BOND BUYBACK

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Context

• The RBI repurchased only Rs 2,069 crore of government bonds from a notified amount of Rs 60,000 crore as banks were unwilling to sell the securities at a loss.

What is a Bond?

• A bond is a financial instrument where an investor lends money to an entity (such as a corporation or government) for a specific period, with a fixed or variable interest rate.

Usage:

• Funding Projects: Companies, municipalities, states, and governments issue bonds to raise capital for various projects and activities.
• Investor Role: Bondholders are creditors to the issuer, earning interest over time and receiving their principal back at maturity.

Bond Buyback

• A bond buyback is when central and state governments purchase their own bonds back from investors before they reach maturity.

Purpose:

• Liability Management: Helps manage the risks associated with refinancing and liquidity in government securities markets.
• Early Debt Settlement: Allows issuers to pay off their debt early through cash payments.

Objectives:

• Cost Reduction: By repurchasing bonds with high-interest rates, governments can decrease their overall debt costs.
• Improving Market Liquidity: Buying back less traded securities can enhance market liquidity.
• Liquidity Injection: Introduces additional liquidity into the financial system.

PRACTICE QUESTION Q. Which of the following is a primary objective of bond buyback by central and state governments? A) Increasing the interest rates on existing bonds. B) Enhancing market speculation on government securities. C) Managing liability and liquidity risks in government securities markets. D) Facilitating the issuance of new bonds to investors. Correct Answer: C Explanation: A primary objective of bond buyback by central and state governments is to manage liability and liquidity risks in government securities markets. This strategy involves repurchasing their own bonds from investors before the bonds reach maturity, thereby addressing refinancing risks and injecting liquidity into the financial system.