1

CHAPTER – I

INTRODUCTION

Background

Bonds are among the major investment instruments in the world along with stocks.
Stocks are shares of the individual companies, but bonds are debt. Investors on bonds
are paid interest on loans they have lent to the entities and government while
stockholders are part of the ownerships of the companies they have invested on and
get dividends depending on the companies´ financial performance. The Nepalese
bond market is relatively small and has not done effective work in the security
market for years. Nepal Stock Exchange (NEPSE) is the only trading floor that trades
mainly shares and comparatively low numbers of development bonds in the country.
On the other hand, the USA being the major developer of the bond market in the
world has different types of bonds to invest in and the yield curves and credit rating
agencies that help to analyze investors to risk their capital. The neighboring country
India still also has an underdeveloped debt market where the two main factors
corruption and political instability are quite similar to that of Nepal. Though it has
some credit rating agencies which Nepal totally lacks, it has been found that ratings
by such agencies are misleading to investors. While considering the present financial
market situation in the country, bankers, brokerages, and academicians have some
recommendations to all the parties involved in the trading of every kind of assets,
especially debt security. With their many years of experience they have proposals to
the government of Nepal on how the bond market could be developed in a shorter
time and why is it critical to let people know about bonds and bond terms for the
country´s economic growth.
The Financial Market is a specialized market that is responsible for channeling
financial resources from the surplus units (savers) to the deficit units (those who
needed additional funds) to carry out some form of economic activities. Financial
markets play an important role in the mobilization of financial resources for long
term investment through financial intermediation. A well functioning financial
market allocates the resources and improves the efficiency of financial decisions that
leaders to the better allocation of resources.

When we talk about Nepal, the financial market is largely dominated by bank and
other financial institution. The Nepalese financial market is largely concentrated on
the equity and loan financing. The bond market which comprises of the government
and corporate bonds covers a very small portion of the market. Although the issuance
of bonds is feasible and beneficial for the organizations, the growth and development
of the Nepalese bond market is in a slow pace.

This project focuses on the current scenario of bond market in Nepal and the reasons
behind preference of bank loans rather than debt instruments like bonds. Also, the
challenges for the development of bond market are explored through the qualitative
and quantitative analysis. The understanding of the hindrances have helped generate
some suggestions for the various related sectors like regulatory bodies, issuers,
investors and traders so that they can contribute to the growth of bond market in
Nepal.

Introduction of Nepalese Market

Nepalese capital market as well as bond market has not reached its maturity stage.
There is not proper exercise of bond till now. Nepal is known as capital scarce
country as revenue surplus is not enough for financing development expenditure;
foreign grant as well as foreign loan and internal borrowing are used to bridge this
gap. Development and expansion of bond market is essential for the rapid economic
growth of country like Nepal. Capital market help to develop the economy by
mobilization of long term fund for productive sectors.

While taking on the Nepalese bond market, it was initiated during the regime of Rana
Bahadur Shah but 104 years autocratic rule of Rana’s discontinued it. The history of
bond market was re-started from the year 2018 B.S., when the government issued the
bond for the first time in Nepal. After that period the government has been issued the
bond regularly to meet its financing needs. Presently, the public debt act 2059 and its
laws and by-laws are active in regulating Nepalese government bond market. While
taking about the Nepalese corporate bond market, the bond of Nepal investment and
development corporation (NIDC) and the bond of bottlers Nepal limited are the early
bonds.

In the context of Nepal, the ‘Security Exchange Center’ was involved in the
transaction of the bond market. Later, it was converted into ‘Nepal Stock Exchange’
the transaction of the government bond had not been done through Nepal stock
exchange. The government and corporate bodies have to go into the Nepalese bond
market for required bond capital. Therefore, bond market of Nepal can be classified
into the following two types.
i. Government bond
ii. Corporate bond

Government Bond Market

The market that deals on securities issued by government in order to collect fund to
meet its financial needs with promises to pay a certain percent of interest at certain
period of time with predetermined maturity period is known as government bond
market. Government raises fund from market to conduct the regular activities to
conduct development programs, to recover the deficit budget etc.

In Nepal, Nepal Rastra Bank has been actively issuing various government bonds in
the country with the main aims of taking the deficit budget and to collect small and
scattered funds from general public. These bonds are as follows:

Treasury Bills
Treasury bills are the short term money market instrument of the government. It
normally matures in 91 days while some matures in 364 days. Thus, treasure bills are
issued to meet short term financial requirement of the government. Treasury bills are
sold to the bidders in the order that one who bids with the expectation of low interest
rate.

After the enforcement of public debt act 2017 B.S., government of Nepal initiated the
process of selling treasury bills to banks, financial institution and individuals since
2018 B.S. It has Rs. 865150 lakhs liability on treasury bills at the end of 2066 Ashad.

