Bond Primary Market Pricing

1 What primary-market pricing means

In the primary market a bond is sold for the first time, by the issuer to investors, and the issuer receives the money. Pricing at issue answers one question: what coupon or yield must the issuer offer so that investors pay the price the issuer wants (usually par)? Once the bond is issued, it trades between investors in the secondary market, and the issuer receives nothing from those trades.

The two markets are tied together. A new issue is priced off the secondary-market yield curve: investors will not accept less than they can earn on similar bonds that already trade. Section 3 builds the issue yield from that curve, and Sections 4 to 6 show how each issuer type turns it into a price.

Throughout, prices are per ₹100 of face value and yields are annual, compounded semi-annually for government securities (the Indian convention) unless stated otherwise.

2 The core principle: price = present value at the market yield

A bond is issued at the price that equals the present value of its promised cash flows, discounted at the yield investors demand on the issue date. The coupon is then chosen so that this price comes out at or near par.

where P = issue price, C = annual coupon in ₹, F = face value (₹100), y = market yield required at issue, f = coupon payments a year (2 for Indian government securities), n = years to maturity.

The formula assumes settlement on a coupon date, regular coupon periods and redemption at face value. Coupon rates and yields must use the same compounding convention. Three outcomes follow from comparing the coupon with the required yield:

Worked example 1: one bond, three coupons

A 10-year bond, ₹100 face value, semi-annual coupons. Investors require 7.00% a year (3.5% a half-year) for this credit and tenor. There are 20 half-years.

Setting the coupon in practice

1. Read the required yield for the tenor and credit (Section 3).
2. Round it to the market's convention: two decimals for government securities, often two decimals or a quarter point for corporate bonds.
3. Set the coupon equal to it for a fresh issue, so the bond is sold at or very near par.
4. For a reissue (a further tranche of a bond already outstanding), the coupon is already fixed, so investors bid a price instead, and that price can be above or below par.

3 Building the issue yield

Every primary issue starts from the risk-free government curve for the same maturity and adds a premium for each extra risk the investor takes. The sum is the yield the issue must offer.

The exact benchmark tenor rarely exists, so it is interpolated from the two nearest points on the curve:

Worked example 2: pricing a 5-year AAA corporate bond

Illustrative numbers. A AAA-rated public-sector company plans a ₹1,000 crore, 5-year bond with annual coupons. The government curve shows 6.30% at 4 years and 6.50% at 6 years. For this teaching example, assume a pure credit component of 65 bps after separating liquidity and structural effects. All benchmark yields in this example are expressed on an annual-effective basis to match the corporate bond valuation.

If the issuer instead sets the coupon at 7.10%, investors still demand 7.20%, so they would pay only about ₹99.59 per ₹100. That is PV at 7.20% of five annual coupons of ₹7.10 plus ₹100 at maturity. In coupon-discovery bidding at par, the market can require a higher coupon. If the coupon is fixed, price bidding instead produces a discount price.

4 Government securities: pricing by RBI auction

The Reserve Bank of India (RBI) sells central government dated securities (G-secs) through auctions held on the E-Kuber platform. The price is not fixed in advance: it is discovered from bids. Since 1 April 2024, all securities under the market borrowing programme are auctioned by the multiple-price method (Business Standard).

Yield-based and price-based auctions

RBI states this in each auction notice: "yield based for new security and price based for securities which are re-issued" (RBI press release, 25 June 2026 auction).

Multiple-price versus uniform-price

Competitive and non-competitive bids

1. Competitive bids: banks, primary dealers, mutual funds, insurers and other large investors bid a yield or price for a quantity.
2. Non-competitive bids: up to 5% of the notified amount of each security is reserved for eligible individuals and small institutions. They are allotted at the weighted average yield or price of the successful competitive bids, without bidding a rate (RBI).
3. Greenshoe: the government may retain more than the notified amount (for example, up to ₹2,000 crore extra on each security in the 25 June 2026 auction).

How the cut-off is found

1. Deduct the actual accepted non-competitive allocation from the notified amount to determine the competitive allocation, subject to the auction notice. The 5% reservation is a maximum, not an assumption that the full amount is always subscribed.
2. Sort competitive bids from the lowest yield (highest price) upward. The government wants the cheapest money first.
3. Accept bids in that order until the available amount is filled. The yield of the last bid accepted is the cut-off yield.
4. Bids exactly at the cut-off are allotted pro rata if they exceed what is left.
5. Bids above the cut-off yield are rejected. RBI may also reject all bids if the cut-off is out of line with market levels.

