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BENCHMARKED INSTRUMENTS

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There are certain debt instruments wherein the fixed income earned is based on a benchmark (i. e. MIBOR & LIBOR and for capital benchmark – NSE Nifty and BSE SENSEX). For instance, the Floating Interest rate Bonds are benchmarked to either the LIBOR, MIBOR etc.  

In short, a benchmark is a standard against which the performance of a security, mutual fund or investment manager can be measured. Generally, broad market and market – segment stock and bond indices are used for this purpose. 

Examples of Benchmark Instruments: 

Floating Interest Rate: Floating rate of interest simply means that the rate of interest is variable. Periodically the interest rate payable for the next period is set with reference to a benchmark market rate agreed upon by both the lender and the borrower. The benchmark market rate is the State Bank of India Prime Lending Rate in domestic markets and LIBOR or US Treasury Bill Rate in the overseas markets. 

Inflation linked Bonds: A bond is considered indexed for inflation if the payments on the instrument are indexed by reference to the change in the value of a general price or wage index over the term of the instrument. The options are that either the interest payments are adjusted for inflation or the principal repayment or both.

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