Development Bond
The bond that is issued to raise the fund from individual and institutions for
development purpose of nation for long term is known as development bond. It
matures normally in five years or more. It can be used as collateral if holder need to
loan. The holder normally gets 90 percent amount of total value when they use it as
collateral. Interest is paid on the semi-annual basis. The income from these bonds is
taxable. It was firstly issued in 2020, amounting Rs. 131 lakhs with a maturity period
of five years. It has Rs. 294785 lakhs liability on development bond till 2066 Ashad.
National saving Bond
It is also a long-term bond and it normally bears maturity period of five years. It has
fixed interest rate payable semi-annually. These bonds are normally taxfree bond and
having high interest rates. The main holders of these bond are general public because
it is focused to the individual investors but also organizations and financial
institutions etc can purchase it, as they have right to purchase national saving bonds.
GON initiated the process of selling national saving bond since 2040 B.S. GON has
issued national saving bond, amounting Rs.2169.15 lakhs with 5 years maturity and
6.5 percent interest rate in 2061B.S. It has Rs.2169 lakhs liability on these bonds at
the of 2066 Ashad.

Special Bond
By definition, it is issued on special occasion when government falls sort of funds.
The government issues special bonds to those parties to whom the government has to
make payments. Instead of paying cash, the government issues special bonds as a
substitute of cash repayment and extends the period of payments. The holder of this
bond can use it as collateral to fulfill their funds need. The holder receives 50 percent
cash, when they use it as collateral. GON was started the process of selling special
bond since 2023 B.S. Till 2066 Ashad, GON has Rs. 2296 lakhs liability on special
bond.

Citizen Saving Bond

It is also a long-term bond instrument of government which normally matures in five
years. The characteristic of the citizen saving bond is same as the other long-term
bonds. The only difference is that it cannot be used as collateral. It has also fix
interest rate and payable semi-annually. It can be purchased by individuals as well as
institutional buyers. It is also a taxable bond. It was first issued in 2058, amounting
Rs. 6281 lakhs. It has Rs.44336 lakhs liability on citizen saving bond at the end of
2065 Ashad.

Corporate Bond Market

The market that deals on the bond issued by corporation in order to fulfill their
financial needs is known as the corporate bond market. The history of corporate bond
market in Nepal is very short. Till 2066 Ashad, only sixteen bonds are issued. Out of
them six bond are listed in NEPSE.

Firstly, bottlers Nepal had issued debenture of Rs.5 million in fiscal year 1986/87
and was redeemed at maturity period. Similarly, Shree Ram Sugar Mills Ltd. had
issued debenture worth Rs. 93 millions in the fiscal year 1997/98. It was convertible
in nature and having 14% coupon rate annually. But due to insufficient public
response it failed in its target. The whole money was refunded before maturity.

While taking about involvement of banking sector in Nepalese bond market,

Himalayan bank Ltd. Nepal, Investment bank Ltd, Everest bank Ltd, Bank of
Kathmandu Ltd, NIC Bank Ltd, Nepal SBI Bank Ltd, Kumari Bank Ltd, Nabil Bank
Ltd, Siddharth Bank Ltd, Laxmi Bank Ltd are issued debentures.

The trading mechanism of bond in primary and secondary market is same as the
stock transaction. Same as issuing share, for bond issued first the offering must be
approved by the board of directors. Then a registration statement is prepared for
review by security board. If accepted the statement, it is effective and securities are
sold. The trading of bond is done by NEPSE in secondary market.

The above presented statement of Nepalese bond market shows Nepalese

government is more forward than corporate sectors in exercising bond instruments. It
is clear that in growth of bond market of Nepal, there is great contribution of NRB,
security board, NEPSE, commercial banks, private organization etc.

There has been made some important legislative provisions, which are directly and
indirectly concern on bond market of Nepal, which are:
 Prevailing securities legislation:
 Securities Related Act, 2006
 Stock Exchange Regulation, 2007
 Securities Businesspersons (Broker, Dealer and Market) Regulation, 2007
 Securities Businesspersons (Merchant Banker) Regulation, 2007
 Securities Registration and Issuance Regulation, 2007
 Approval of OTC (Over the Counter) Markets Operation, Bylaws, 2008

Features of Bond

The basic features of bond are as follows:-

Maturity Date

It is the date at which bond matures and holder receives the final payment of principal
and interest. As per the CFA institute, there are three classes of maturity namely short
term maturity (one to five years in length), intermediate term maturity (five to twelve
years in length) and long term maturity (twelve or more years in length).

Par Value/ Face Value

Par value is the stated face value of the bond. It can be any amount but is typically
$1,000 per bond.

Coupon Rate

Coupon rate states the interest rate the bond will pay to the holders each year. To find
the coupon amount, coupon amount is multiplied by the par value. Generally, the
higher the rate, the less price sensitivity for the bond price because of interest rate
movements.

