Affiliated to

University of Mumbai

Revised Syllabus for

Programme:
B.Com
(Accounting and Finance)
Semester VI
Under Choice Based Credit System
Academic Year 2021-2022

PROJECT ON
A STUDY ON INVESTOR'S AWARENESS ABOUT VARIOUS
DEBT INSTRUMENTS

1
 PROJECT REPORT
ON

A STUDY ON INVESTOR'S AWARENESS ABOUT VARIOUS DEBT

INSTRUMENTS

SUBMITTED BY

PRIYAM DHAKAN

TYBCom.
ACCOUNTING AND FINANCE

(SEMESTER VI)

UNDER THE GUIDANCE OF

MR. VIKAS MISHRA

ACADEMIC YEAR
2021 - 2022

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 DECLARATION

I, Priyam Dhakan the student of T.Y.BCom (Accounting and

Finance)Semester VI (2021 - 2022) hereby declare that I have
completed the Project on A STUDY ON INVESTOR’S
AWARENESS ABOUT VARIOUS DEBT INSTRUMENTS.
I also declare that this report which is the partial fulfilment of the
requirement for the degree of T.Y.BCom (ACCOUNTING AND
FINANCE) of KES SHROFF COLLEGE OF ARTS AND
COMMERCE, is the result of my own efforts with the help of
experts.

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 CERTIFICATE

This is to certify that Mr. Priyam Dhakan of Third Year

B.Com (Accounting and Finance) Semester VI (2021 - 2022)
has successfully completed the Project on A STUDY ON
INVESTOR’S AWARENESS ABOUT VARIOUS DEBT
INSTRUMENTS as per the guidelines of KES’ Shroff
College of Arts and Commerce, Kandivali(W), Mumbai-
400067.

Coordinator Guide Principal

Dr. Vaibhav R. Ashar Mr. Vikas Mishra Dr. L. Bhushan

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 ACKNOWLEDGEMENT

To list who all have helped me is difficult because they are so

numerous and the depth is so enormous.
I would like to acknowledge the following as being idealistic channels
and fresh dimensions in the completion of this internship.
I take this opportunity to thank the KES SHROFF COLLEGE OF
ARTS AND COMMERCE (AUTONOMOUS) for giving me
chance to present this report.
I am thankful to KES SHROFF COLLEGE OF ARTS AND
COMMERCE (AUTONOMOUS) and Mr. Vikas Mishra for
providing me opportunity to work on the project with their company
and gaining work experience.
I would like to thank my Principal, Dr. Lily Bhushan for providing
the support required for the internship.
I take this opportunity to thank our Guide Mr. Vikas Mishra, for her
moral support and guidance.
Lastly, I would like to thank each and every person who directly or
indirectly helped me specially my parents and peers who supported
me throughout my project.

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 TABLE OF CONTENT

SR.NO CONTENTS PAGE

NO.
1. CHAPTER 1: INTRODUCTION 1 – 27
2. CHAPTER 2: REVIEW OF LITERATURE 28-32
3. CHAPTER 3: RESEARCH METHODOLOGY 33-39
● Objective
● Hypothesis
● Scope of the Study
● Limitations of the study
● Significance of the study
● Sample size, Data Collection, Research Design, Tools
and Techniques to be used, Data Analysis, Data
Interpretation.
4. CHAPTER 4: DATA ANALYSIS, INTERPRETATION 40-54
AND PRESENTATION
5. CHAPTER 5: FINDINGS, CONCLUSION, 55-62
SUGGESTIONS & REFERENCES
6. ANNEXURE 63-67

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CHAPTER 1: INTRODUCTION

Definition of ‘Debt Instruments’

You've probably come across debt at some point in your life. Debt provides liquidity to the
financial markets by giving borrowers access to the capital they need. Individuals, businesses,
and governments use debt instruments for a variety of reasons.

These instruments come in a number of different forms—some more obvious than others.
Keep reading to find out more about debt instruments and the most common types issued by
lenders.

Financial instruments are monetary contracts between parties. They can be created, traded,
modified and settled. They can be cash (currency), evidence of an ownership interest in an
entity or a contractual right to receive or deliver in the form of currency (forex); debt
(bonds, loans); equity (shares); or derivatives (options, futures, forwards).

International Accounting Standards IAS 32 and 39 define a financial instrument as "any

contract that gives rise to a financial asset of one entity and a financial liability or equity
instrument of another entity".

Financial instruments may be categorized by "asset class" depending on whether they are
equity-based (reflecting ownership of the issuing entity) or debt-based (reflecting a loan the
investor has made to the issuing entity). If the instrument is debt it can be further categorized
into short-term (less than one year) or long-term. Foreign exchange instruments and
transactions are neither debt- nor equity-based and belong in their own category.

A debt instrument is an asset that an entity, such as an individual, business, or the

government, uses to raise capital or to generate investment income. For instance, a company
may need to finance the purchase of a new piece of equipment, while government agencies
may require financing for projects such as infrastructure improvements or to fund their day-
to-day operations.

This type of instrument essentially acts as an IOU between the issuer and the purchaser. The
purchaser becomes the lender by providing a lump-sum payment to the issuer or borrower. In
exchange, the issuing company guarantees the purchaser full repayment of the investment at a
later date. The terms of these types of contracts often include the payment of interest over
time, resulting in cumulative profit for the lender.

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Below, is a list some of the most common examples of debt instruments you can find in the
financial industry from fixed-income assets to other types of facilities.

Fixed-Income Assets:-

These assets are investment securities offered to investors by corporations and governments.
Investors purchase the security for the full amount and receive interest or dividend payments
over regular intervals until the instrument matures.

At this point, the issuer repays the investor the full principal amount invested. Bonds and
debentures are among the most popular types of fixed-income debt instruments.

Bonds:-

Bonds are issued by governments or businesses. Investors pay the issuer the market value of
the bond in exchange for guaranteed loan repayment and the promise of
scheduled coupon payments. This is the annual rate of interest that a bond pays. It is
generally expressed as a percentage of the bond's face value.

This type of investment is backed by the assets of the issuing entity. If a company issues
bonds to raise debt capital and declares bankruptcy, bondholders are entitled to repayment of
their investments from the company's assets.

Debentures:-

Debentures are often used to raise short-term capital to fund specific projects. This type of
debt instrument is backed only by the credit and general trustworthiness of the issuer. Both
bonds and debentures are popular among investors because of their guaranteed fixed rates of
income. But there is a distinction between the two.

The primary difference between a debenture and other bonds is that the former has no asset
backing it or collateral. The bondholders' investment is expected to be repaid with the
revenue those projects generate.

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Other Types of Debt Instruments:-

Banks and other financial institutions also issue debt instruments. Most consumers, though,
know these as credit facilities. Consumers apply for credit for a number of reasons, whether
that's to purchase a home or car, to pay off their debts, or so they can make large purchases
and pay for them at a later date.

Banks use the money they receive from savers to lend out to others. Banks receive interest
on top of the principal they lend out, a small portion of which is deposited into their clients'
savings accounts. These can be collateralized or not based on the type of facility and the
borrower's credit history.

Mortgages:-

These debt instruments are used to finance the purchase real estate—a piece land, a home, or
a commercial property. Mortgages are amortized over a certain period of time, allowing the
borrower to make payments until the loan is paid off.

Lenders also receive interest over the life of the loan. The risk of default is reduced for the
lender because mortgages are collateralized by the real estate itself. This means if the debtor
stops paying, the lender can begin foreclosure proceedings to repossess the property and sell
it to pay off the loan. The lender is free to pursue the borrower for any remaining balance.

Loans:-

Loans are possibly the most easily understood debt instrument. Most people use loans at
some point. They can be acquired from financial institutions or individuals and can be used
for a variety of purposes, such as the purchase of a vehicle, to finance a business venture, or
to consolidate their other debts into one.

Under the terms of a simple loan, the purchaser is allowed to borrow a given sum from the
lender in exchange for repayment over a specified period of time. The purchaser agrees to
repay the total amount of the loan, plus a pre-determined amount of interest for the privilege.

Lines of Credit (LOC):-

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Lines of credit give borrowers access to a specific credit limit issued based on their
relationship with a bank and their credit score. This limit is revolving, which means the
debtor can draw on it regularly as long as they maintain their payments. Just like other credit
facilities, borrowers pay principal and interest. LOCs may be secured or unsecured based on
the needs and financial situation of the borrower.

Here's an example of how they work. Let's say Mr. Chan has a $20,000 LOC. He uses it to
pay down some debt, buys some furniture, and pays a contractor for some work around his
home. This totals $11,000. Mr. Chan still has $9,000 available. But if he makes a $5,000
payment to pay down his balance, he has access to $14,000 that he can use freely.

Credit Cards:-

A credit card provides a borrower with a set credit limit they can access continuously over
time. Like a line of credit, consumers are able to use their credit cards as long as they make
their payments.

Borrowers have two payment options: They can pay the balance in full each month and
avoid paying any interest charges or they can make the minimum monthly payment. This
option means the cardholder carries the remaining balance over to the next month. As such,
they are responsible for any interest added as per their cardholder agreement.

Common Debt Instruments:-

• Bonds
• Leases
• Promissory Notes
• Certificates
• Mortgages
• Treasury Bills

What are Bonds?

