield bonds are also known as junk bonds.
• Mortgage-Backed Securities
Real estate companies create mortgage-backed securities by pooling many mortgages
and issuing bonds against the underlying mortgage pool.
• Treasury Bonds:The central government issues treasury bonds. Hence, it is the safest
type of bond because there is no credit risk. These bonds have a maturity period of ten
to thirty years and pay a fixed interest rate, which is a factor in the prevailing market
conditions.
• Municipal Bonds
Local and state governments use these to gather funds for development projects such
as schools, highways, and hospitals. Municipal Bonds are exempted from tax. They
are available in both short-term and long-term maturities.
• Floating Rate Bonds
Floating rate bonds have an interest rate adjusted periodically based on a reference
rate, such as the Reserve Bank of India's repo rate. It protects investors from interest
rate risk because the rates move with prevailing market rates. The interest rate of these
bonds is subject to market fluctuations and macroeconomic parameters.
• Zero-Coupon Bonds
Zero-coupon bonds are issued at a discount to their face value and do not pay periodic
interest. Instead, they offer a fixed return at maturity, i.e., the difference between the
issue price and face value. They are ideal for investors who want to lock in a fixed
return for a specific period.
• Callable Bonds
The issuer can redeem callable bonds before maturity, usually at a premium price.
They offer the issuer flexibility in managing their debt obligations but carry
reinvestment risk for the investor.
• Convertible Bonds
The issuing company can convert these bonds into shares of the issuing company's
stock at a pre-determined conversion ratio. They offer the investor the potential for
capital appreciation and fixed income.
• Inflation-Protected Bonds
The government issues inflation-protected bonds intending to protect investors from
 inflation. They pay a fixed interest rate, which is adjusted periodically to reflect
changes in the Consumer Price Index.
Repo rate:
• It is repurchasing agreement or repurchase options. Banks obtain loans from the RBI
by selling qualifying securities.
• It refers to the rate at which commercial banks borrow money by selling their
securities to the central bank of our country i.e. RBI to maintain liquidity.
• Current repo rate in India, fixed by RBI is 6.50% (As per Feb. 2024).
Debentures:
 Debentures are unsecured investment options and not financed by any
collateral. The lending is based on mutual trust. Investors act as potential
creditors of the issuing company or institution.
 Debentures are written instruments of debt that companies issue under their
common seal. They are similar to a loan certificate.
 Debentures are actually the most common way for large companies to borrow
money.
 Debentures are the instruments used to raise long term loan. Debentures
holders are classified as creditors of the company.
Key Features:
 Debt instruments
 Fixed maturity period/date
 Fixed Interest payments
 No ownership rights
 No voting rights
Types of Debentures:
• Secured Debentures and Unsecured Debentures:
• These are debentures that are secured against an assets of the company. The
charge may be fixed, i.e. against a specific assets or floating, i.e. against all
assets of the firm.
• These are not secured by any charge against the assets of the company, neither
fixed nor floating. Normally such kinds of debentures are not issued by
companies in India.
• Redeemable Debentures and Irredeemable Debentures:
 • These debentures are payable at the expiry of their term. Which means at the
end of a specified period they are payable, either in the lump sum or in
installments over a time period. Such debentures can be redeemable at par,
premium or at a discount.
• Such debentures are perpetual in nature. There is no fixed date at which they
become payable. They are redeemable when the company goes into the
liquidation process.
• Fully Convertible Debentures: These shares can be converted to equity shares at the
option of the debenture holder. So if he wishes then after a specified time interval all
his shares will be converted to equity shares and he will become a shareholder.
• Partly Convertible Debentures: Here the holders of such debentures are given the
option to partially convert their debentures to shares. If he opts for the conversion, he
will be both a creditor and a shareholder of the company.
• Non-Convertible Debentures: As the name suggests such debentures do not have an
option to be converted to shares or any kind of equity. These debentures will remain
so till their maturity, no conversion will take place. These are the most common type
of debentures.
What are the risk factors while investing in debentures?
 Credit risk
 Interest rate risk
 Liquidity risk
 Market risk
Bond Valuation/Bond Pricing:
• Face Value: it is the nominal value of the bond. It is the denomination on the face of
the bond.
• Coupon rate: It is the interest rate assured by the bond issuer.
• Coupon Payment: these are the payments made by applying coupon rate on the face
value.
• Issue price: it is the price at which it has been issued in the primary market.
• Maturity date: it is the date at which bond is matured for conversion of bond into
equity etc.
• Intrinsic Value: it is the present value of future cash inflows that ate receivable from
the bond.
 • YTM: It is yield to maturity which means the total return to expect from the
investment in bonds/debt mutual funds if the same is held till maturity. It is expressed
as a percentage of the current market price.
• Bond pricing means present value of future cash inflows from bond.
• Intrinsic value of bond: PV of future inflows discount at yield of similar bond.
• Decision Criteria:
• If intrinsic value of bond is more than current market price than it is under
priced, hence bond should be purchased.
• If intrinsic value of bond is less than current market price than it is over
priced, hence should not be purchased.
• If intrinsic value of bond is equal to current market price, than it is correctly
priced, hence bond should be purchased.