Importance of Bond Market

Bond market is essence to accelerate any nation’s economy. The significance of bond
market to it’s participating are as follows:

• Importance of Bonds to Investor

Bonds pay interest semiannually and thus is considered to provide a
predictable income stream. Generally the people invest in bonds for the
expected interest income and also for preserving their capital investment. The
bonds play major role in the in diversifying the investment portfolio for
attaining the financial objective.
• Importance of Bonds to Corporation
At some point the company faces the situation where it has to generate the
fund in order to finance the new project or a plant expansion. Notes payable,
leasing and the issuance of common shares are few methods of generating the
funds. Notes payable and leasing does not help in generating huge money, as
 they involve finding individuals, companies or financial institutions who are
willing to supply the needed funds. Issuing stock allows the share holder a
certain measure of control, which not be in the interest of corporation. The
other advantage is that the interest on bonds is deductible on the corporation’s
income tax return. Hence, corporation issue bonds.

Roles of Bond Market in the Economic Development

The development of bond market facilitates transparency i.e. pushing companies to
disclose in public markets and forcing them to better understand themselves. It
provides a competitive platform and thus demanding for effective management and
practicing financial discipline. The development of bond market would serve
investors with investment choice i.e. investing in bond or deposit in bank. It reduces
the dominance of banking sector in Nepalese capital market i.e. creating competition
between bond market and local banking. Bond market would promote efficient
diversification and protects the investors from concentrated financial markets
securities. It reduces reliance on and exposure to the banking sector in case of future
shocks. It enables the allocation of available funds in the economy to the most
productive uses i.e. funding essential economic activity such as funding of either
ongoing general purpose business needs, or specific projects for innovation,
investment, or growth by companies.

Constraints on Development of Nepalese Bond market

Nepalese bond market has tiny operation and the factors hindering Nepalese bond
market development factors are:
Low Demand
Nepalese bond investors comprises of 70% of private investors mainly insurance
companies and remaining public investors. Lack of public awareness has negative
influence over the development of Bond market. It affects the demand and acceptance
of the product in the market. The issuer on bond may get de-motivated due to market
acceptance risk and affecting reputation of the company if bonds are undersubscribed.
Thus, inadequate supply base and low demand for the product create challenge in
bond market growth.

Volatility
The volatility in share markets influences the investors’ perception. Such volatility
can lead to a general erosion of investors’ confidence and flow capital away from
share market as well as adversely affecting investment decisions in bond market.

Capital Gain
The Nepalese investors seeking for capital appreciation rather than fixed flow of
income tends to prefer stock market. Unlike bond market, stock market is more liquid
and has wide coverage.

Alternative sources of debt financing

The corporate house and listed companies in Nepal seek alternate source of debt
financing i.e. borrowing from commercial bank to design their capital structure. Such
tendency discouraged issuer from entering into bond market incurring relatively high
cost. For instance, the number of banks form syndicate for financing large projects of
companies. Borrowing companies find such source of funding cheap as well as
flexible and tailor made. As a result of which, the corporate bond are less attractive to
them.
Illiquid Secondary bond market
The trading of bond in secondary market is negligible creating liquidity problem for
bond investors. This phenomenon discourages investors and thus acts as constraint in
development of bond market.

High transaction cost of bond issuance

The transaction cost of bond is relatively higher than stock issuance due extra cost of
annual trustee fees and promotion cost is also high because of lack of public
awareness.

Disclosure
There are big corporate house such as Chaudhary Group, Khetan group, etc. The
unwillingness of such companies to meet the disclosure requirements for listings on
the exchange has reduced the supply of the corporate bonds.

Yield Curve
One of the limitations why government bond is lacking efficiency is inability to
develop proper yield curve. An yield curve for government bonds facilitates
government debt management as well as development of corporate bond too.

Political Instability and Unpredictable macroeconomic environment

Political instability is one of the factors leading to low confident and distrust in
market and thus act as obstacle in development in bond market. Political stability and
predictable microeconomic environment are the essence for creating and maintaining
trust among investors, inducing financial discipline, etc

Objectives
The study of Nepalese bond market has been conducted with the following
objectives:
• To know the current situation of bond market and the steps taken for
development.
• To understand the challenges for growth of Nepalese bond market.
• To get an overview of why Nepalese bond market is lagging behind by
exploring perspective of players in Bond market.

Rationale

This study will provide guidelines to the investor to achieve their overall objectives of
expected interest income and also for preserving their capital investment. Also, this
study helps to perform debt and cash management functions and evaluate the existing
risk. It provides the mutual bond between the money market instruments. In order to
understand the reason behind the slow developing of the bond market in Nepal, this
research study is conducted.

The bond market is responsible for channeling financial resources from the surplus to
those who needs additional fund to carry out some form of economic activities. It is
used to trigger economic development of country. Bond market in Nepal is lagging
behind that shows its negligence in present situation.