Bonds are the most common debt instrument. Bonds are created through a contract known as
a bond indenture. They are fixed-income securities that are contractually obligated to

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provide a series of interest payments of a fixed amount and also repayment of the principal
amount at maturity.

Bonds appreciate in value when market interest rates decrease. It follows the logic that the
present value of a bond’s future cash flows is less when a greater discount rate is applied.

Who Issues Bonds?

Corporations

Corporate bonds can be issued by financial companies or non-financial companies to

investors.

Government Entities

The primary governmental entities that regularly issue bonds include:

1. Sovereign National Governments

Debt instruments issued by a national government – examples include US Treasury Bonds,

Canadian Treasury Bonds, etc.

2. Non-Sovereign Governments

Government entities that are not national governments can access debt financing through
bonds – examples include state government bonds, municipal bonds, etc.

3. Quasi-Government Entities

Debt instruments issued by organizations that do not represent a country’s governmental

organization or bonds

4. Supranational Entities

Global organizations like the World Bank and International Monetary Fund (IMF)

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Advantages of Debt Instruments

If a company properly invests borrowed funds through debt instruments, it can increase
profitability. The process of financing through creditors to maximize shareholder wealth is
referred to as leverage.

If the investment returns are greater than the interest payments, the debtor will be able to
generate profits on the debt financing. In the field of private equity, companies make
investments through leveraged buyouts that are built around the investment to provide
greater returns than the interest payments.

Disadvantages of Debt Instruments

Debt financing can be a great source of risk for businesses, primarily through increased
liquidity and solvency risk. Liquidity is hindered because interest payments are classified as
a current liability and represent a cash outflow within one year.

Liquidity and solvency are important factors to consider, especially when assessing a
company based on the going-concern principle. Debt financing is popular among
individuals, companies, and governments.

Leases:-

A lease is a contractual arrangement calling for the user (referred to as the lessee) to pay the
owner (the lessor) for use of an asset. Property, buildings and vehicles are common assets
that are leased. Industrial or business equipment is also leased. Broadly put, a lease

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agreement is a contract between two parties: the lessor and the lessee. The lessor is the legal
owner of the asset, while the lessee obtains the right to use the asset in return for regular
rental payments. The lessee also agrees to abide by various conditions regarding their use of
the property or equipment. For example, a person leasing a car may agree to the condition
that the car will only be used for personal use.

The term rental agreement can refer to two kinds of leases:

A lease in which the asset is tangible property. Here, the user rents the asset (e.g. land or
goods) let out or rented out by the owner (the verb to lease is less precise because it can refer
to either of these actions). Examples of a lease for intangible property include use of a
computer program (similar to a license, but with different provisions), or use of a radio
frequency (such as a contract with a cell-phone provider).

A periodic lease agreement (most often a month-to-month lease) internationally and in some
regions of the United States.

What is a Promissory Note?

A promissory note refers to a financial instrument that includes a written promise from the
issuer to pay a second party – the payee – a specific sum of money, either on a specific
future date or whenever the payee demands payment (depending on the terms of the note).
The promissory note should include all terms that relate to the indebtedness, including when
and where the note was issued, the principal amount the issuer owes, what the interest rate
on the note is, and when the note reaches maturity (becomes due).

Promissory notes are debt instruments. They can be issued by financial institutions.
However, they can also be issued by small companies or individuals. They enable a person
or a business to obtain financing without going through a bank. The issuer of the note simply
must be willing to carry it until maturity and be willing and able to provide the funds
specified in the agreed-upon terms laid out in the note.

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Promissory Notes as Corporate Credit

In the business world, promissory notes are often used to provide short-term credit. If, for
example, a small company has sold goods or services, but has yet to receive full
compensation for them, cash flow dwindles and it might have difficulty managing its debts.

The company can ask its creditors to accept a promissory note, with the condition that they
will pay the total amount they owe on the note in the future once their accounts
receivables are collected. They can also ask a financial institution to accept a promissory
note, essentially taking out a temporary loan and paying it back once they have the funds to
do so.

Promissory notes are also a potentially good source of short-term credit for companies that
have already exhausted more traditional options like bond issues and corporate loans. This
usually means, however, that the issuing company is more likely to default. It also means
that the interest rate on the note will offer a higher return.

Corporate promissory notes usually have to be registered both in the state they’re issued in,
as well as with the Securities and Exchange Commission(SEC). Regulators then examine the
note and the issuing company to determine if the company can realistically fulfil the
promises outlined in the note.

What Is a Mortgage?

The term “mortgage” refers to a loan used to purchase or maintain a home, land, or other
types of real estate. The borrower agrees to pay the lender over time, typically in a series of
regular payments that are divided into principal and interest. The property serves as
collateral to secure the loan.

A borrower must apply for a mortgage through their preferred lender and ensure that they
meet several requirements, including minimum credit scores and down payments. Mortgage
applications go through a rigorous underwriting process before they reach the closing phase.
Mortgage types vary based on the needs of the borrower, such as conventional and fixed-rate
loans.

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Individuals and businesses use mortgages to buy real estate without paying the entire
purchase price up front. The borrower repays the loan plus interest over a specified number of
years until they own the property free and clear. Mortgages are also known as liens against
property or claims on property. If the borrower stops paying the mortgage, the lender can
foreclose on the property.

For example, a residential homebuyer pledges their house to their lender, which then has a
claim on the property. This ensures the lender’s interest in the property should the buyer
default on their financial obligation. In the case of a foreclosure, the lender may evict the
residents, sell the property, and use the money from the sale to pay off the mortgage debt.

The Mortgage Process

Would-be borrowers begin the process by applying to one or more mortgage lenders. The
lender will ask for evidence that the borrower is capable of repaying the loan. This may
include bank and investment statements, recent tax returns, and proof of current employment.
The lender will generally run a credit check as well.

If the application is approved, the lender will offer the borrower a loan of up to a certain
amount and at a particular interest rate. Homebuyers can apply for a mortgage after they have
chosen a property to buy or while they are still shopping for one, a process known as pre-
approval. Being pre-approved for a mortgage can give buyers an edge in a tight housing
market, because sellers will know that they have the money to back up their offer.

Once a buyer and seller agree on the terms of their deal, they or their representatives will
meet at what’s called a closing. This is when the borrower makes their down payment to the
lender. The seller will transfer ownership of the property to the buyer and receive the agreed-
upon sum of money, and the buyer will sign any remaining mortgage documents.

Types of Mortgages

Mortgages come in a variety of forms. The most common types are 30-year and 15-year
fixed-rate mortgages. Some mortgage terms are as short as five years, while others can run 40
years or longer. Stretching payments over more years may reduce the monthly payment, but it
also increases the total amount of interest that the borrower pays over the life of the loan.

Within the different term lengths are numerous types of home loans, including Federal
Housing Administration (FHA) loans, U.S. Department of Agriculture (USDA) loans, and

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U.S. Department of Veterans Affairs (VA) loans available for specific populations that may
not have the income, credit scores, or down payments required to qualify for conventional
mortgages.

The following are just a few examples of some of the most popular types of mortgage loans
available to borrowers.

Fixed-Rate Mortgages

With a fixed-rate mortgage, the interest rate stays the same for the entire term of the loan, as
do the borrower's monthly payments toward the mortgage. A fixed-rate mortgage is also
called a traditional mortgage.

Adjustable-Rate Mortgage (ARM)

With an adjustable-rate mortgage(ARM), the interest rate is fixed for an initial term, after
which it can change periodically based on prevailing interest rates. The initial interest rate is
often a below-market rate, which can make the mortgage more affordable in the short term
but possibly less affordable long-term if the rate rises substantially.

ARMs typically have limits, or caps, on how much the interest rate can rise each time it
adjusts and in total over the life of the loan.

Interest-Only Loans

Other, less common types of mortgages, such as interest-only mortgages and payment-option
ARMs, can involve complex repayment schedules and are best used by sophisticated
borrowers.

Many homeowners got into financial trouble with these types of mortgages during
the housing bubble of the early 2000s.

Reverse Mortgages

As their name suggests, reverse mortgages are a very different financial product. They are
designed for homeowners age 62 or older who want to convert part of the equity in their
homes into cash.

These homeowners can borrow against the value of their home and receive the money as a
lump sum, fixed monthly payment, or line of credit. The entire loan balance becomes due
when the borrower dies, moves away permanently, or sells the home.

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Average Mortgage Rates for 2022

How much you’ll have to pay for a mortgage depends on the type of mortgage (such as fixed
or adjustable), its term (such as 20 or 30 years), any discount points paid, and interest rates at
the time. Interest rates can vary from week to week and from lender to lender, so it pays to
shop around.

Mortgage rates were at near-record lows in 2020, with rates bottoming out at a 2.66%
average on a 30-year fixed-rate mortgage for the week of Dec. 24, 2020. Rates continued to
stay stably low throughout 2021 and have started to climb steadily since Dec. 3, 2021.
According to the Federal Home Loan Mortgage Corp., average interest rates looked like this
as of February 2022:

• 30-year fixed-rate mortgage: 3.92% (0.8 point)

• 15-year fixed-rate mortgage: 3.15% (0.8 point)

• 5/1 adjustable-rate mortgage: 2.98% (0.8 point).

What Is a Treasury Bill (T-Bill)?

A Treasury Bill (T-Bill) is a short-term U.S. government debt obligation backed by the
Treasury Department with a maturity of one year or less. Treasury bills are usually sold in
denominations of $1,000. However, some can reach a maximum denomination of $5 million
in non-competitive bids. These securities are widely regarded as low-risk and secure
investments.

