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Debt Instruments

  • Posted By
    10Pointer
  • Categories
    Economy
  • Published
    8th Aug, 2020
  • A debt instrument is a tool an entity can utilize to raise capital.
  • It is a documented, binding obligation that provides funds to an entity in return for a promise from the entity to repay a lender or investor in accordance with terms of a contract.
  • Debt instrument contracts include detailed provisions on the deal such as collateral involved, the rate of interest, the schedule for interest payments, and the timeframe to maturity if applicable.
  • As per RBI’s extant Basel III guidelines, if a bank holds a debt instrument directly, it would have to allocate lower capital as compared to holding the same debt instrument through a mutual fund (MF)/exchange traded fund (ETF).
  • RBI recently permitted banks to invest in debt instruments through mutual funds (MFs) or exchange traded funds without allocating additional charges.
  • This is to expand the bond market.
  • This will result in substantial capital savings for banks and is expected to give a boost to the corporate bond market.

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