This study has been conducted to understand the current situation and challenges for
the Nepal bond market through the traders and experts in the financial market. The
bond market will help to reduce the concentration on bank and financial institutions
for fulfilling the financial need developing countries, bond market is still developing
stage .In Nepalese context, there are very few research works about the
bond/debenture market.
It has been found that there is little concern about bond market of Nepal among the
researcher, concerned experts, investors as well as the corporate bodies and
corporation. Now a day, it has been seen that investors are interested to invest on
bond /debenture securities too. Bonds are assumed less risky security of investment
with fixed return. They are less risky security in the sense that there are very few
chance of losing principal and interest even in liquidation of company .They are
means of maximizing value of firm. Shortages of the fund for the process of industrial
expansion and growth can be received from bond issue. Instead of having so many
opportunities Nepalese bond market is not being able to grow smoothly. Bond
securities are firstly issued by the capital raising companies through primary capital
market and later on these securities are negotiable in secondary capital market.
Capital market provides investors good investment opportunity with fair return and
instant liquidity with minimum risk of loss. On the one hand corporate bodies are
suffering by financial crisis, on the other investors with surplus money cannot find the
appropriate investing scheme. They are unable to bring product innovation,
introducing new technologies, and employing management and technological expert
due to lack of funds. Only some management organization can utilize this fund by
issuing bond, but there is not proper exercise of bond in Nepalese capital market.

In the past bond securities issues were under subscribed, but thereafter they are
oversubscribing. This shows the growing trend of bond market. Bond markets have
some prospects of growth even if the whole economic growth id in downturn due to
political instability. There is very high risk to invest in shares, but low risk to invest in
bonds. Many companies are going to be liquidated due to political of borrowers.

We can find that the countries with developed bonds market are developed
countries .As such countries spent heavy investment in research and development
activities, many research works regarding to the bond market are conducted. In
instability in the country. And in such situation the bondholder are very safe than
share shareholder. But investment in share is higher than in bond. As we know,
investment strategies also depend on the investment environment. But in Nepal such
investment strategies are not practiced yet .In this way, it is seen that public concern
towards bond market is growing but there are various problem found by organization
and people concerned with it. This hinders the growth of bond market. Inadequate
legal provisions, limited supply of quality bonds, poor knowledge about securities etc.
might be the obstacles in the development of bond market. Thus the researcher felt
need of research on topic trend and problems of bond markets in Nepal. The
researcher gives his attention in identification of past and future trend and problems
restricting Nepalese bond market.

Beside these, some specific problems are as follow:

• What is the trend of government bond as well as corporate bond issues in
Nepal?
• What are the main problems of bond market in Nepal?
• What are the value and duration of Nepalese corporate bonds?
• What is the position of bond market in the structure of Nepalese securities
market?
• What are the prospects of developing corporate bond market in Nepal?
• Who are the key investors of government bond and corporate bond?
• What are the key characteristics, valuation and duration of corporate bond?
• What should be done to promote the bond market of Nepal?

Review
Bonds are mostly fixed-income capital market securities and one of the popular debt
instruments. This study has been conducted with the objective of understanding the
current situation and challenges for the Nepalese bond market through the perspective
of issuers, traders and experts in the financial market and comparison with some of
the countries in South Asia.

Bond markets play an important part in diversified financial systems by linking

borrowers that have financing needs with investors that are willing to place funds in
interest-bearing securities.

The bond market not only serves particular borrowing needs efficiently but also helps
in effective functioning of the financial market Also, it is considered that a developed
bond market will help reduce the concentration on banks and financial institutions for
fulfilling the financial needs of the borrowers.

In context of Nepal, bonds are largely inactive and occupy lesser portion of the total
capital market. Bonds (government and corporate) constitute of 12.76% of the paid up
capital of listed securities; equity being the highest in proportion (87.23%) and
remaining in mutual funds (0.00583%) and preferred stock (0.00093%), (NEPSE,
2013). With high concentration of banks and financial institutions in financing the
debt needs, the importance of bond market is even more eminent considering the need
to invest for infrastructure development projects like hydropower, real estate,
construction, transportation, etc.

The Nepalese bond market is growing very slowly and this can be attributed to
various factors. According to a study of World Bank, the Nepalese bond market
development has not been regarded as a top priority due to the civil unrest dominating
policy makers’ concerns. The challenges for the bond market in Nepal is due to the
factors like: shallow bond market, political situation and volatile economic
environment, inadequate regulatory environment, Absence of money market, lack of
institutional investors, absence of sufficient reliable data to build yield curve, absence
of specialized market intermediaries, differential taxation in interest, lack of
investors’ education, high cost of trading and high trading lots.