The Treasury Department sells T-Bills during auctions using a competitive and non-
competitive bidding process. Non competitive bids—also known as non-competitive
tenders—have a price based on the average of all the competitive bids received. T-Bills tend
to have a high tangible net worth.

Understanding Treasury Bills (T-Bills)

The U.S. government issues T-bills to fund various public projects, such as the construction
of schools and highways. When an investor purchases a T-Bill, the U.S. government is
effectively writing an IOU to the investor. T-bills are considered a safe and conservative
investment since the U.S. government backs them.

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T-Bills are normally held until the maturity date. However, some holders may wish to cash
out before maturity and realize the short-term interest gains by reselling the investment in the
secondary market.

T-Bill Maturities

T-bills can have maturities of just a few days or up to a maximum of 52 weeks, but common
maturities are 4, 8, 13, 26, and 52 weeks. The longer the maturity date, the higher the interest
rate that the T-Bill will pay to the investor.

T-Bill Redemptions and Interest Earned

T-bills are issued at a discount from the par value (also known as the face value) of the bill,
meaning the purchase price is less than the face value of the bill. For example, a $1,000 bill
might cost the investor $950 to buy the product.

When the bill matures, the investor is paid the face value—par value—of the bill they bought.
If the face value amount is greater than the purchase price, the difference is the interest
earned for the investor. T-bills do not pay regular interest payments as with a coupon bond,
but a T-Bill does include interest, reflected in the amount it pays when it matures.

T-Bill Tax Considerations

The interest income from T-bills is exempt from state and local income taxes. However, the
interest income is subject to federal income tax. Investors can access the research division of
the Treasury Direct website for more tax information.

Purchasing T-Bills

Previously issued T-bills can be bought on the secondary market through a broker. New
issues of T-Bills can be purchased at auctions held by the government on the Treasury Direct
site. T-bills purchased at auctions are priced through a bidding process. Bids are referred to as
competitive or non-competitive bids. Further bidders can be indirect bidders who buy through
a pipeline such as a bank or a dealer. Bidders may also be direct bidders purchasing on their
own behalf. Bidders range from individual investors to hedge funds, banks, and primary
dealers.

A competitive bid sets a price at a discount from the T-bill's par value, letting you specify the
yield you wish to get from the T-Bill. Non competitive bids auctions allow investors to

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submit a bid to purchase a set dollar amount of bills. The yield investors receive is based
upon the average auction price from all bidders.

Competitive bids are made through a local bank or a licensed broker. Individual investors can
make non-competitive bids via the Treasury Direct website. Once completed, the purchase of
the T-Bill serves as a statement from the government that says you are owed the money you
invested, according to the terms of the bid.

T-Bill Investment Pros and Cons

Treasury Bills are one of the safest investments available to the investor. But this safety can
come at a cost. T-bills pay a fixed rate of interest, which can provide a stable income.
However, if interest rates are rising, existing T-bills fall out of favour since their rates are less
attractive compared to the overall market. As a result, T-bills have interest rate risk meaning
there is a risk that existing bondholders might lose out on higher rates in the future.

Although T-bills have zero default risk, their returns are typically lower than corporate bonds
and some certificates of deposit. Since Treasury bills don't pay periodic interest payments,
they're sold at a discounted price to the face value of the bond. The gain is realized when the
bond matures, which is the difference between the purchase price and the face value.3

However, if they're sold early, there could be a gain or loss depending on where bond prices
are trading at the time of the sale. In other words, if sold early, the sale price of the T-bill
could be lower than the original purchase price.

Pros:-

• Zero default risk since T-bills have a U.S. government guarantee.

• T-bills offer a low minimum investment requirement of $100.

• Interest income is exempt from state and local income taxes but subject to federal income

taxes.

• Investors can buy and sell T-bills with ease in the secondary bond market.

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Cons:-

• T-Bills offer low returns compared with other debt instruments as well as when compared

to certificates of deposits (CDs).

• The T-Bill pays no coupon—interest payments—leading up to its maturity.

• T-bills can inhibit cash flow for investors who require steady income.

• T-bills have interest rate risk, so, their rate could become less attractive in a rising-rate

environment.

What Influences T-Bill Prices?

T-Bill prices fluctuate similarly to other debt securities. Many factors can influence T-Bill
prices, including macroeconomic conditions, monetary policy, and the overall supply and
demand for Treasuries.

Maturity Dates

T-Bills with longer maturity dates tend to have higher returns than those with shorter
maturities. In other words, short-term T-bills are discounted less than longer-dated T-bills.
Longer-dated maturities pay higher returns than short-dated bills because there's more risk
priced into the instruments meaning there's a greater chance that interest rates could rise.
Rising market interest rates make the fixed-rate T-bills less attractive.

Market Risk

Investors' risk tolerance affects prices. T-Bill prices tend to drop when other investments such
as equities appear less risky, and the U.S. economy is in an expansion. Conversely, during
recessions, investors tend to invest in T-Bills as a safe place for their money spiking the
demand for these safe products. Since T-bills are backed by the full faith and credit of the

14
U.S. government, the Corporate Finance Institute views them as the closest thing to a risk-
free return in the market.

The Federal Reserve

The monetary policy set by the Federal Reserve through the federal funds rate has a strong
impact on T-Bill prices as well. The federal funds rate refers to the interest rate that banks
charge other banks for lending them money from their reserve balances on an overnight basis.
The Fed will increase or decrease the fed funds rate in an effort to contract or expand the
monetary policy and the availability of money in the economy. A lower rate allows banks to
have more money to lend while a higher fed funds rate decreases money in the system for
banks to lend.

As a result, the Fed's actions impact short-term rates including those for T-bill. A rising
federal funds rate tends to draw money away from Treasuries and into higher-yielding
investments. Since the T-bill rate is fixed, investors tend to sell T-bills when the Fed is hiking
rates because the T-bill rates are less attractive. Conversely, if the Fed is cutting interest rates,
money flows into existing T-bills driving up prices as investors buy up the higher-yielding T-
bills.

The Federal Reserve is also one of the largest purchasers of government debt securities.
When the Federal Reserve purchases U.S. government bonds, bond prices rise while the
money supply increases throughout the economy as sellers receive funds to spend or invest.
Funds deposited into banks are used by financial institutions to lend to companies and
individuals, boosting economic activity.

Inflation

Treasuries also have to compete with inflation, which measures the pace of rising prices in
the economy. Even if T-Bills are the most liquid and safest debt security in the market, fewer
investors tend to buy them in times when the inflation rate is higher than the T-bill return. For
example, if an investor bought a T-Bill with a 2% yield while inflation was at 3%, the
investor would have a net loss on the investment when measured in real terms. As a result, T-

15
bill prices tend to fall during inflationary periods as investors sell them and opt for higher-
yielding investments.

Example of a Treasury Bill Purchase

As an example, let's say an investor purchases a par value of $1,000 T-Bill with a competitive
bid of $950. When the T-Bill matures, the investor is paid $1,000, thereby earning $50 in
interest on the investment. The investor is guaranteed to at least recoup the purchase price,
but since the U.S. Treasury backs T-bills, the interest amount should be earned as well.

As stated earlier, the Treasury Department auctions new T-bills throughout the year. On
March 28, 2019, the Treasury issued a 52-week T-bill at a discounted price of $97.613778 to
a $100 face value. In other words, it would cost approximately $970 for a $1,000 T-bill.

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History And Brief Overview of Debt Instruments:-

The financial market is broadly divided into two categories, money market and capital
market. Further, the capital market, which forms the primary source of funds for major
players in the economy, is divided into two major categories – Equity Market and Debt
Market. From the discussion above we can summarise that the major source of finance in the
economy can be funds from financial institutions, short term funds in money market, raising
equity in the share market and raising debt in the debt market. In this article we will focus on
the capital market and within the capital market broadly on the debt market.

The capital market of an economy is considered to be well developed, only when a parallel
development is ensured both in the equity and the debt segment. A well developed debt
market can be the optimal alternative, not only to support the financing requirement for
infrastructural development, but also to relieve banks from all the problems of long-term
financing, and spreading out the huge financing risk to a wider investor base to strengthen
India’s bank-based financial system, to allow corporate borrowers to tap the low cost market,
to enable investors including FIIs to earn fixed but higher returns, and above all to ensure
overall growth of the economy.

Capital market, both debt and equity, has become increasingly important for India’s growth
story. During the last 5 years’, India’s nominal GDP grew by over 67%. Over the same time
period, while outstanding bank credit increased by 63%, outstanding corporate bonds
increased by over 117%, i.e., from ` 12.6 trillion to ` 27.4 trillion. Financing through equity,
during the same time period, was over `6.2 trillion. As a result, the share of bank loans in
credit disbursed to the commercial sector declined from 56% in 2011 to 38% in 2017. On the
other hand, over the same time period nonbank sources of credit such as commercial paper,
corporate bonds and external commercial borrowings increased from44% to 62%.

Debt Market

Once the stats have highlighted the significance, let us understand the debt market. The Debt
Market is the market where fixed income securities of various types and features are issued
and traded. Debt Market is therefore; market for fixed income securities issued by Central
and State Governments, Municipal Corporations, Government bodies and commercial entities
like Financial Institutions, Banks, Public Sector Units, Public Ltd. Companies, Private Ltd.