Worked example 3: a yield-based, multiple-price auction

Illustrative numbers. A new 10-year G-sec, notified amount ₹10,000 crore, semi-annual coupons. Non-competitive bids take 5% = ₹500 crore, leaving ₹9,500 crore for competitive bids.

Underwriting by primary dealers

Primary dealers (PDs) underwrite every dated-security auction, so the government is sure to raise the full amount.

1. Minimum underwriting commitment (MUC): each PD must underwrite a fixed share, about half the notified amount in total.
2. Additional competitive underwriting (ACU): PDs bid for the remaining half in a separate auction on the morning of the main auction. They quote a commission in paise per ₹100.
3. Devolvement: if the main auction is under-subscribed, the shortfall devolves on the PDs in proportion to what they underwrote, and they must buy it at the cut-off.

Real example: for the 6.68% GS 2040 reissue (₹17,000 crore), MUC was ₹8,505 crore and ACU ₹8,495 crore, so the whole issue was underwritten. The ACU cut-off commission was only 0.39 paise per ₹100, a sign that PDs saw little risk of devolvement (The Tribune, 29 May 2026).

Auction-day timeline (dated securities)

Timings as in RBI's notice for the 25 June 2026 auction (RBI); check each notice, as timings can change.

5 Treasury bills: pricing at a discount

Treasury bills (T-bills) pay no coupon. They are issued below face value and repaid at face value, so the whole return is the discount. RBI auctions 91-day, 182-day and 364-day bills every week, with price-based bids.

where P = price per ₹100, d = days to maturity, y = annualised implicit yield (the yield RBI publishes). It uses simple interest on the price paid and a 365-day year.

Worked example 4: the 19 August 2026 T-bill auction

Real cut-off prices from RBI's result (RBI press release, 19 August 2026):

On the 91-day bill the government received ₹8,883.50 crore (9,000 × 98.7055 ÷ 100) and repays ₹9,000 crore after 91 days. The ₹116.50 crore difference is the interest.

Working the other way: a bidder who wants a 5.26% yield on the 91-day bill bids 100 ÷ (1 + 0.0526 × 91 ÷ 365) = ₹98.7056.

Implicit yield versus discount yield

US-style quotes often use the bank discount yield, (100 − P) ÷ 100 × 360 ÷ d, which divides by face value and uses 360 days. For the positive-return 91-day bill above, this gives 5.1211%. Using a 365-day discount basis instead gives 5.1922%. The Indian implicit yield is 5.2603%, based on the price paid and a 365-day year. These are different quotation conventions; state the denominator and day-count basis when comparing them.

Other discount instruments priced the same way

6 Corporate bonds: Electronic Book Provider (EBP), public issues and book building

Two routes to market

When EBP is mandatory

The Securities and Exchange Board of India (SEBI) requires private placements of debt securities, Non-Convertible Redeemable Preference Shares (NCRPS) and municipal debt to go through the EBP when any of these holds:

• a single issue of ₹20 crore or more, including any greenshoe;
• a shelf issue whose tranches add up to ₹20 crore or more in a financial year;
• a later issue that takes the year's total to ₹20 crore or more.

Smaller issues may choose to use the platform. Issuers in existence for less than three years may use it whatever the size.

Key EBP mechanics (NSE operating guidelines, updated 17 Nov 2025)

Uniform yield vs multiple yield allotment

• Uniform yield. Every successful bidder gets the cut-off coupon and pays face value (₹100). This is the most common choice.
• Multiple yield. The coupon is still the cut-off coupon, but each bidder pays a price that delivers the yield they bid. Bidders who bid below the cut-off therefore pay more than par.

Worked example 5: EBP coupon discovery (illustrative)

A AAA-rated PSU issues a 5-year bond with annual coupons. Base issue is ₹500 crore with a greenshoe of ₹250 crore. The coupon is discovered in closed bidding, and the issuer accepts ₹750 crore.

Step 1. Sort bids from lowest coupon to highest and accumulate.

The book is 1.40 times the total issue size (₹1,050 crore ÷ ₹750 crore). The cut-off coupon is 7.12%. At the cut-off, ₹150 crore is left out of ₹200 crore bid, so each bidder there gets 150 ÷ 200 = 75%.

Step 2. Uniform yield. The coupon is 7.12%, every bidder pays ₹100, and the issuer raises exactly ₹750.00 crore.

