Gilt-edged instruments

Some borrowers can promise to repay and mean it completely, because they can never actually run out of money to do so. The Government of India is that kind of borrower, at least for its own rupee debt.

Securities the government issues to borrow are called government securities, or G-Secs. Because they carry no risk of default, the workbook calls them gilt-edged instruments — a name that signals the highest possible safety.

The Central Government issues both short-term treasury bills and longer-term bonds. State Governments issue only the longer-term kind, called State Government Securities.

G-Secs split by maturity. Treasury bills are short term, with an original maturity of less than one year, issued only by the Central Government, at standard maturities of 91 days, 182 days and 364 days. Government bonds, or dated securities, have an original maturity of one year or more, and are issued by both the Central Government and, as State Government Securities, by the states.

The 'gilt-edged' label rests entirely on the absence of default risk, not on liquidity or on the security's price stability — a gilt-edged instrument can still lose value if interest rates rise, even though the government will still repay it in full at maturity.

An investor buys a 91-day Treasury Bill for Rs 98,500, redeemable at Rs 1,00,000 on maturity — a gilt-edged instrument with zero default risk, since the Central Government stands behind it. The Rs 1,500 difference is the investor's return, built into the price rather than paid as a separate coupon.

A second investor buys a 10-year Government of India bond instead, paying a fixed coupon every year. Both instruments are gilt-edged — safe from default — but the bond's price can still swing sharply if interest rates move, purely because of its longer maturity, even though the government's promise to repay never weakens.

Chapter 6 (Securities Market Segments), section 6.1.3 (Issuers of Securities), introduces gilt-edged instruments while describing government securities, immediately naming the 91/182/364-day treasury bill maturities. Expect a question on which level of government issues treasury bills versus dated securities, or one testing whether 'gilt-edged' means free of default risk or free of price risk.

• Gilt-edged means no default risk — not no price risk. A gilt-edged bond's market price still moves with interest rates.
• Only the Central Government issues treasury bills. State Governments issue only State Government Securities, the longer-term kind.
• Do not confuse the 91/182/364-day treasury bill maturities with the tenor of a dated security, which runs to a year or more.