The factors like legal and regulatory framework, market infrastructure, lack of proper
price mechanism, small investor base, lack of foreign investment, etc. have been
lagging in the development of bond market in those countries. The development of
Nepalese bond market can be initiated through the efforts of all the stakeholders of
the capital market to increase breadth and depth of the market. The development of
the bond market needs can be done in terms of improving money market, improving
market infrastructure, enhancing corporate governance through better regulatory
framework, etc.

Methods

The study group used both primary and secondary source of data to prepare the
report. First secondary data were collected and studied to develop conceptual
framework of the study and scope the study. After determining the scope of the study,
primary data were collected i.e. the study group set open ended questionnaire for
structured interview with bond brokers and corporate officers.

The study has been supported by secondary data such as research articles, newspaper
clippings, bond data from NEPSE and SEBON, website materials, books, etc.

This study is mainly descriptive in nature i.e. analyzing the views and opinions of
concerned people in Nepalese bond market. It also includes quantitative analysis to
support qualitative perspective of bond market. Finally, based on the findings and
analyses, recommendations have made.

Limitations

This study is simply conducted for the partial fulfillment of the requirement for the
degree of Bachelor of Business Studies. There are certain limitations of the study
among which some of the important ones are as following:
• The lack of adequate data from relevant source can also make some
differences in the interpretation of the study.
• Nepalese bond investors are not much active due to which the study was not
able to take chance to gather their opinion.
• The qualitative analysis can be biased as it is based on the view of certain
experts and traders which can be based on certain factors and beliefs about the
market.
• Due to the lack of trading of bonds in secondary market, the study is based on
the issue date rather than current date.
• The lack of adequate data from relevant source can also make some
differences in the interpretation of the study.

CHAPTER – II
 RESULT AND ANALYSIS

Data Presentation

In this chapter an attempt has been made to analyze and evaluate major financial items,
which have an impact in bond market. A number of financial ratios that are crucial in
evaluating bond market have been calculated and analyzed in this chapter. After this, the
bond market of Nepal has been explored.

Analysis of Results

In analysis we have constructed yield curve for both government and corporate bond. It is
graphic presentation of relationship between various times to maturity and yield of
particular bond. Investors can use the yield curve for forecasting interest rates, pricing
bonds and creating strategies for boosting total returns. It is also indicator of economic
condition of any economy. But in case of Nepal it is very difficult to construct feasible
yield curve as bonds in Nepal have rare trading. So, we use total time to maturity rather
than remaining maturity time from today date because we can’t find today’s market price
and interest rate of bond as bonds are not trading in secondary market.

Government Development Bond Yield Curve

Government development bond yield curve as shown below is inverted shaped yield
curve. This shape of yield curve is very rare, and it form during extraordinary market
condition where the future are expected to offer lower yields than bonds with shorter
maturities which is opposite to the pure expectation theory. This yield curve demonstrate
two basic outcomes: first, investors are not benefited for holding long term development
bond and second the economic condition will be down in future.

In this situation the investors will be compensated few for taking more risk. This may
also be a reason why investors are not choosing to purchase government development
bond. However some investors may perceive this inverted curve as an indication that the
economy will soon experience a slowdown, which causes future interest rates to give
even lower yields. So it is better to buy long this government development bond at
present yield because future yields will be even lower if economy will slowdown in near
future.

Fig. No. 1 Government Development Bond Yield Curve

Corporate Bond Yield Curve

The corporate bond yield curve we constructed is mixture of normal and humped shaped
yield curve. Generally this shape yield curve forms during normal condition in the
expectation that beyond some slowdown in middle years, the economic condition will be
continue toward improvement. This yield curve demonstrates that investors can gain
benefit by holding long term corporate bond. In other words the market enforces long
term bond issuer to provide higher return in long term than short term. So, as compare to
GD bond corporate bond provide higher yield in long term.

14%

12%

10%

8%
YTM

6% Interest rate
Fitted values
4%

2%

0%
0 2 4 6 8 10 12 14 16 18
Time to maturity

Fig. No. 2 Corporate Bond Yield Curve

The given figure represent corporate bond yield curve. This yield curve demonstrates that
investors can gain benefit by holding long term corporate bond. In other words the
market enforces long term bond issuer to provide higher return in long term than short
term. So, as compare to GD bond corporate bond provide higher yield in long term.

The Credit Spread

The credit spread, or quality spread, is the additional yield an investor receives for
acquiring a corporate bond instead of government bond with similar maturity. As
illustrated in the graph below, the credit spread is the gap between line of corporate bond
yield curve and government development yield curve.

Corporate bonds have more risk of default than government securities and so, the yield
on corporate bond is higher than government bond while price is lower than those of
government bond. It is clear in this graph that corporate bond is providing extra amount
of risk premium to the investors in both short term and long term maturity period. So,
corporate bond is lucrative for less risk averse investors who want higher return by taking
more risk whereas GD bond is appropriate for more risk averse investor.