17
Companies and also structured finance instruments. Fixed Income securities offer a
predictable stream of payments by way of interest and repayment of principal at the maturity
of the instrument. Depending on the issuer of fixed income securities, it can be classified as
Government Securities, i.e. bonds issued by the Central /State Government of an economy,
and Corporate Bonds, i.e. bonds issued by private and public corporations. Debt instruments
can also be categorised in terms of their maturity, nature of interest, special features
embedded in it, etc. Short term debt instruments, issued by the Central Government and by
corporates, are respectively known as Treasury Bills and Commercial Papers. Similarly,
securities issued with a maturity of more than one year are known as dated securities. The
original maturity of a debt security may range from 1 year to 30 years. The instruments with
short term maturities or quasi-money instruments form part of the money market. The
Instruments traded in the money-market are Treasury Bills, Certificates of Deposits (CDs),
Commercial Paper (CPs), Bills of Exchange, Call Money, Repo/Reverse Repo, Collateralised
Borowing and Lending Obligation (CBLO) and other such instruments of short-term
maturities (i.e. not exceeding 1 year with regard to the original maturity). The other
instruments with maturity of more than 1 year form part of the debt market.

Types of securities

There are variety of securities and products available in the debt market. Let us try and
understand the nature of some of the most prominent products in the Indian economy.

• G-Sec (government securities): G-Secs in India currently have a face value of ` 100/-
and are issued by the RBI on behalf of the Government of India. All G-Secs are
normally coupon (Interest rate) bearing and have semi annual coupon or interest
payments with tenure of between5to30years.This may change according to the
structure of the Instrument.

• SDLs (State Development Loans): SDLs are issuance of respective states in order to
manage finances of their own state. All the features of SDLs are similar to G-Sec
except that normally they are issued for maximum maturity of 10 Years and their
pricing considers fiscal health of the respective states and risk element associated
therein. For this reason SDLs are issued/traded at market determined spread above the
corresponding benchmark G-Sec.

• benchmark G-Sec.  Treasury Bills/Cash Management Bills (CMB): Treasury Bills

are for short-term instruments issued by the RBI for the Government for financing the
18
 temporary funding requirements and are issued for maturities of 91 Days, 182 Days
and 364 Days, whereas CMBs are issued for maturity below 91 days. T-Bills/ CMBs
have a face value of ` 100 but have no coupon (no interest payment). T-Bills are
instead issued at a discount to the face value (say @ ` 95) and redeemed at par (` 100).
The difference of ` 5 (100 - 95) represents the return to the investor obtained at the
end of the maturity period.

• Commercial Paper: Commercial Paper (CP) is an unsecured money market instrument

issued by corporates in the form of a promissory note.

• Certificate of Deposit: Certificate of Deposit(CD) is a negotiable money market

instrument issued by banks in dematerialised form or as Usance Promissory Note in
the form of a promissory note.

• Fixed Rate Bonds: This is the most popular type of corporate bond traded in most of
the markets, paying a semi-annual but fixed coupon over their life and the principal at
the end of the maturity.

• Floating Rate Bonds: These are the bonds, even if the coupon of which are usually
paid semi-annually, the coupon rate is not fixed throughout the life and varies over
time with reference to some benchmark rate. These types of bonds may have some
Floor or Cap attached on it, representing that even if the benchmark rate changes by
any value, the coupon rate even if floating but will always lie within the range of
Floor and Cap rate. Some of the well known benchmark rates used in Indian market
are MIBOR, Call Rate, T-bill rate, PLR, etc.

• Debentures: Debentures are also fixed interest debt instruments with different
maturity, but is usually secured in nature and therefore offers lower interest
comparative to bonds. Debentures, based on their convertibility to the form of equity,
can be of three types: Non-Convertible (NCD), Partially Convertible (PCD), and
Fully Convertible Debenture (FCD).

• Tax-saving infrastructure Bonds: In order to facilitate infrastructure financing through

the bond route, some special types of tax-free bonds, issued by some infrastructure
companies, are offered to the investors.

• Zero Coupon Bonds: Zero Coupon Bonds (ZCBs) are issued at a discount to their face
value and the principal/face value is repaid to the holders at the time of maturity.

19
 Instead of paying any periodic coupons, the ZCB holder gets the price discount in
the beginning itself. Therefore, ZCBs are alternatively known as Deep Discount
Bonds. Treasury Bills and CMBs are example of Zero-Coupon Bonds.

• Market Linked Debentures (MLD): MLDs have an underlying principal component in

the form of debt securities and where the returns are linked to market returns on other
underlying securities/ indices such as Nifty or a 10-year government security paper.
MLDs can be of two types: principal protected and principal non-protected.

Issuer of securities

Once we have understood the different type of debt securities, let us focus on who can issue
such securities. The various participants who are permitted to issue debt securities in India
are:

• Central Government

• State Governments

• Government Agencies/ Statutory Bodies

• Public Sector Units

• Corporate

• Banks

• Financial Institutions

• NBFCs

The quantum of participation by various issuers can be gauged from following data-

20
Platform for issue of securities Corporate Bonds

Similar to equity market, debt market also has primary market and secondary market. The
primary market can be further divided into private placements and public issue. A private
placement is defined as an issue of securities by a company to a selected group of persons.
On the other side, a public issue is an offer made to the public in general to subscribe to the
bonds. In a public issue, the company has to issue a prospectus before issuing the bonds.
After the public issue, these bonds are listed on a recognised stock exchange in India. Unlike
equities, the debt securities which are privately placed can be listed on a recognised stock
exchange. Hence, both the privately placed and public issue-based securities can be traded on
a recognised stock exchange. Even though any securities including corporate bonds are
primarily issued in the primary market, either through public or private placements, the
secondary market plays a number of important function, including: providing effective price
discovery; shifting risk; pricing new issues; offering an alternative mode of investment;
aiding management of resources; and enforcing discipline on the issuer.

The secondary debt market further has segments in India. The segments in the secondary debt
market based on the characteristics of the investors and the structure of the market are:

• Wholesale Debt Market - where the investors are mostly Banks, Financial Institutions,
the RBI, Primary Dealers, Insurance companies, MFs, Corporates and FIIs.

• Retail Debt Market involving participation by individual investors, provident funds,

pension funds, private trusts, NBFCs and other legal entities in addition to the
wholesale investor classes.

The above markets are provided by stock exchanges through various platforms. The BSE and
NSE, both provide trading platforms for both wholesale and retail debt market. For e.g., BSE
provides the facilities through its NDS-RST platform and the BOLT System of the Exchange.
The size and significance of these platforms can be assessed from the data available with
SEBI, in the month of April and May 2019, Corporate bonds worth `113461.46crores were
listed on NSE and BSE platforms in 364 issues.

Government Securities (G-Sec & SDLs)

The Central & State Government raises resources to fund their fiscal deficit by way of market
borrowing. This activity is facilitated by Reserve Bank of India (RBI) by way of auction of
these securities through an electronic platform called E-Kuber, the Core Banking Solution

21
(CBS) of RBI. Investors place their bid in the auction through this platform. The allocation is
done on either Uniform Price basis or Multiple Price basis. In an endeavour to facilitate wider
participation and retail holding of G-Sec, retail investors are allowed to participate in auction
on non-competitive basis.

Risks associated with debt market

Now that we have discussed the What, Who, How and Where of the debt market, let us
understand the risks associated with the debt market. From the earlier discussion we had
concluded that effectively the debt instruments issued in the market offer fixed or floating
interest rate. With this understanding the investors many times treat investment in a debt
market security as a risk-free investment. However, the recent turmoil in the debt market
triggered by the securities of major players such as IL&FS, DHFL etc. was an eye opener for
all investors. Hence, it’s prudent to understand the risks associated with debt securities.

The following are the risks associated with debt securities:

• Interest Rate Risk: The primary risk of investing in any debt security, irrespective of
the nature of the security, is the Interest Rate Risk. Price of a debt instrument is
inversely related to the movement in risk-free rate of interest, say yield of
Government securities. Therefore, as and when interest rate increases, the price of
bond is expected to fall, leading to a loss for the holder of the security.

• Default Risk/Credit Risk: This can be defined as the risk that an issuer of a bond may
be unable to make timely payment of interest or principal on a debt security or to
otherwise comply with the provisions of a bond indenture and is also referred to as
credit risk. Credit risk in bond investment includes Credit Spread Risk and Default
Risk. Credit spreads reflects the credit worthiness of corporate borrowers, and depend
upon the credit rating provided to the corporates by external rating agencies. The
value of a corporate bond not only depends upon the risk-free rate, but also on the
credit spread of respective securities. Poorer the credit quality of a corporate bond
issuer as reflected through a lower credit rating, greater would be the credit spread,
leading to fall in bond price. Therefore, credit spread risk is the risk off all in bond
price due to migration of issuers’ credit rating from higher to lower level, say from
AAA to A, and therefore rise in risk premium.

22
 • Reinvestment Rate Risk: This can be defined as the probability of a fall in the interest
rate resulting in a lack of options to invest the interest received at regular intervals at
higher rates at comparable rates in the market.

The following are the risks associated with trading in debt securities:

• Counter Party Risk: is the normal risk associated with any transaction and refers to the
failure or inability of the opposite party to the contract to deliver either the promised
security or the sale-value at the time of settlement.