Step 3. Multiple yield. The coupon is 7.12%, and each bidder pays the price of a 7.12% bond at the yield they bid:

Price = Σ 7.12 ÷ (1 + y)^t for t = 1 to 5, plus 100 ÷ (1 + y)⁵

Multiple yield raises ₹0.96 crore more for the issuer with these bids and allotments held constant. Each bidder must consider the price implied by their own bid: a yield below the cut-off implies a premium price. This does not guarantee truthful bidding; strategic bidding can occur, and proceeds need not be higher when bidders change their behaviour.

Public issues and the role of credit rating

• A public issue is made through an offer document with the coupon fixed in advance, usually as several series (for example 3, 5 and 10 years, with annual or cumulative payment). Allocation follows investor categories, such as institutions, non-institutions, HNIs and retail.
• At least one credit rating is required. The rating sets the credit spread the market demands (Section 3) and, for EBP issues, the anchor limit above.
• Pricing rule of thumb. Fixed coupon = interpolated Government Security (G-sec) yield for the tenor + the spread recently paid by issuers of the same rating, sector and tenor + a small retail or new-issue premium.

7 State Development Loans (SDLs) and special bond structures

SDLs

• State governments borrow through SDLs. The Reserve Bank of India (RBI) auctions them on behalf of the states, usually every week, on the same multiple-price, yield-based e-Kuber platform used for central Government Securities (G-secs).
• SDLs are priced as a spread over the G-sec of the same maturity. The spread depends on the state's fiscal position, the auction size and liquidity. A state with a weak fiscal position or a very large borrowing usually pays more.
• Illustration. The 10-year G-sec trades at 6.50% and comparable SDLs clear about 40 basis points (bp) above it. A new 10-year SDL is then likely to cut off near 6.90%. If the auction clears at 6.95% instead, a reissued 6.90% SDL (semi-annual coupons) would price at 99.6439.

Zero-coupon bonds

A zero-coupon bond pays no coupon, only face value at maturity. It is issued at a discount.

Price = 100 ÷ (1 + y)ⁿ

Example. A 5-year zero at a 7.20% annual yield: 100 ÷ 1.072⁵ = ₹70.64. The investor's whole return is the ₹29.36 of accretion to par.

Floating Rate Bonds (FRBs)

• Coupon = benchmark + fixed spread, reset periodically. In India the benchmark is usually a Treasury bill (T-bill) yield or a Mumbai Interbank Offered Rate (MIBOR)-linked Overnight Indexed Swap (OIS) rate, and the reset is usually every six months.
• In the primary market, investors bid the spread, not the coupon. The cut-off spread becomes the fixed spread for the life of the bond.
• Why it prices near par. At each reset the coupon moves back to market levels, so price risk is limited to changes in the required spread. Example: benchmark 182-day T-bill 5.57% + 1.10% cut-off spread = 6.67% first coupon.

Callable and puttable bonds

• Callable bond. The issuer may repay early, typically when rates fall. Investors demand a higher yield to compensate for that option. Yield to Worst (YTW) is the lowest contractual yield across maturity and the applicable issuer call dates and redemption prices, assuming payment as promised. With a single call date, it is the lower of YTM and YTC.
• Example. A 10-year 7.40% bond (annual coupon) callable at par after 5 years is issued at ₹101.50.

The YTW is 7.03% for the stated maturity and single call scenario, assuming payment as promised. YTW is a yield comparison measure, not a complete valuation model or a guaranteed return. Valuation should also consider call terms, likely exercise and, where appropriate, an option-adjusted spread model.

• Puttable bond. The investor can demand early repayment. The option belongs to the investor, so the bond prices at a lower yield than an otherwise identical straight bond.
• Bank capital bonds. Additional Tier 1 (AT1) and Tier 2 bonds carry call options and loss-absorption features, so they pay a clear spread over senior bonds of the same bank.

8 Issue costs and the all-in cost of borrowing

The coupon is not the issuer's true cost. The issuer receives the issue price minus issue expenses, and may also pay recurring fees. The all-in cost is the Internal Rate of Return (IRR) of the issuer's net cash flows.

Typical cost items

The actual rates vary by issuer and deal. The figures below are illustrative.

Worked example 6: all-in cost (illustrative)

A company issues a ₹500 crore, 5-year bond with a 7.20% annual coupon at par. One-time costs are 0.25% of face value and recurring costs are 0.02% a year.