Watching from economic condition side, the below graph shows that economic condition
of Nepal will be contracting in long run thus corporate bond is compensating more in
long term compare to government bond.
Hence, it is better to hold corporate bond for long term whereas government bond for
short term
14.00%
13%
12.00%
11%
11.00
10%
10.00%
9%
8% 8% 8% 8%
8.00%

9.5 6%
6.00%
9.00
9 9 9 9
4.00%

8Corporate bond rate GD bond rate 2.00%

7.5

7.000.00%
123456789
Fig. No. 3 Credit Spread Chart
The above trend line shows the credit spread is the gap between line of corporate bond
yield curve and government development yield curve.Watching from economic condition
side, the above graph shows that economic condition of Nepal will be contracting in long
run thus corporate bond is compensating more in long term compare to government
bond.

Development of Bond Market in Nepal

The floatation of shares by Biratnagar Jute Mills and Nepal Bank Ltd. laid the foundation
for the development of securities market in Nepal. The government issued bond in 1964
for the first time in Nepal and it carried 6 percent rate of interest and had the maturity
period of five years (Shrestha, 2038). The transaction in secondary market begun at
NEPSE in 15th December, 2006. During the mid early 90’s, Nepalese economy faced high
liquidity and government securities not sufficient to mop up the excess liquidity.
Therefore, NRB issued bond in the name of “NRB Bond” for the first time in December
31, 1991. After the liquation was controlled, NRB bond was completely phase out in
Nepal from April 1, 1998.

Government Bond in Nepal

The bond market in Nepal has not been developed much. Even the existing bond market
is largely concentrated in the government bonds. The government bond is issued by
Nepal Rastra Bank and traded in NEPSE (secondary market). The government bonds
issued in Nepal are categorized under five types: Development Bond (DB), Citizen
Saving Bond, Foreign Bond, Special Bond and National Saving Bond.

The government bonds that are listed in the NEPSE along with the paid up capital are
given as following:
Table No. 1

Government Bond In Nepal

S.N Name Quantity Paid Up Amount

o Value (in Rs.)
1 Bikas Rinpatra 2072 7500000.00 100 750000
2 Bikas Rinpatra 2075 12000000.00 100 1200000
3 Bikas Rinpatra 2075 'ka' 21000000.00 100 2100000
4 Bikas Rinpatra 2076 22000000.00 100 2200000
5 Bikas Rinpatra 2076 "ka" 9000000.00 100 900000
6 Bikas Rinpatra 2076 "Ga" 4600000.00 100 460000
7 Bikas Rinpatra 2076 "kha" 10400000.00 100 1040000
8 Bikas Rinpatra 2072 "ka" 15000000.00 100 1500000
9 Bikas Rinpatra 2071 "ka" 20000000.00 100 2000000
10 Bikas Rinpatra 2071 "Kha" 30000000.00 100 3000000
11 Bikas Rinpatra 2073 "Ka" 27500000.00 100 2750000
12 Bikash Rinpatra 2069 15000000.00 100 1500000
13 Bikas Rinpatra 2072 "kha" 25500000.00 100 2550000
14 BIKAS RINPATRA 2072 "GA" 49909000.00 100 4990900
15 BIKAS RINPATRA 2072 100
"GHA" 30000000.00 3000000
16 100
BIKAS RINPATRA 2071 "GA" 50000000.00 5000000
17 Bikas Rinpatra 2070 "Ka" 35000000.00 100 3500000
18 BIKAS RINPATRA 2071 100
"GHA" 65000000.00 6500000
Total 449,409,000.0 44,940,900,00
0 0

(Source: NEPSE, NRB)

Among the different types of bonds issued, the development bond is the most popular
form of government bond and the foreign bond is the least popular one among the four
types of bonds. Even the listed securities compose of the development bonds only. The
trading of those bonds occurs very less due to which the yield curve generation and price
discovery is a difficult process.

The proposed and issued amount of the treasury bills and other long term government
bonds as of the year 2068/2069 B.S. is as following:

Table No. 2

Proposed and Issued Amount of Treasury and Long Term Gov. Bond

(Rs. In Billion)

TB DB CSB Foreign National Total

Bond Saving
Proposed 16 14 1.41 1.00 5.00 37.41
Amount
Issued 17.28342 14 0.12656 .00866 5.00 36.418651
Amount 5 6
Issued % 108.02% 100% 8.98% 0.866% 100% 97.35%

(Source: NRB)

As given in the table, the treasury bills are oversubscribed and the citizen saving bond
and foreign bond are undersubscribed. The unsubscribed amount of the citizen savings
has been transferred to the treasury bills. Even though the development bonds are traded
in listed secondary market, there is still no market for treasury bills. The treasury bills are
traded among the parties that determine the interest rates themselves and then inform to
NRB. The lack of secondary market for such money market instrument is also one of the
impediments for the development of bond market in Nepal.
The Treasury Bills still composes of the largest proportion (63.8215%) in the government
debt issued to public and others. The bond is yet to be popular among the investors. The
development bonds are the most issued long term bonds (27.8898%) as they have
provision of trading in the secondary market.

