Bonds close day with gains of 2.67%
SBI Bonds which were issued in the last week of February were listed today. Since writing the article another corporate action has happened. The company announced the record date as the 17th of March for payment of interest for the year ended 31st March 2011. What this effectively means that even if one were to sell the bond today or till the 31st March, the Interest at the coupon rate for the 15 day period from the date of allotment to the end of the financial year ending 31st March 2011 would accrue to the original applicant. If we were to assume that the person had applied for the 9.95% bond than the accrued interest would roughly be Rs 41 per bond. The flip side to this is that the buyer of the bond loses interest on his investment even though he has paid for it. The bond prices are likely to remain firm as long as the coupon rate is the highest as bonds trade on yield basis.
The bonds closed for trading at a price of Rs 10,267. This is an effective premium of Rs 267 per bond. IF one adds the interest on the application amount of about Rs 55, the incentive which was given to brokers and passed on to applicants of about Rs 75 per bond, the total return in about 1 month to investors is Rs 437 per bond. (Rs 267 premium, Rs 40 accrued interest, Rs 55 interest on application and Rs 75 as incentive).
The yield on the 9.95% bond at the present market price of Rs 10,267 works out to 9.69%. There is no accrued interest and once the bond has traded for a few weeks one would find the yields increasing as there would be an interest component in the price as well.
The yield factor can be further confirmed from the price of the 10 year maturity bond issued to retail investors at a coupon rate of 9.75%. This bond is trading at a nominal discount and closed the day at a price of Rs 9,970. This price makes the yield at 9.78%. If one were to look at the bonds issued for QIB’s and HNI’s, the price for the 10 year maturity bond with a coupon rate of 9.3% was trading at Rs 9,905 which corresponds to a yield of 9.38% while the 15 year bond with a coupon rate of 9.45% was trading at a price of Rs 9,919 or a yield of 9.52%.
The difference in yield is varying from the lowest at 9.39 for the 10 year 9.30% bond to the highest of 9.78% for the 10 year 9.75% bond. The yields would have to converge and they would become much closer than what they are in the next week or two. One should also remember that this was the first big bond issue where there has been such a large retail participation. The knowledge of retail and even the intermediaries whom they interact with is not upto the mark and hence there was so much of confusion as to what to expect from the issue and which bond to apply for?
I believe this is a good beginning and in the coming year 2011-12 bond offerings would increase in number in a substantial manner and would offer trading and investment opportunities for investors.
The returns of Rs 437 per bond works out to almost 4.37% per month and it would be a substantial gain for retail investors.