The gap of about 8 bp is the price of accessing the market. On a small issue the fixed costs are spread over less money, so the gap is wider. That is one reason smaller issuers often prefer a bank loan.

Investor yield vs issuer cost

• Investor yield = the yield on the price the investor pays (before tax). In Worked example 5, the multiple-yield bidder at 7.05% earns 7.05% even though the coupon is 7.12%.
• Issuer cost = the IRR of what the issuer actually receives and pays, including fees.
• A discount issue (coupon below the market yield, Section 2) raises less cash today but keeps the coupon low. The cost is still the market yield plus fees.
• What issuers can control: timing, tenor choice, call features, the rating, the choice between uniform and multiple yield, and building a regular issuance programme that lowers the new-issue premium.

9 Case study: a public issue of NCDs, A to Z

This case follows one secured Non-Convertible Debenture (NCD) public issue from the board meeting to the final redemption. It pulls together everything above: the issue yield from Section 3, the series design, allotment, listing and the all-in cost from Section 8. The issuer and every number in it are fictional and illustrative.

A. Decide and approve

1. Board resolution approving the shelf limit, tranche size and authorising a committee to fix the terms.
2. Shareholder approvals where needed: the overall borrowing limit (Companies Act, 2013, Section 180(1)(c)) and creating a charge on assets (Section 180(1)(a)).
3. Check the issue fits the HFC’s Asset-Liability Management (ALM) gaps: 3- and 5-year money matches the life of home loans better than short bank lines.

B. Appoint the team

C. Rating, security and documents

• The CRA rates the NCDs AA (Stable). The rating fixes which comparable bonds set the spread (Section 3).
• The debenture trustee completes due diligence on the receivables offered as security and confirms the 1.10× asset cover.
• A Recovery Expense Fund is created with the designated exchange: 0.01% of the issue size, capped at ₹25 lakh. On ₹300 crore that is ₹3 lakh, kept for the trustee to use if it ever has to enforce the security.
• Documents: debenture trust deed, security documents, and the draft shelf prospectus.

D. Regulatory filing

1. The draft shelf prospectus is filed with the designated stock exchange and posted for public comments (7 working days).
2. The exchange gives in-principle approval for listing.
3. The final shelf prospectus and the Tranche I prospectus (with the coupons) are filed with the Registrar of Companies (RoC), the exchanges and SEBI, and the issue is advertised.

E. Price the series

Retail NCDs are sold at par with a fixed coupon for each series, so the coupon must equal the yield investors need (Section 2). The lead manager builds that yield exactly as in Section 3, from the G-sec curve, the spread on traded AA HFC paper of similar tenor, and a premium for selling a large tranche to individual investors.

The same yield is then offered in different payment patterns, so each investor can choose how they receive it:

F. The issue opens: who can apply, and how

• The issue stays open for at least 3 and at most 10 working days, and can close early once the full size is subscribed.
• Investors apply through Application Supported by Blocked Amount (ASBA): the money stays in their bank account, only blocked, until allotment. Individuals can also use UPI (up to ₹5 lakh per application) through their broker.
• All NCDs are credited in demat form.

G. Allotment: first come, first served

NCD public issues allot by date of application within each category. Every day’s applications are filled in full until the category is full; on the day it becomes oversubscribed, that day’s applications are allotted proportionately, and later applications get nothing. The issue closed early, after three days.

H. Close, allot, list

I. What the money really costs the issuer

A public issue costs more to run than an EBP placement: lead-manager fees, selling commission to brokers and distributors, advertising, registrar and exchange charges, stamp duty and the rating. Assume 1.75% upfront and 0.05% a year for trustee, rating surveillance and RTA. The all-in cost is the IRR of what the issuer receives and pays (Section 8):

Net proceeds are 300 × (1 − 0.0175) = ₹294.75 crore. Fees add about 60 bp a year to the cost, and the 3-year series feel it most because the upfront fee is spread over fewer years. That is the trade-off against a cheaper EBP placement: a public issue reaches new investors and builds a retail franchise, but costs more.

J. Life after listing

• Interest and redemption are paid on the stated dates to holders on the record date; the RTA runs the payments.
• Trustee monitoring: periodic asset-cover certificates, covenant checks and disclosures to the exchange.
• Rating surveillance: a downgrade would hit the secondary-market price.
• Debenture redemption: listed companies need not create a Debenture Redemption Reserve, but companies covered by the rules must keep 15% of the debentures maturing in a year in specified deposits or securities.
• Secondary trading: the price now moves with yields. One year later, Series III has 4 years left. If the required yield falls to 8.40%, the NCD trades at ₹1,014.77; if it rises to 9.40%, at ₹982.34. The coupon stays fixed; only the price changes.

