LOLC Securities Debt Trading

Corporations often issue corporate debt to meet their capital requirements. These debt securities, such as bonds, typically bear coupon interest payable annually, biannually, or quarterly on predetermined dates. Additionally, the principal amount is repayable on a specified date upon the redemption of the debt securities. 

Initial public offering (IPO) of the debentures. The prospectus issued by the debt-issuing company provides essential information like coupon rate (interest rate), maturity, interest-paying cycle, credit ratings, business nature, and financials.

Alternatively, investors can acquire listed debentures through the secondary market. Debentures are traded similarly to equities, allowing individuals to buy and sell them through the market. The debenture's price and value are influenced by market interest rates and risk profile. Due to the relative stability of interest rates and risk profiles over a short period, debentures experience lower price fluctuations compared to equities.

The Colombo Stock Exchange (CSE) facilitates secondary trading of Corporate Debt Securities, offering participants the convenience of trading both equity and debt securities on a single platform.

In corporate debt investing, the terms par value, nominal value, and face value all refer to the same concept, which represents the amount the bondholder will receive when the bond matures. Typically, for fixed-income instruments, this value aligns with the price paid at the time of issuance. However, certain instruments, such as zero-coupon bonds or Treasury Bills, may be issued at a discount.

However, the selling price in the secondary market may not always align with the par value. Market expectations regarding interest rates can influence whether the secondary market price is lower than par value (discount) or higher than par value (premium).

At the initial stage, the bond is issued at a price known as the issue price. Typically, this price aligns with the par value. However, in certain cases, the issue price may deviate from the par value. For instance, in zero-coupon bonds, the issue price is typically lower than the par value. 

The coupon rate represents the yield or interest earned from fixed-income instruments.

For Example, Consider a debenture with a par value of Rs100 and a coupon rate of 14%, payable annually. On the interest payment date, an investor will receive Rs100 x 14% = Rs14.

In cases where the coupon payment frequency exceeds once a year, you will receive a proportional amount of the coupon on each interest payment date.

For instance, in the same bond mentioned above, if the coupon payment is semi-annual, the investor will receive Rs 100 x 14% x ½ = Rs7 interest payment, twice a year.

In the debt securities market, investors have the option to execute trades on two distinct settlement boards; namely TOM and SPOT. The TOM Board provides early settlement on T+1 while the SPOT Board offers normal settlement on T+2.

Cash settlement can be conducted on T+1 or T+2, while debt securities settlement follows a Delivery versus Payment (DVP) basis. Additionally, participants have the facility to engage in negotiated trades through the Crossing Board.