American Depositary Receipts (ADRs):
• These are financial instruments that allow investors in the United States to invest in
foreign companies.
• An ADR is a negotiable certificate that represents ownership of a certain number of
shares in a foreign company.
• The ADRs are issued by a US depository bank, which holds the foreign company's
shares in custody.
• The ADRs trade on US stock exchanges like regular stocks and their value is based
on the value of the foreign company's shares in their home market. ADRs allow US
investors to invest in foreign companies without having to deal with the complexities
of foreign markets and currencies.
• American Depositary Receipts (ADRs) are a type of security that allows investors to
buy and sell shares of foreign companies on US stock exchanges.
• ADRs provide US investors with a convenient way to invest in foreign companies,
without having to deal with the complexities of trading on foreign exchanges or
converting currencies.
• From an Indian tax perspective, investing in American Depositary Receipts (ADRs)
is considered a foreign investment and is subject to foreign exchange regulations and
taxation.
• When an Indian resident invests in ADRs, they are required to fulfill with the Reserve
Bank of India's (RBI) regulations governing outward remittances, which means that
they must have a valid bank account and tax registration number.
 • Dividends received on ADRs are subject to tax in India at the applicable rates, and
any capital gains resulting from the sale of ADRs are also subject to tax in India,
depending on the holding period and other factors.
• Indian investors holding ADRs are required to report their foreign investments and
any income earned on those investments on their tax returns, and failure to do so can
result in penalties and fines.
Features:
• Trading on U.S. Exchanges
• Dividends and Benefits
• Level of ADRs
• Voting Rights
• ADR Fees and Costs
• ADR Cancellation
Different Types of ADR programs
Sponsored ADRs
In sponsored ADRs, a bank acts on behalf of the foreign company to issue the ADR
and handles transactions with investors, while the foreign company retains control over the
ADR and usually pays the costs of issuance.
Unsponsored ADRs
Unsponsored ADRs are issued by a bank without the direct involvement or permission
of the foreign company. Multiple unsponsored ADRs for the same foreign company may be
issued by different U.S. banks, and these offerings may have varying dividends.
ADR Levels
• Level 1 ADRs:
● These are the simplest and least expensive types of ADR programs.
● They allow foreign companies to list their shares on US stock exchanges
without having to comply with the Securities and Exchange Commission (SEC)
registration requirements.
● Level 1 ADRs are traded on US stock exchanges like regular stocks and are
denominated in US dollars.
● However, they are not backed by the underlying foreign shares, and investors do
not have voting rights or the ability to convert the ADRs back into foreign shares.
• Level 2 ADRs:
● These ADRs require the foreign company to comply with the SEC’s registration
requirements, making them more expensive and time- consuming to establish than
Level 1 ADRs.
● Level 2 ADRs are traded on US exchanges and are backed by the underlying
foreign shares.
● They offer investors voting rights and the ability to convert the ADRs back into
foreign shares.
● Level 2 ADRs can be used to raise capital through secondary offerings,
allowing the foreign company to issue new ADRs to US investors.
Level 3 ADRs:
● These are the most expensive and complex types of ADR programs.
● Level 3 ADRs allow foreign companies to issue new shares and raise capital
directly from US investors, without having to comply with the SEC registration
requirements.
● Level 3 ADRs can only be issued by companies that have been publicly traded
for at least one year and meet certain financial and governance requirements.
● Level 3 ADRs provide the most flexibility and liquidity to investors, as they can
be traded freely on US exchanges and can be converted back into foreign shares at any time.
American Depositary Receipt Pricing and Costs
• The pricing and costs of American Depositary Receipts (ADRs) can vary depending
on a variety of factors. Here are some key considerations:
 Conversion ratio
 Depositary bank fees
 Foreign exchange rates
 Trading fees
Advantages of American Depositary Receipts (ADRs):
 Access to foreign markets
 Convenience
 Diversification
 Liquidity
 Transparency
 Potential for higher returns
Disadvantages of American Depositary Receipts (ADRs):
 Currency risk
 Market risk
 Fees
  Limited availability
 Lack of voting rights
 Regulatory differences
ADR risk factors and expenses
 Currency Risk
 Political Risk
 Liquidity Risk
 Taxes
 Conversion Fees
 Regulatory Risk

Conclusion:
American Depositary Receipts (ADRs) provide exposure to foreign markets, diversify
investment portfolios, and offer investors access to a wider range of investment
opportunities.
Global Depositary Receipts (GRDs):
• GDRs are financial instruments used to raise capital from international investors.
• Global Depository Receipt (GDR) are certificates issued by a depository bank, which
purchases foreign company shares and deposits them in the account.
• GDRs are listed on non-US stock exchanges like the Luxembourg or London Stock
Exchange.
• GDRs are typically denominated in US dollars and traded on international stock
exchanges.
• It is a negotiable financial instrument issued by a foreign bank representing a
foreign firm's listed securities on a stock exchange other than the United States
(US).
• It is a foreign currency-denominated negotiable instrument.
• Indian companies can only get their shares listed on foreign exchanges through
Global Depository Receipts (GDR).