10 Teaching caselets: three ways to see primary pricing

Three short caselets for class discussion. Each isolates one idea, uses small numbers you can check by hand, and ends with discussion questions and model answers. All numbers are illustrative.

Caselet 1 · New G-sec versus reissue

RBI holds two auctions on the same day, each with a notified amount of ₹6,000 crore. Non-competitive bids take 5% (₹300 crore), leaving ₹5,700 crore for competitive bids in each. The same five bidders take part in both.

• Auction A, a new 10-year G-sec: there is no coupon yet. Bidders quote a yield, and the cut-off yield becomes the coupon.
• Auction B, a reissue of 7.10% GS with 8 years left: the coupon is already fixed. Bidders quote a price, and the auction discovers the price.

Caselet 2 · One bid book, two auction formats

Multiple price: each winner pays the price of its own bid. Uniform price: every winner pays the cut-off price.

A · New issue: uniform price = ₹100 for everyone, because the coupon equals the cut-off yield.

B · Reissue: uniform price = ₹103.95 for everyone.

Caselet 3 · Corporate bond pricing bridge

A AA+ rated NBFC raises ₹1,000 crore for 7 years through a private placement on the EBP, with annual coupons. Follow the bridge from the government benchmark to the coupon and then to the issuer’s true cost.

5 · EBP book (uniform yield): the cut-off coupon is 8.04%, 0.4 bp above the required yield because bids are in whole basis points. The bonds are issued at par.

11 Practice problems with solutions

Try each one before reading the solution.

12 Key takeaways, abbreviations and sources

Key takeaways

1. A new bond is priced like any other bond: the present value of its cash flows at the yield the market demands on the day of issue.
2. Issue yield = benchmark G-sec (interpolated to the tenor) + credit spread + liquidity spread + structure premium + new-issue premium.
3. RBI auctions G-secs on a multiple-price basis (since April 2024). They are yield-based for new securities, where the cut-off yield becomes the coupon, and price-based for reissues.
4. Up to 5% of the notified amount is reserved for non-competitive bidders at the weighted average price. Primary dealers underwrite through MUC and ACU, and absorb devolvement.
5. T-bills are discount instruments: implicit yield = (100 − P) ÷ P × 365 ÷ d.
6. Corporate private placements of ₹20 crore or more must use the EBP. The coupon is discovered on yield priority, with pro-rata at the cut-off, and settled on a uniform-yield or multiple-yield basis.
7. Special structures change the yield to quote: zero coupon (discount accretion), FRB (spread bidding), callable (yield to worst).
8. The issuer's true cost is the all-in IRR after fees, which is always above the coupon for a par issue.
9. A public NCD issue runs from approvals, intermediaries, rating and security, through a shelf and tranche prospectus, to series priced off the G-sec curve, first-come-first-served allotment and listing within T+3 working days. Compare series on effective yield.

Sources

1. Reserve Bank of India, auction result press release, 25 June 2026
2. Reserve Bank of India, Treasury bill auction results, 19 August 2026
3. Business Standard: RBI returns to multiple-price auctions for G-secs (April 2024)
4. The Tribune: primary dealer underwriting (MUC/ACU) for 6.68% GS 2040 (29 May 2026)
5. NSE, EBP Operating Guidelines (updated 17 Nov 2025)
6. Taxmann: SEBI makes the EBP platform mandatory for private placements
7. SEBI circular (Sept 2024): listing of public debt issues within T+3 working days
8. NSE: guidance on the Recovery Expense Fund
9. Example of a 2026 NCD public issue: series, categories and first-come-first-served allotment

Worked examples 2, 3, 5 and 6, the NCD case study and the practice problems use illustrative numbers; every one of them is rebuilt with live formulas in the Excel workbook. Worked example 4 uses RBI's published auction results. Illustrative calculations use the conventions stated in each example. Regulatory thresholds, bidding rules and timings should be checked against the current official documents before use.

Educational content only. Worked examples 1, 2, 3, 5 and 6 and the practice problems use hypothetical numbers chosen for teaching; Worked example 4 and the primary-dealer underwriting figures are from published RBI auction results and news reports. Nothing here is investment advice. Rules and timings are as published at the time of writing; always check the current RBI notice, SEBI circular or EBP guidelines.