A debt instrument is an obligation undertaken by the issuer of the debt instrument to repay principal with interest at a predetermined future date. The concept of a debt instrument is based on a premise that when a person borrows, he enters into an agreement with the lender that he will repay the principal and interest at a future date. This arrangement can be converted in the form of an instrument wherein the loans can be made tradable by converting it into instruments of smaller units with a pro rate allocation of principal and interest. So the basic features of any debt instrument are as follows:

• Face value of the instrument, is the value that is written on the debt certificate.
• Issue price, is the value at which the security is issued. It might be at par or at a premium or discount.
• Coupon, the interest rates payable on the instrument.
• Terms and conditions like repayment period, pattern and mode of repayment

The wholesale debt market is not centrally located anywhere but it is an over the counter market where buyers and sellers conduct business linked by telephones, computers, faxes, telexes and other means of communications. Its participants include Banks, Financial Institutions, the RBI, Primary Dealers, Insurance companies, Provident Funds, MFs, Corporates and FIIs. In this market, the players give two way quotes, i.e., both buy and sell quotes to each other.

Types of trades

There are usually two types of trades in the wholesale debt market - an outright sale or purchase and a Repo trade. An outright sale or purchase means that one participant buy or sells the securities to the other. In a Repo transaction, one participant sells securities to other with an agreement to purchase them back at a later date. The trade is called a Repo transaction from the point of view of the seller and it is called a Reverse Repo transaction from point of view of the buyer.

The Banks and FIs enters into an outright sales or purchase to manage their reserve requirements and liquidity. Insurance companies enter into outright sale or purchase to enter into or to exit an investment. Banks and FIs enter into reverse repo transactions to manage their reserve requirements or to manage liquidity.