• Price Risk: refers to the possibility of not being able to receive the expected price on
any order due to an adverse movement in the prices.

• Liquidity Risk: Liquidity Risk is another type of risk that bond investors may face.
Liquidity risk arises from the illiquidity of a debt issue in the secondary bond market.
In other words, whenever an investor fails to sell a security at a fair price due to lack
of sufficient demand, the market is said to be illiquid for that security, and creates
liquidity risk for the investors.

Pricing of a bond

Pricing of a bond is essentially determination of yield on that debt instrument and resultant
absolute price. From an investor perspective it is important to understand how the yield
(corresponding price) is determined in the debt market. The yield of a bond in the markets is
determined by the forces of demand and supply, as is the case in any market. Other than this
the yield of a bond in the market place also depends on a number of other factors and will
fluctuate according to changes in:

• Macro-Economic conditions, both domestic and relevant global ones.

• General money market conditions including the state of money supply in the
economy.

• Risk On or Risk Off situation. Interest rates prevalent in the market and the rates of
new issues.

• Future Interest Rate Expectations.

• Inflation expectation based on both domestic prices and global commodity prices viz.
Crude etc.

23
 • Credit quality of the issuer.

Yield refers to the effective rate of interest paid on a bond or note. There are many different
kinds of yields depending on the investment scenario and the characteristics of the
investment.

Yield To Maturity (YTM)is the most popular measure of yield in the Debt Markets and is the
percentage rate of return paid on a bond, note or other fixed income security if you buy and
hold the security till its maturity date. Current Yield is the coupon divided by the Market
Price and gives a fair approximation of the present yield.

Therefore, Current Yield = Coupon of the Security (in%)x Face Value of the Security (viz.
100incaseofG-Secs.)/Market Price of the Security

E.g; Suppose the market price for a10.18%G-Sec2012is ` 120.The current yield on the
security will be (0.1018x 100)/120=8.48%

The yield on the government securities is influenced by various factors such as level of
money supply in the economy, inflation, future interest rate expectations, borrowing program
of the government & the monetary policy followed by the government.

The two major regulators regulating the debt market are the RBI and SEBI.

Regulatory Framework

The overall debt market can be divided in terms of issuers of debt securities: government,
financial institutions including NBFC and corporates. The two major regulators regulating the
debt market are the RBI and SEBI. The areas regulated by respective regulators are as under:

RBI: it regulates and also facilitates the government bonds and other securities on behalf of
the government. Further, RBI also regulates the debt securities issued by financial institutions
and NBFCs

SEBI: SEBI regulates all corporate bonds, both PSU and private sector. Further, any debt
security listed on a stock exchange either by government or financial institutions are also
regulated by SEBI in addition to the RBI.

MCA: The Ministry of Corporate Affairs regulates the unlisted debt securities issued by a
corporate.

The list of some of the major regulations for the debt market is as under:

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RBI :

• Master Direction on Money Market Instruments: Call/ Notice Money Market,

Commercial Paper, Certificates of Deposit and Non-Convertible Debentures (original
maturity up to one year).

• Master Direction – Non-Banking Financial Companies Acceptance of Public Deposits

(Reserve Bank) Directions, 2016 (Updated as on February 22,2019).

• RBI Guidelines on Private Placement of NCDs for NBFCs.

SEBI :

• Securities and Exchange Board of India (Issue and Listing of Debt Securities)
Regulations, 2008.

• SEBI(Issue and Listing of Debt Securities by Municipalities) Regulations, 2015.

Following the announcement in Union Budget 2018-19, SEBI has recently on November 26,
2018 issued guidelines on ‘Fund raising by issuance of Debt Securities by Large Corporates’
which mandate a large corporate to raise at least 25% of its incremental borrowings by way
of issuance of debt securities. The above mandate is effective from April 01, 2019.

Financial instruments can be either cash instruments or derivative instruments:

• Cash instruments – instruments whose value is determined directly by the markets.

They can be securities, which are readily transferable, and instruments such
as loans and deposits, where both borrower and lender have to agree on a transfer.

• Derivative Instruments – instruments which derive their value from the value and
characteristics of one or more underlining entities such as an asset, index, or interest
rate. They can be exchange-traded derivatives and over-the-counter (OTC)
derivatives. Some of the more common derivatives
include forwards, futures, options, swaps, and variations of these such as
synthetic collateralized debt obligations and credit default swaps.

25
 Instrument type

Asset class
Exchange-traded
Securities Other cash OTC Derivatives
Derivatives

Interest rate swaps

Debt (long Bond futures Interest rate caps and
term) Bonds Loans Options on floors
1 year bond futures Interest rate options
Exotic derivatives

Bills, e.g. T-
Debt (short Deposits
bills Short-term interest Forward rate
term) Certificates of
Commercial rate futures agreements
≤ 1 year Deposit
paper

Stock options Stock options

Equity Stock N/A
Equity futures Exotic derivatives

Foreign
exchange options
Foreign Spot foreign Outright forwards
N/A Currency Futures
Exchange exchange Foreign exchange
swaps
Currency swaps.

https://en.wikipedia.org/wiki/Financial_instrument

26
 Table 1: Outstanding External Debt by Instruments

(US$ billion)

End-March

Instrument 2019 2020 2021

2018
R PR P

1 2 3 4 5

1. Special Drawing Rights (allocations) 5.8 5.5 5.4 5.6

2. Currency and Deposits 127.6 134.4 134.1 143.8

3. Debt Securities 98.3 91.9 97.5 96.7

4. Loans 178.7 189.0 194.3 198.3

5. Trade Credit and Advances 103.2 105.2 104.3 100.3

6. Other Debt Liabilities 0.0 0.0 0.0 0.0

7. Direct Investment: Intercompany Lending 15.7 17.1 22.8 25.3

Total Debt 529.3 543.1 558.4 570.0

R: Revised. PR: Partially Revised. P: Provisional.

The above table was presented by RBI as for the Financial Year ending as on 31st March
2021, The instrument-wise classification shows that the loans were the largest component of
external debt, with a share of 34.8 per cent, followed by currency and deposits (25.2 per
cent), trade credit and advances (17.6 per cent) and debt securities (17.0 per cent).

https://www.rbi.org.in/Scripts/BS_PressReleaseDisplay.aspx?prid=51819

27
 CHAPTER 2: REVIEW OF LITERATURE

Review of Literature provides a critical summary of research already done on the relevant
topic. It provides researchers a bird’s view on the problem in hand, stresses the need for the
new study, and demonstrates how it will contribute to existing evidence. The primary purpose
of literature is to gain a broad background available related to problems in conducting
research. Thus, it facilitates selecting a problem and its purpose, developing a framework and
formulating a lesson plan. In brief, review of relevant literature is an analysis and synthesis of
research sources to generate a picture of what is known about a particular situation and to
expose the knowledge gaps that exist in the situation. To locate the unsearched areas in the
current research, the literature already available and relevant to the problem is reviewed. The
literature available is broken down into following topics and is presented below:

A) Investor’s awareness and preferences towards debt and equity funds.

B) Risk-Return profile of investors.

A. Investor’s awareness and preferences towards debt and equity funds.

1. In the book, “Money Lessons for a Lifetime: Stories, Observations and Tips on
Living a Prosperous Life”, Gim Jorgensen, said: “If you want to fine-tune your asset
allocation, you might select one of the following long-term portfolios:

• Relatively conservative, income-oriented, in or near retirement. Put 45 percent of your

assets in stocks, 35 percent in bonds, and 20 percent in cash or short-term saving accounts.

• A moderate approach for the middle-of-the-roaders between the ages of 45 and 65. Put 60
percent in stocks, 35 percent in bonds, and 5 percent in cash.

• An aggressive approach for those under age 45. For a growth-oriented portfolio with little
or no income, put 85 percent in stocks, 10 percent in bonds, and 5 percent in cash.

• A more aggressive approach for those under age 35. Put 95 percent in stocks and 5 percent
in bonds.

2.“A study of investor behaviour on investment avenues” in Mumbai was undertaken

by Brahmabhatt, P.S Raghu Kumari, and Dr. ShamiraMalekar.

In this study they analyzed the investor behavior and their preferences. The objectives for
their study were to understand about various investment avenues available in the market, to

28
understand the pattern of investors while making the investments, & to find out the factors
that investors consider before investing. Through their study it was revealed that people like
to invest in stock market. The percentage of income they make as investment depend on their
annual income.

3. “A Study on Preferred Investment Avenues among Salaried People With Reference

To Pune, India” The research was conducted by Sonali Patil and Dr. Kalpana
Nandawar. The paper was issued on (Sep.-Oct. 2014). The present study is an attempt
to throw a light on Investment behaviour of salaried employees of Pune, India.

4. “A Study of Customers’ Preference towards Investment in Equity Shares and

Mutual Funds” The research was conducted by Manoj Kumar. The paper was released
on April 2013. The major focus of the paper is related to customer’s preference with
respect to:

• To know the investors‟ preference towards various investment alternatives

• To know Customers preference towards investment between shares and mutual fund.

• To find out most important attribute for investment consideration.

• To find out objectives of investment.

5. “A Study on People’s Preferences in Investment Behaviour”. The paper was

published by N. Geetha& Dr. M. Ramesh in November 2011.The main focus of the
study was: • To study the factor that influence investment behaviour of the people.

• To study the attitude of the respondents towards different investment choices.

• This study examined on people’s choice in investment avenues of Kurumbalur.