Total Government Bonds and Treasury Bills (Rs. in Billion, as of Ashadh end, 2069
B.S.)

Table No. 3

Total Government Bonds and Treasury Bills

S.No. Bonds Amount Percentage

1. Treasury bills 131.624107 63.8215
2. Development Bonds 57.519400 27.8898
3. Citizen Saving Bonds 4.1231 2.3029
4. National Saving Bonds 15.680000 5.9058
5. Special Bonds 0.157600 0.0764
6. Foreign Emp. Bonds 0.016040 0.0036
Total 209.1202 100.00

This shows that there is lot to be improved in the government bond sector too. The public
awareness about the existing bond alternatives and their benefits is a must. Without
making them aware, even the secure government bonds are not preferred in the market.
Also, the secondary market for those bonds needs development. Only development bonds
are being traded in the secondary market. The secondary market of Treasury Bills as well
as the long term bonds should be developed for the improvement of liquidity
improvement.
Current Situation of Nepalese Bond Market

The bond market in Nepal is relatively undeveloped where only a tiny corporate bonds
and government bonds are under operation. The prices of these bonds are not market
oriented i.e. not traded in secondary market. Currently, Nepal Rastra Bank issues five
types of bond to meet short and long term needs of funds. These instruments are:
Development bond, National Saving bond, Citizen saving bond, Foreign employment
bond and Treasury bond (of 28, 91,182 and 364 days). Besides these government
securities some corporate bonds are also issued to fulfill various long term financial
needs. According to current data of NEPSE in 2012, total listed government’s
development bond is 18 amounting NPR 44940.90 million where as corporate bond is 16
amounting NPR 6275 million. There are almost six million units of bonds listed at
NEPSE but never traded. The absence of such trading has not only marred the prospect of
bonds for small investors but also made difficult the actual valuation of bonds in market.

As of 2012, the government bond constitutes the majority with 88% of the total bond
issued whereas the remaining 12% is issued by corporate sector. Within the corporate
sector also, the majority is dominated by the commercial banks. This is because, banks
seeks to increase Tier II ratio to maintain the capacity of extending loan. Moreover, the
total bond to GDP ratios is 3.29% where as 31.7% for stock market capitalization to GDP
ratio. Currently, stock market captures 92% of total security market in Nepal. These
above figures demonstrate that the size of capital market is relatively very small as
compared to the stock market in Nepal.

Further, the rate of return on corporate bond is now in increasing trend than earlier days.
According current data of NEPSE, rate of return on Nepal SBI Bank Rinpatra 2078 is
12.5%, on SBL debenture 2075 is 11% and 10% on Global bank ltd debenture issued in
2068-2070 as compared to 8% on Nepal Bidhut Pradhikaran Rinpatra 2069, 6% on BOK
Rinpatra 2069, and 6% on Nepal Investment bank bond issued in between 2062-2065.
This inclines in rate of return may light the candles in the capital market of Nepal. Due to
such increment in rate of return and some kind of public awareness of bond, in fiscal year
2012-2013, the amount of corporate debenture issued in the capital market is almost
double the initial public offering (IPOs) held in fiscal year 2012-2013 compared to 2010-
11 and 2011-12.

Fig. No. 4 IPO vs. Debenture Issue

Findings
Every task is conducted in order to solve problems. This field work report entitled “A
Study of Bond Market In Nepal” is prepared to find out its various financial and
statistical tools. After completing the field work report, the researcher has drawn out the
following major findings.

