Bond Investment Basics

www.akcapindia.com
 WHAT IS A BOND?
• Bond is simply a loan between the issuer (borrower) and the bondholder (lender). When
you purchase a bond, you are lending money to any entity known as issuer. In return, you
receive a bond and issuer pays fixed interest on the amount of money you lend.
• Characteristics of Bonds
• Face Value: A bond issued at a face value to the bond holder. For example, Rs 1000 per
bond.
• Principal Amount: Total amount invested by the bondholder in a bond issue is the principal
amount. For example you invest Rs 10,000 and you get total 10 bonds with face value
worth of Rs 1000 each.
• Coupon Rate: The coupon is the interest rate that the issuer pays to the security holder. It
refers to the periodic interest payments that are made by the issuer of the bond to the
bond holder and are expressed as a percentage of the face value.
• Maturity Date: Term to maturity of a bond changes every day from the date of issue of the
bond until its maturity. The issuer has to repay the principal amount on the maturity date.
 REASONS FOR INVESTING IN BONDS

• Predictable stream of payments & Regular interest income

Eg: Interest payment frequency : Monthly, Quarterly, Semi Annually
Annual & Cumulative.
• Portfolio Diversification & Portfolio risk-mitigation
• Preserve and increase their invested capital
• Reasonable degree of safety
• Investment in Govt. securities (risk-free), tax-free bonds, Bank Perpetual Bonds, Perpetual
Bonds like Cholamandalam, Tata Motors Finance, Tata Steel, Tata Power, Zero coupon bonds,
Non Convertible Debentures etc.
FACTORS AFFECTING BOND PRICES:

• Interest Rate Cycle.

i.e: Inverse Co-relation between interest rates and price of the bonds
• Change in Credit rating of securities (Upgrade/Downgrade)
• Liquidity of bond
• Tenure / Duration of bond
CREDIT RATINGS OF BONDS

• A credit rating is an evaluation of the credit worthiness of a debtor, especially a business

(company) or a government.

• The evaluation is made by a credit rating agency of the debtor's ability to pay back the
debt and the likelihood of default.

• The credit rating represents the credit rating agency's evaluation of qualitative and
quantitative information for a company or government; including non-public information
obtained by the credit rating agencies‘ analysts.

• The credit rating is used by individuals and entities that purchase the bonds issued by
companies and governments to determine the likelihood that the government will pay its
bond obligations.
 Bonds Features Fixed Deposits
Most bonds are secured in nature as its backed by Safety All Corporate FDs are unsecured. Bank FDs are insured
Assets up to Rs 1 lakh (capital & interest) per depositor
Can be liquidated anytime as bonds are tradable Liquidity Can be withdrawn pre‐maturely, however, at reduced
on exchanges. Bonds don’t have lock-in period. interest rates.
Offers fixed returns and possibility of capital gains Returns Returns are fixed. Cannot be traded hence you cannot
take advantage of interest rate changes in the economy

It is mandatory for issuers to get the instrument Credit Rating Mandatory for NBFCs but not for others. Bank FDs are
rated by at least one credit rating agency not rated

As per the tax slab of the individual other than tax Taxation As per the tax slab of the individual
free bonds
Listed bonds and NCDs held in demat mode do TDS TDS is applicable if interest exceeds above prescribed
not attract TDS (as per section 193 of I.T. act). limit.

Monthly/Quarterly/Semi- Interest Monthly/Quarterly/Semi-annually/Annually/Cumulative

annually/Annually/Cumulative payout
Frequency
Bonds V/s FD Illustration
Particulars Bank FD with 8% Interest Zero Coupon Bond

Initial Amt Invested 10,00,000.00 10,00,000.00

Interest / Coupon paid at the end of the year/tenure 80000 80000

TDS deducted (Under section 194A of IT Act) -8000 0

Interest Post TDS to Investor 72,000.00 80,000.00
Applicable Tax ** 16,000.00 8,000.00
Total Amount 56,000.00 72,000.00

If any investor, has no income, or if his income falls in lower than 10% tax slab, his TDS would still be deducted on Bank FDs, unless he
submits Form 15G / Form 15H to the bank every financial year.