6. International Journal of Management Research and Business strategy has published

Research paper on 3rd July,2015 On “Investors Preferences towards Equity”. This
research is done by Satyanarayana, N B C Sidhu and S Harish Rao.

This research paper talks about Investors that makes an investment in Equity considering the
high returns irrespective of risk. The study is undertaken to understand Equity market and to
find out the new opportunities to attract the investors towards the Equities according to their
risk preferences. The study is conducted to understand the functioning of Equities in India
Equity market.

29
7. A research paper by Malcolm baker et al in 2007 on “Investor Sentiment in the
Stock Market” tries to study the role of investor’s sentiments in investing money in
various financial instruments.

8. Kenneth French et al in paper “Investor Diversification & International Equity

Market”, tries to find estimates of International equity holdings of investors in U.S,
Japan, and Britain.

This study found out that more than 98% of the equity portfolio of Japanese investors is held
domestically, 94% of U.S and 82% of Britain .This research paper basically focus on
investor’s preferences and behaviour ,their investment patterns. This research paper also
International Asset Ownership pattern This paper reviews our research into the investment
decisions involved in constructing a diversified portfolio.

9.A study conducted by Meenakshi Chaturvedi and Shruti Khare discusses about
saving pattern and investment preferences of individual household in India.

The objectives of the study were to study the saving pattern of the individual household in
India, to analyse the Investment preferences of individual household in India, to study
relation of saving pattern and investment preferences to social, economic, educational and
occupational background of the individual household & to give suggestions for evolving
better investor awareness and educational programs. It is concluded from the study that
Majority of the respondent (79.6%) stated that they had a high degree of awareness about
bank deposits as investment avenues.

10. A study on investment avenues with particular reference to mutual fund by Dr. G.
Santhiyavalli M. Usharani in 2012 focuses on the following things.

• To study the socio-economic profile of selected individual investors.

• To assess their saving objectives.

• To identify the preferred savings avenue of the respondents.

• To identify their preferred mutual scheme.

It has been seen that there are strong theoretical and empirical explanations for various
investments tools, definitions of various investment tools, awareness, perception and attitude
of people towards various investment options etc. However, there is dearth of literature on
investors preferences towards debt and equity staying in Mumbai.

30
B. Risk-Return profile of investors and Factors Affecting the Investors preferences
towards debt and equity:

1. Suman Chakraborty and Sabat Kumar Digal (2011) found in their research work,
demographic factors like age, occupation and income level of investors have significant
impact on savings.

It was found that female investors tend to save more in a disciplined way than the male
investors. Paper attempts to explore whether dichotomy of the popular believes that men are
more pro-risk than women. It was observed that women are risk averse indeed but save more
than the male counterparts as the income level rises.

2. Kabra, et al (2010), in their research found that investors' age and gender plays a
significant role in deciding the risk taking ability of investors.

3. Manish Mittal and R. K. Vyas (2007) in their study found that gender plays a key role
in deciding where to invest.

They further found that men prefer Equities as their first choice and women prefer post office
deposits as their first choice. The investor in the age group 18-25choose Equities for
investing and above 45 years choose Derivatives. Less income group prefers investment in
debt instruments and high-income group prefers Derivatives as a preferred investment choice.

4.Verma (2008), studied the impact of demographics and individual’s personality on

investment preferences among Indian investors and found that mutual funds were most
popular amongst professionals, students and the self-employed.

Retired people displayed their risk aversion by not investing in mutual funds and equity
shares. It was also found that higher the education, higher was the level of understanding of
investment complexities. Graduates and above in qualification preferred to invest in equity
shares as well as mutual funds.

5. Gupta and Jain (2008) in their research work based on an all-India survey of 1463
households found the preferences of investors towards investment in shares, in various
types of mutual fund schemes, gold fund, bank fixed deposits and government savings
schemes.

The study found that the investors’ investment attitude towards various investment types is
based on their income, age, risk appetite, quality of market regulation etc.

31
From the review of literature it can be inferred that various studies on investment pattern and
preferences provide only glimpses of investment pattern of investors across India. None of
the studies are limited to Mumbai and finding the factors affecting the investor’s preferences
and risk appetite of people living in Mumbai city. Hence the present research is an effort in
that direction.

32
 CHAPTER 3: RESEARCH METHODOLOGY

RESEARCH METHODOLOGY:

Research methodology is the procedure of conditions for collection and examination of data
in a manner that aims to combine relevance to the research purpose with economy in
procedure. Research methodology is the conceptual structure within which research is
conducted. It contemplates for the collection measurement and analysis of the data.

Research Methodology is about ‘A Study on Investors Awareness about Various Debt

Instruments’. The scope of this study is limited to Mumbai Suburban only.

This includes the Objectives, Hypothesis, Scope of the Study, Limitations, Significance,
Sample Size, Data collection, Tools and Technique to be used.

Objectives:

People prefer to invest in Equity Based Options rather than Debt instruments because they
think that it is much safer to invest in Direct Equity, it is this perspective that people investing
for a long-term period are trying to change amongst the regular investors. The below
mentioned objectives will help you to understand and analyze that these Debt Instruments are
also a great avenue to invest in. The objectives of this study are as follows:

1. To know the level of Awareness of Investors about Various Debt Instruments.

2. To know the Investor’s preference while Investing in any Debt Instrument.
3. To know which gender specific and particular age group invest in Debt
Instruments.
4. To find out what percentage of their Annual Income do Investors Invest in
such options.

33
Hypothesis:

A hypothesis is a precise, testable statement of what the researcher predict will be the
outcome of the study.

1. H0: The Investor’s are not Aware about Various Debt Instruments.

H1: The Investor’s are Aware about Various Debt Instruments.

OPTIONS NO. OF %
RESPONDENTS
YES 65 61.9%
NO 40 38.1%
TOTAL 105 100%

As you can see from the above Chart, out of 105 Respondents;

65 Respondents (61.9%) are Aware of Various Debt Instruments and its purpose.

40 Respondents (38.1%) are Not Aware of Various Debt Instruments and its purpose.

Accept Alternate H1 Hypothesis.

We can see from the above data provided that people are Aware about Various Debt
Instruments and its purpose.

34
SCOPE OF THE STUDY:

1. The study is conducted to know about the Investor’s Awareness about Various Debt
Instruments.
2. This study also intends to find out about the awareness of the general public about
the Debt Instruments which are available to invest in.
3. This study defines how important these Instruments are in raising capital for a
business.

35
LIMITATIONS OF THE STUDY:

1. The research is restricted to Mumbai and not India

2. The study has been conducted to analyse only some factors affecting investment
behaviour of investors.
3. The sample size may not truly represent the behaviour of the population.
4. This study is for a particular time frame and hence the results might differ with the
change in government policies, stock market scams, deflation, market expectations-
bull and bear, etc. because the speculation will differ, sentiments might change thus
affecting the investors’ behaviour towards equity market.
5. There were only 105 respondents in the survey conducted.
6. Lack of reliable data available made the analysis of the study limited.

36
SIGNIFICANCE OF THE STUDY:

Debt is a route that most people know and have the necessary experience of. There is a wide
range of debt instruments that are present from bank fixed deposits to company fixed deposits
and even bonds and debentures whose issues come in the market. Debt operates on a simple
principle of giving a fixed % of return to investors at the end of the tenure. The good part for
the investor is that the risk in the investment is very less. But on the other hand, the returns
are limited to the interest as a percentage of the total amount. This is a trade-off that the
investor takes for the purpose of the investment.

37
SAMPLE SIZE:

The sample size for the study was 105 Respondents.

DATA COLLECTION:

Data collection is the process of collecting from all the relevant sources to find solutions to
the research problem, test the hypothesis & evaluate the outcomes. Both primary and
secondary data has been used in this study to find out about Investor’s Awareness about
Various Debt Instruments.

RESEARCH DESIGN:

A Descriptive Research design has been implemented for this research paper.

PRIMARY DATA:

Primary data has been collected through the help of a questionnaire.

SECONDARY DATA:

Secondary data has been collected from various research papers available online & on
websites.

TOOLS AND TECHNIQUE:

Data has been analyzed through the simple average method and percentage method. The use
of Tabular Method has been Implemented here.

DATA ANALYSIS:

38
Data Analysis has been done through people’s responses and also through data available
online.

DATA INTERPRETETION:

Data has been interpreted using statistical tools like graphs, pie charts and tables which gives
us detailed information about the study.

39
 CHAPTER 4: DATA ANALYSIS, INTERPRETATION AND
PRESENTATION

1. GENDER OF THE RESPONDENTS

GENDER NO. OF %
RESPONDENTS
MALE 56 53.3%
FEMALE 46 43.8%
LGBTQ 3 2.9%
TOTAL 105 100%

The above chart shows the gender of the respondents.

We can see that there are 53.3% of Male respondents, 43.8% of Female respondents and
2.9% belonging to the LQBTQ category.

The majority of the respondents in this survey are Males, but it is not far away from the count
of Females.

40
2. AGE

AGE NO. OF %
RESPONDENTS
18 OR BELOW 8 7.6%
18-45 87 82.9%
45-60 7 6.7%
60 & ABOVE 3 2.9%
TOTAL 105 100%

This chart shows the age of the respondents.

The majority of the people are in the age group of 18-45(82.9%).

7.6% belong to the age group of 18 or below.

