TRADING MECHANISM OF GOVERNMENT SECURITIES
Trading in Government securities takes place by following methods:
(i) Public Debt Office of the Reserve Bank of India issues notification: the Reserve bank of India has various office the to ensure the functioning of RBI. When the Reserve Bank of India wants to sell government securities, it orders its Public Debt Office to issue a notification specifying the date of opening of the issues for subscription. The issue is kept open for a definite number of days. The investor can purchase securities anytime till the expiry of the last date of the scheme. RBI also authorises other banks to sell securities on its behalf.
(ii) Through Securities General Ledger (SGL) Account: SGL account is the account which authorised banks need to maintain with the Reserve Bank of India for various transaction done by them. The dealing bank has to fill up the prescribed SGL form while doing any transaction of sale or purchase with the RBI. In SGL form particulars about date and value of the transaction are recorded which has taken place.
(iii) by Issuing Bank Receipt: This method is useful when the transaction of sale has a condition that the securities will be bought back at a future date at a predetermined price. In this method, the banks issuing government securities does not actually issue securities but issues a receipt to the purchaser that it holds securities of that much value with it on behalf of the investor/purchaser. by this way, physical transfer of securities is avoided. It also does not require filling up of SGL forms and submitting them to the RBI.
MERITS AND DEMERITS OF GOVERNMENT SECURITIES :
- Zero risk: Government securities are free from any risk as there are no chances of default and government assures payment of principal along with interest.
- interest is paid regularly: in government bonds interest is paid at regular intervals generally half yearly or quarterly.
- Liquidity: government securities can be bought and sold regularly and can be instantly converted into cash.
- Tax exemptions: there is tax relief on the interest earned on government securities.
- Assured interest for long period of time.
- If interest rate rises in the future investor may lose: if market rates of interest rise in the future, the investor will have to suffer losses as his money is locked in a fixed rate government security.
- The rate of return is lower: we already discussed that rate of return in government securities are generally lower than that of corporate securities.