• Indian companies trade shares on international exchanges except for the US through a
GDR. A foreign depository issues the depository receipts for Indian companies.
The depository bank is the intermediary that acts as the custodian of the shares issued
by the Indian company.
Features/Characteristics
 • GDRs are typically denominated in a currency such as US dollars or euros.
• GDRs are issued by banks or financial institutions in foreign countries on behalf of
foreign companies that wish to raise capital from international investors.
• GDRs represent ownership in a foreign company.
• GDRs are traded on international stock exchanges, allowing investors to invest in
foreign companies without having to deal with the complexities of investing in a
foreign stock exchange.
• GDR holders are entitled to receive dividends and other distributions from the
underlying shares.
• GDRs can be converted into the underlying shares at the option of the holder.
• GDRs are subject to regulatory requirements in the country of issuance and the
country where they are traded.

• Global depository receipts example

Example 1: 'Wipro' wants to list its shares in Singapore. 'Wipro' has to deposit shares with a
Singapore Bank. Singapore Bank will issue a receipt against these shares. Every receipt given
by the Singapore Bank represents a particular number of shares of 'Wipro’.
Example 2: A firm registered in the Indian Stock Exchange issues shares in a foreign land. It
is termed as Global Depository Receipt. Example- Tata Steel issuing shares in the UK.
Advantages of GDRs:
• They help multinational businesses to connect with many investors.
• They give investors a chance to diversify their holdings globally.
• They can boost the liquidity of shares.
• Shares listed on international markets can raise the credibility of a foreign business.
• GDRs are easy and more cost effective than buying stocks on international exchanges.
Disadvantages of GDRs:
 High administrative costs.
 Poor liquidity
 Dividend payments are made after deducting international taxes and currency
exchange fees.
 Political and currency risks.
 Investors are exposed to economic risks
In which country can GDR be issued?
• GDRs can be issued in any country except the USA.
• Global Depository Receipts and India
• The depository bank then gives GDRs in foreign money to international traders in
trade for these shares.
• Businesses that intend to issue GDRs must first receive approval from the Foreign
Investment Promotion Board and Ministry of Finance (FIPB).
• Indian Companies using ADRs/GRDs
Indian Depository Receipts (IDRs)
• IDRs are issued and traded in a similar manner as ADRs and GDRs.
• In a IDR, a foreign company lists its shares in Indian domestic market in INR terms
while the underlying shares are listed and traded in any foreign exchange.
• Indian Depository Receipt (IDR) is an economic instrument that allows a foreign
company to raise funds in India.
• In an Indian Depository Receipt, a foreign company published depository receipts to
the Indian investor.
• The first foreign Corporation to publish an IDR was the Standard Chartered Bank.
• These depository receipts are denominated in rupees.
• This is issued by a foreign firm that cannot go through the Indian listing process. It is
believed to be beneficial for a foreign firm that wishes to share the risks and rewards
of the offerings with the Indian shareholders.
Exchange Traded Funds (ETFs):
• ETFs are the most popular type of exchange traded product.
• An exchange-traded fund, or ETF, allows investors to buy many stocks or bonds at
once.
• An exchange-traded fund (ETF) is a pooled investment security that can be bought
and sold like an individual stock.
• An exchange-traded fund (ETF) is a collection of investments such as equities or
bonds.
• For example, if you buy an S&P 500 ETF, your money will be invested in the 500
companies in that index.
• ETFs will let you invest in a large number of securities at once, and they often have
cheaper fees than other types of funds. ETFs are also more easily traded.
 • Most ETFs track an index, such as stock index.
• ETFs may be attractive as investments because of their low costs, tax efficiency, and
stock like features.
Types of ETFs
• Index ETFs
• Fixed Income ETFs
• Commodity ETFs
• Sectors ETFs
• Foreign market ETFs
• Country ETFs
Popular ETFs
 SPDR S&P 500
 iShares Russell 2000
 Invesco QQQ
 Reliance Nifty BeES
 ICICI Prudential Nifty
 Kotak Banking ETF
How to Invest in ETF?
 Step 1: Open a brokerage account.
 Step 2: Choose the ETF.
 Step 3: Transfer the money.
Advantages to investing in ETFs:
 Simple to invest
 Transparency
 Trade like stocks
 Low cost of investment
 Diversification benefit
 Support small ticket investments
 ETFs are taxes like stocks
 exposure to a variety of stocks, bonds, and other assets,
  ETFs are more liquid (easy to buy and sell) than mutual funds.
Limitations:
 Actively managed ETFs have higher fees
 Single-industry-focused ETFs limit diversification
 Lack of liquidity hinders transactions
Participatory Notes (P-Notes)
• These are offshore derivatives instruments with Indian shares as underlying assets.
• These instruments are used for making investments in the stock markets.
• These are not used within the country. That is why it is called offshore derivative
investments (ODIs).
• They are used outside India for making investments in shares listed in the Indian stock
market.
• These are issued by brokers and Foreign Institutional Investor (FIIs) registered with
SEBI.
Benefits:
• Anonymity- it enables large hedge funds to carry out their operations without
disclosing their identity.
• Ease of trading
• Tax savings