The lowest number of people in an age group is 60 and above which consists of only 3
Respondents which amounts up to 2.9%.

41
3. ANNUAL INCOME

ANNUAL INCOME NO. OF %

RESPONDENTS
(Rs)
1-5 LAKH 66 62.9%
5-10 LAKH 25 23.8%
10 LAKH & ABOVE 14 13.3%
TOTAL 105 100%

The above chart shows the Annual Income of the Respondents.

As you can see, that the majority of the people belong in the 1-5 Lakh Rs (62.9%) group of
Earnings which has a total of 66 Respondents.

There are 25 Respondents who earn between 5-10 Lakh Rs (23.8%).

There is a fair amount of people who earn 10 Lakh and Above which constitutes to 14
Respondents (13.3%).

42
4.DO YOU INVEST IN ANY TYPE OF INVESTMENT AVENUE?

OPTIONS NO. OF %
RESPONDENTDS
YES 67 63.8%
NO 38 36.2%
TOTAL 105 100%

This chart shows the statistics of Respondents that invest in any type of Investment
Avenue.
Out of 105 Respondents, majority of them i.e. 67 Respondents (63.8%) do invest in
avenues.
38 Respondents (36.2%) do not prefer to invest in any investment avenue.

43
 4. ARE YOU AWARE OF DEBT INSTRUMENTS & IT’S
PURPOSE?

OPTIONS NO. OF %
RESPONDENTS
YES 65 61.9%
NO 40 38.1%
TOTAL 105 100%

65 Respondents (61.9%) are aware Debt Instruments and its purpose.

40 Respondents (38.1%) are unaware of Debt Instruments and its purpose.

44
 5. WHAT TYPE OF INVESTMENT OPTIONS DO YOU INVEST
IN?

OPTIONS NO. OF TIMES %

CHOSEN IN
CHECKBOX
DIRECT EQUITY 50 47.6%
EQUITY MUTUAL 51 48.6%
FUNDS
BONDS 31 29.5%
DEBT MUTUAL 27 25.7%
FUNDS
FIXED DEPOSITS 68 64.8%

45
As you can see from the above Bar Graph, people prefer to invest more in Direct Equity and
Fixed Deposits rather other investment options and the other investment options are Debt
Instruments.

6. WHICH OPTION IS MUCH SAFER & HAS COMPARATIVELY

LESS RISK TO INVEST IN?

OPTIONS NO. OF %
RESPONDENTS
EQUITY 63 60%
FINANCING
DEBT FINANCING 42 40%
TOTAL 105 100%

63 Respondents (60%) think that it safer to invest Equity Financing.

42 Respondents (40%) are aware of Debt Financing and think it is a much safer and risk
free option to invest in.

46
 7. HOW MUCH % OF YOUR ANNUAL INCOME DO YOU
INVEST IN SUCH OPTIONS?

OPTIONS NO. OF %
RESPONDENTS
5-10% 63 60%
10-20% 29 27.6%
20% AND ABOVE 13 12.4%
TOTAL 105 100%

This chart shows the statistics of how much % of their Annual Income, people invest in
Investing Avenues.

63 Respondents (60%) invest between 5-10% of their Annual Income.

29 Respondents (27.6%) invest between 10-20% of their Annual Income.

Only 13 Respondents (12.4%) invest 20% or above from their Annual Income.

47
 8. WHICH OPTION DO YOU THINK WILL GIVE A MUCH
BETTER RETURN IN INVESTMENT?

OPTIONS NO. OF %
RESPONDENTS
EQUITY BASED 78 74.3%
FINANCING
DEBT BASED 27 25.7%
FINANCING
TOTAL 105 100%

The above chart shows which type of financing gives better return in Investment.

As you can see, 78 Respondents (74.3%) prefer to invest in Equity Based Financing because
it is their perception that it may be a safer option to invest in.

48
Whilst, only 27 Respondents (25.7%) go for Debt Based Financing as people are unaware of
those instruments and it is our job to make such amateur investors to give a detailed
assessment Debt Market.

9. A DEBT INSTRUMENT IS AN ASSET THAT AN ENTITY,

SUCH AS AN INDIVIDUAL, BUSINESS, OR THE
GOVERNMENT, USES TO RAISE CAPITAL OR TO
GENERATE INVESTMENT INCOME. GIVEN BELOW ARE
INSTRUMENTS IN WHICH YOU CAN INVEST AND RAISE
CAPITAL, WHICH ONE WOULD YOU PREFER?

OPTIONS NO. OF TIMES %

CHOSEN IN
CHECKBOX
GOVERNMENT 71 67.6%
SECURITIES
BONDS 52 49.5%
TREASURY BILLS 33 31.4%
COMMERCIAL 29 27.6%
PAPER
MORTGAGES 17 16.2%
LOANS 30 28.6%

49
 10. DO YOU PREFER TO INVEST ON YOUR OWN OR
THROUGH ANY OTHER OUTSOURCED PERSON?

OPTIONS NO. OF %
RESPONDENTS
INVEST ON OWN 68 64.8%
THROUGH A 25 23.8%
BROKER
COMPANY BASED 12 11.4%
FUND INVESTMENT
TOTAL 105 100%

50
The above chart shows that how do people invest in avenues and whose help do they take
while making such decisions.

As you can see, 68 Respondents (64.8%) people prefer to invest on their own in Investment
Avenues.

25 Respondents (23.8%) people prefer to invest with the help of a Broker which also charges
Brokerage.

Only 12 Respondents (11.4%) prefer to invest through a Company Based Fund Investment
which also charge a certain amount of money while helping you in investing.

11. DEBT SECURITIES AND LOANS ARE AMONG OTHER

INSTRUMENTS IN WHICH PEOPLE PREFER TO INVEST IN,
ARE YOU WILLING TO INVEST IN SUCH OPTIONS?

OPTIONS NO. OF %
RESPONDENTS
YES 70 66.7%
NO 35 33.3%
TOTAL 105 100%

51
The above chart shows the willingness of people to invest in Debt Securities and Loans.

Out of 105 Respondents, 70 Respondents (66.7%) are willing to invest in Debt Securities and
Loans.

Whilst, the other remaining 35 Respondents (33.3%) don’t have a broader scope and are
unwilling to invest in Debt Instruments.

12. DO YOU THINK INVESTING IN VARIOUS DEBT

INSTRUMENTS CAN HELP TO DIVERSIFY AN
INDIVIDUAL'S BUSINESS?

OPTIONS NO. OF %
RESPONDENTS
YES 73 69.5%
NO 32 30.5%
TOTAL 105 100%

52
The above chart represents that how does Investing in Various Debt Instruments help to
Diversify an Individual’s Business.

From the above mentioned finding we can see that 73 Respondents (69.5%) do believe that
investing in such Instruments can help diversify Business.

The other 32 Respondents (30.5%) don’t believe in the assessment and are giving a clear
sign they maybe unwilling to Invest in such Debt Instruments.

13. IN LAST 5 YEARS, THESE DEBT INSTRUMENTS HAVE

RAPIDLY GREW AND ARE NOW WELL KNOWN AMONGST
INVESTORS WHO HAVE BEEN INVESTING FOR A LONG
TIME, SO, IF YOUR PEERS SUGGEST YOU TO INVEST,
WOULD YOU BE WILLING?

OPTIONS NO. OF %
RESPONDENTS
YES 40 38.1%
NO 16 15.2%

53
WILL GATHER 49 46.7%
MORE INFO. FROM
ADULTS
TOTAL 105 100%

These Debt Instruments have shown a surge in past years and people are willing to invest in
them.

14. DO YOU THINK YOU HAVE GATHERED VALUABLE

INFORMATION REGARDING DEBT INSTRUMENTS TILL
NOW?

OPTIONS NO. OF %
RESPONDENTS
YES 70 66.7%
NO 35 33.3%
TOTAL 105 100%

54
The above chart shows that how much valuable information on Debt Instruments the
Respondents did gather after filling the survey.

70 Respondents (66.7%) did gather valuable information on Various Debt Instruments.

The other 35 Respondents (33.3%) still need a broader idea about Various Debt Instruments.

CHAPTER 5: FINDINGS, CONCLUSION, SUGGESTIONS &

REFERENCES

FINDINGS:

➢ We can see that there are 53.3% of Male respondents, 43.8% of Female respondents
and 2.9% belonging to the LQBTQ category.

➢ The majority of the respondents in this survey are Males, but it is not far away from
the count of Females.

55
➢ We can clearly see that the Majority of the Respondents are Male.

➢ The majority of the people are in the age group of 18-45(82.9%).

➢ 7.6% belong to the age group of 18 or below.

➢ The lowest number of people in an age group is 60 and above which consists of only
3 Respondents which amounts up to 2.9%.

➢ As you can see, that the majority of the people belong in the 1-5 Lakh Rs (62.9%)
group of Earnings which has a total of 66 Respondents.

➢ There are 25 Respondents who earn between 5-10 Lakh Rs (23.8%)

➢ There is a fair amount of people who earn 10 Lakh and Above which constitutes to 14
Respondents (13.3%).

➢ Out of 105 Respondents, majority of them i.e. 67 Respondents (63.8%) do invest in

avenues.
➢ 38 Respondents (36.2%) do not prefer to invest in any investment avenue.

➢ 65 Respondents (61.9%) are aware Debt Instruments and its purpose.