• To fulfill the financial needs of the country, GON has use different types of
bonds. Out of them, T-Bills, Development bonds, special bonds, national saving
bonds and citizen saving bonds are major type of bonds. Outstanding amount of
T-Bills, Development bonds and citizen saving bonds are in increasing trend. But
outstanding amount of National saving bonds and special bonds are in decreasing
trend. By observing the trend of total government bond market, it is increasing
every year, which is good sign for bond market. If government maintain this trend
in future, it will be helpful to reduce external debt and by mobilizing internal debt
in productive sectors nation can get more benefit.
• While analyzing the ownership pattern of different government bonds. We found
that NRB, commercial banks, financial institutions, government and private
business enterprises, individual investors and others are the main holders of
different government bonds. NRB is the main investor of government bonds and
commercial banks is in second. Participation of financial institutions, government
and private business enterprises and individual investors is comparatively low.
Participation of individual investor is not satisfactory.
• With respect to preference regarding to the appropriate source of financing for
raising long term fund, the majority of respondents prefer the common stock. Due
to poor practice of issuing other alternatives as preferred stock, bond, mutual
fund, most of the investors are familiar with common stock only. So, the Nepalese
capital market has dominated by common stocks market. In the view of investors,
common stocks is more marketable the other securities. Lack of strength
secondary market of bond, poor practice of bond instruments, lack of investor's
 awareness are the reasons which do not attract investors towards bond market.
• As regards the most desirable bonds in Nepalese bond market, the majority of
respondents gave their first priority to ‘long-term government bond’, second
priority to ‘long-term corporate bond’, third priority to ‘short-term government
bond' and last priority to short-term corporate bond’ it shows that Nepalese
investors want to invest for a long period rather than short period and they also
want security on their investment therefore they preferred government bond rather
than corporate bond.
• With respect to preference for various sector's bond, the majority of respondents
choose banking sector's bond. Then after, manufacturing, hotel and Trading
sector's bond are preferred at second, third and fourth respectively. According to
respondents, Banking sectors are economically strong than other sectors at
presents. Therefore, investors are interested to invest on Banking sectors bond
rather than other sector's bond. It shows that in future, banking sector's bond
market may be prosperous. But on the other hand, least preference on other
sector's bond create lots of problem in growth of bond market as these sectors'
need more debt capital. So, all other sectors should disclose their good
performance reports like positive financial information to the general public or
investors in order to attract them towards their bond.
• With respect to reason regarding slow growth of bond market in Nepal, the
majority of respondents gave the first rank to lack of investors, awareness'. The
second rank to 'Insufficient supply of quality bonds', the third rank to’ Lack of
proper legal provision' and the fourth rank to "lack of capital gain opportunity'.
This study shows that Nepalese investors have little knowledge about bond
market because there is few practice of bond. Lack of quality bond supply is the
another main reason which hindered the properly growth of Nepalese bond
market. In Nepalese capital market, share issuances are heavily over subscribed
but bond issuances are not. This fact strongly support the above respondents
 opinion.
• Regarding the choice of type of bond, most of the respondents choose convertible
bond that after choose attached with warrant and lastly, they choose straight bond.
It shows that Nepalese investors want 'Sweetener' feature in bond, such as,
convertible facture, bond with warrant etc. But there is no practice of these type of
bond in Nepalese bond market. Therefore, investors are not much interested
towards bond market.
 Chapter – III

SUMMARY AND CONCLUSION

Summary

In a country like Nepal, the bank financing (loans) plays a much important role than the
debt instruments like bonds. For the development of any national economy, the real
sector development is very essential and for this different kinds of financial instruments
are developed. As one of the popular debt instruments in the developed nations, bonds
play a very important role in developing diversified investment environment which can
act as a cushion against risk from the concentration in the bank loans and equity market.

The Nepalese bond market is not well developed and the investors and borrowers still
prefer bank loans against the bonds. Even within the bond market, the government bond
composes higher proportion than that of corporate sector. The corporate sectors, public
regulatory sector (NRB), brokers and other experts hold different views regarding the
lack of incentive for bond market growth and development.

Compared to some of the developing countries in South Asia, the bond market of Nepal
is yet to develop in terms of investor awareness, proper implementation of regulatory
framework, integration of efforts for bond market development among the regulatory
body, issuers and traders. Even within the corporate bond issuers, the banks and financial
institutions are the major players and this can create yet another concentration risk for the
investors.

The development of bond market is yet a long path to follow, but the progressive steps
need to be taken by various sectors: regulatory bodies, potential issuers and the investors.
The challenges for bond market can be tackled through steps in the forms of
improvement in the public awareness, encouragement to the issuers for bond market
development, proper implementation of the regulatory framework, support from the
traders and building confidence about the security of the investments in bond market. The
development and growth of bond market needs lots of exercise from every related sector

Conclusion

Mostly, in the developing nations like Nepal, bond market is growing very slowly due to
various reasons. Despite the ongoing efforts from the regulatory bodies, the development
of the investment environment is hindered by several factors like lack of proper
implementation of regulations, difficulty in generating interest among the investors and
potential issuers, several complexities in issue and trading procedures, lack of
information among the investors, etc.

Compared to the South Asian bond markets in countries like Malaysia, Singapore, India,
the bond market is not being prioritized for the investment even by the government
sector. But there are similarities with countries like Bangladesh where the bond market is
facing lots of hindrance like in Nepal.

Nepalese bond market needs lots of reform for encouraging the issuers and investors to
be actively involved in the primary as well as secondary market. Even the government
bond as well as money market needs to be improved for providing initiatives to investors
and issuers. The regulatory body needs to integrate their efforts with issuers, investors
and secondary market. Even the benefits of bond market needs to be well communicated
to all related parties. Also, public needs to be made confident about the investment
environment. There are lots of steps required for the development of bond market in
Nepal, but continuous efforts need to be made for this.