➢ 40 Respondents (38.1%) are unaware of Debt Instruments and its purpose.

➢ 63 Respondents (60%) think that it safer to invest Equity Financing.

56
➢ 42 Respondents (40%) are aware of Debt Financing and think it is a much safer and
risk-free option to invest in.

➢ 63 Respondents (60%) invest between 5-10% of their Annual Income.

➢ 29 Respondents (27.6%) invest between 10-20% of their Annual Income.

➢ Only 13 Respondents (12.4%) invest 20% or above from their Annual Income.

➢ 78 Respondents (74.3%) prefer to invest in Equity Based Financing because it is their

perception that it may be a safer option to invest in.

➢ Whilst, only 27 Respondents (25.7%) go for Debt Based Financing as people are
unaware of those instruments and it is our job to make such amateur investors to give
a detailed assessment Debt Market.

➢ 68 Respondents (64.8%) people prefer to invest on their own in Investment Avenues.

➢ 25 Respondents (23.8%) people prefer to invest with the help of a Broker which also
charges Brokerage.

➢ Only 12 Respondents (11.4%) prefer to invest through a Company Based Fund

Investment which also charge a certain amount of money while helping you in
investing.

➢ Out of 105 Respondents, 70 Respondents (66.7%) are willing to invest in Debt

Securities and Loans.

57
 ➢ Whilst, the other remaining 35 Respondents (33.3%) don’t have a broader scope and
are unwilling to invest in Debt Instruments.

➢ From the above mentioned finding we can see that 73 Respondents (69.5%) do
believe that investing in such Instruments can help diversify Business.

➢ The other 32 Respondents (30.5%) don’t believe in the assessment and are giving a
clear sign they may be unwilling to Invest in such Debt Instruments.

➢ 70 Respondents (66.7%) did gather valuable information on Various Debt

Instruments.

➢ The other 35 Respondents (33.3%) still need a broader idea about Various Debt
Instruments.

CONCLUSION

Investment Management has become one of the key elements of many individuals, firms, and
corporates.

Decision to choose between Debt and Equity is one of the difficult jobs further.

The current study found not only the Investor behaviour that affects the investment decision
but also other factors like Income, Occupation, Age, Marital Status has similar influence on
investors during constructing investment portfolio.

58
It seems to be people mostly prefer Bank Deposit is secured form of Investment but Equity,
on the other hand, is an essential asset class for the long-term growth of savings with returns
that beat inflation. Equity funds typically invest in stocks of companies and have proven in
the past to provide inflation beating return over the long term.

Only the people having high risk-taking ability prefer Equity as an investment option. Debt
mutual funds are normally lower in risk and they invest in financial instruments which yield a
fixed income e.g. government bonds, company debentures, commercial paper and company
fixed deposits.

However, this does not imply a guaranteed return but a certain fixed income. Debts funds
provide tax benefits and hence they are more attractive than FDs People preferring Debt
instruments are risk averse & their main objective of investment is to get steady income.

Taking heart from the successes in the case of the equity markets, we believe that a
concerted, focused thrust by policy makers towards achieving a turnaround in the debt
markets is the need of the hour. The institutionalization of the key ingredients, as outlined
above, is the first critical step in this process. In addition to the usual suggestions about
improving market micro-structure to bring in best practices from international markets, we
point out a few concrete steps that can be taken specifically to facilitate debt investments by
small investors in India.

We believe that small investor attitude towards debt instruments needs change, and that this
will not be possible without a radical overhaul of the small savings schemes in India. The
lack of depth and width in government bond markets needs to increase so that small investors
can invest in debt securities for capital gains rather than simply hold them to maturity as
income instruments.

There seems to be widespread misconception about pooled investment vehicles that needs to
be removed as investments such as mutual funds can really fulfil the entire range of risk

59
appetite for small investors while increasing the depth and width of primary and secondary
debt capital markets.

SUGGESTIONS

➢ It is of course legitimate to ask why the Indian government should focus on the debt
market at this stage, especially when there is a substantial unfinished agenda in other
segments of the financial sector.

➢ The reasons lie in the structural changes that have taken place since the initiation of
economic reforms in India, and which are expected to continue in the foreseeable
future.

➢ If the financial sector is unable to provide funds in the three broad categories in more
or less the same proportion as required by the demand, the possibility is that there

60
 could simultaneously exist excess demand and excess supply in different segments of
the financial market.

➢ People have to be made more aware about Various Debt Instruments as we people
have to ask Government the question about such policies, reforms, drives, etc. which
will help have a broader concept regarding Debt Instruments.

➢ In addition to these, in the last two years, bilateral netting and negotiating has been
replaced by a trade-for-trade regime with settlement that now takes place at more
efficient depository. Also, the large fiscal deficits have led to a greater market for
Government debt. Clearly, very little progress has been made in creating the
infrastructure and implementing the policy regime that is needed to facilitate the
evolution of the Indian debt capital market into a global participant.

REFERENCES

➢ www.moneycontrol.com
➢ www.wikipedia.com
➢ https://onlinelibrary.wiley.com/action/doSearch?SeriesKey=14680416&sortBy=Earli
est&pageSize=20&startPage=1
➢ Baker, M., & Wurgler, J. (2007). Investor Sentiment in the Stock Market.
doi:10.3386/w13189
➢ Baker, M., & Wurgler, J. (2007). Investor Sentiment in the Stock Market.
doi:10.3386/w13189

➢ www.investopedia.com

61
➢ www.timesofindia.com
➢ www.economictimes.com
➢ https://www.oecd.org/cfe/regionaldevelopment/Brown_When-to-use-financial-
instruments.pdf
➢ https://niti.gov.in/planningcommission.gov.in/docs/reports/wrkpapers/wkpr_debt.pdf
➢ https://www.imf.org/external/np/sta/bop/pdf/chap5.pdf
➢ https://www.rbi.org.in/Scripts/BS_PressReleaseDisplay.aspx?prid=51819
➢ https://www.investopedia.com/ask/answers/050515/what-are-some-examples-debt-
instruments.asp
➢ https://www.lexology.com/library/detail.aspx?g=aa9c7b4d-ba77-46c3-b9a0-
533aa6268ab0
➢ https://rbidocs.rbi.org.in/rdocs/Bulletin/PDFs/5671.pdf
➢ https://timesofindia.indiatimes.com/business/faqs/market-faqs/what-is-the-
importance-of-debt-market-to-the-economy/articleshow/60425009.cms
➢ https://business.mapsofindia.com/india-market/debt.html
➢ https://corporatefinanceinstitute.com/resources/knowledge/credit/debt-instrument/
➢ https://corporatefinanceinstitute.com/resources/knowledge/finance/debt-vs-equity/
➢ https://www.lawinsider.com/dictionary/lease-instruments
➢ https://en.wikipedia.org/wiki/Bond_(finance)
➢ https://en.wikipedia.org/wiki/Financial_instrument
➢ https://timesofindia.indiatimes.com/business/faqs/market-faqs/what-is-the-
importance-of-debt-market-to-the-economy/articleshow/60425009.cms
➢ https://www.slideshare.net/NikitaDattani/history-of-indian-debt-market-61912801
➢ https://groww.in/p/debt-funds.
➢ International Journal of Business and Management Invention (IJBMI) ISSN (Online):
2319 – 8028, ISSN (Print): 2319 – 801X www.ijbmi.org || Volume 6 Issue 12 ||
December. 2017 || PP—60-70.

62
 ANNEXURE

1. Name: ___________

2. Gender

o Male

o Female

o Prefer not to say

63
3. Age

o 18 or Below

o 18-45

o 45-60

o 60 and Above

4. Annual Income

o 1-5 Lakh

o 5-10 Lakh

o 10 Lakh and Above

5. Do you Invest in any type of Investment Avenue?

o Yes

o No

6. Are you Aware of Debt Instruments and its Purpose?

o Yes

o No

64
7. What type of Investment Options do you Invest in?

o Direct Equity

o Equity Mutual Funds

o Bonds

o Debt Mutual Funds

o Fixed Deposits

8. Which Option is much Safer and has Comparatively less Risk to Invest in?

o Equity Financing

o Debt Financing

9. How much % of your Annual Income do you Invest in such Options

o 5-10%

o 10-20%

o 20% and Above

10. Which Option do you think will give a much better Return in Investment?

o Equity Based Financing

o Debt Based Financing

65
 11. A Debt Instrument is an Asset that an entity, such as an Individual, Business, or

the Government, uses to raise Capital or to Generate Investment Income. Given

below are Instruments in which you can invest and raise Capital, which one would

you prefer?

o Government Securities

o Bonds

o Treasury Bills

o Commercial Paper

o Mortgages

o Loans

12. Do you prefer to Invest on your own or through any other Outsourced Person?

o Invest on Own

o Broker

o Company Based Fund Investment

13. Debt Securities and Loans are among other Instruments in which people prefer to

invest in, are you willing to invest in such options?

o Yes

o No

66
14. Do you think Investing in Various Debt Instruments can help to Diversify an

Individual's Business?

o Yes

o No

15. In Last 5 years, these Debt Instruments have Rapidly Grew and are now well known

amongst Investors who have been Investing for a Long Time, so, if your Peers suggest

you to Invest, would you be willing?

o Yes

o No

o Will Gather more Information from Adults Investing in such Instruments

16. Do you think you have Gathered Valuable Information regarding Debt Instruments

till now?

o Yes

o No

67
68