This hassle is avoided in a case where an investor invests in bonds, as TDS is not applicable on Listed NCDs under Section 193 of IT Act

** Bond with a Zero Coupon Bond will fetch an flat rate of 10% LTCG
** The scenario is taken for individual at 30% Tax Bracket.
 Types Of Bonds
• Tax Free Bonds
Tax-free bonds are types of goods or financial products, which the government enterprises issue. As the name
suggests, its most attractive feature absolute tax exemption.

Who should invest in tax-free bonds?

Tax-free bond is a good choice for an investor who wants to earn fixed annual income from the interest proceeds. these
bonds suit people with a low-risk profile, who can afford a long-term lock-in period.
Entities like trusts, co-operative & regional banks and corporate companies too are regular investors in tax-free
bonds. Individuals including HUF Members and NRIs as well as high net-worth individuals often choose this to diversify
their portfolio.

• Perpetual Bonds:
These bonds are generally issued by large manufacturing companies or by banks to fund their long-term capital
requirements. Perpetual bond, which is also known as a perpetual or just a perp, is a bond with no maturity date.
In banks, the perpetual bonds come under as Additional Tier 1 bonds which gives it features of Quasi Equity. Which
means that in case of bank winds up then the Investors in Perpetual bonds will be paid last but before equity investors.
Types Of Bonds ( Conti…)

• Corporate Bonds:
A corporate bond is a bond issued by a corporation in order to raise financing for a variety of reasons such as
to ongoing operations, M&A, or to expand business.
The term is usually applied to longer-term debt instruments, with maturity of at least one year. Corporate debt
instruments with maturity shorter than one year are referred to as commercial paper.

• Zero Coupon Bonds:

A zero-coupon bond, also known as an "accrual bond," is a debt security that doesn't pay interest (a coupon)
but is traded at a deep discount, rendering profit at maturity when the bond is redeemed for its full face value.
Eg: Notified: NABARD, REC, NHB
Eg: Corporate Bonds: Shriram
 CASH FLOW
9.56% SBI
Payment done by client
including Accrued -101.6919 25-Dec-18
Interest & Clean Price
9.5600 4-Dec-19

9.5600 4-Dec-20
Cash in flow (Interest)
9.5600 4-Dec-21

9.5600 4-Dec-22

Redemption Value 109.5600 4-Dec-23

(PAR + Accrued
Interest) 9.2500% XIRR

Last IP 4-Dec-18

No. of Days 21
Accrued Interest
Calculation
Acc Int 0.5500

Quote 101.1419
 Secondary Deal – Process Flow
• STEP 1 Exchange of Indicative Quotes only.
• STEP 2 Counter Party to complete KYC & ICCL documentation before
confirmation. No Transaction will be executed without KYC being
completed.
• STEP 3 Written confirmation for deal required from client on email/fax.
• STEP 4 Client cannot back out after written confirmation is provided to us. RM
needs to ensure the same and is responsibility of RM thereafter.
• STEP 5 Deal will be confirmed by AK on Recorded lines with SBICAP/Client
only after written confirmation from SBICAP/Client.
• STEP 6 Deal sheet will be exchanged with counter party. The deal sheet
needs to be signed by counter party for acceptance.
• STEP 7 On deal date, deal is reported in ICCL / NSCCL
• STEP 8 On value date counter party needs to transfer funds through RTGS &
confirm UTR No by 11.30 am.
• STEP 9 On receipt of funds bonds are transferred & transaction is completed.
SAMPLE DEAL SHEET
Q&A
 Disclaimer

• This module/presentation (“document “) has been prepared by A. K. Stockmart Pvt. Ltd. (“the Company”) (it includes
group companies also) and the contents of this disclaimer are applicable to this document and to any and all written or
oral communication(s) made by the Company or its directors, employees, associates, representatives and agents.
• The information contained in this document is strictly confidential and solely for the information of the recipients. The
information should not be reproduced or redistributed or passed on, directly or indirectly in any form, to any other person/
entity or published, in whole or in part, for any purpose whatsoever.
• This document is meant for assistance and presentation purpose only and does not constitute an offer or recommendation
to buy or sell any products or services of the Company or any of its third party client(s). The document is prepared based on
certain assumptions which may change. The information furnished is a general illustration only.
• The Company reserves the right to add, modify, alter and delete any content of this document at its sole and absolute
discretion without any prior notice and without assigning any reason whatsoever. The Company does not undertake any
obligation to update such information/ data for any subsequent event(s) that may occur thereafter, and does not explicitly
or implicitly guarantee that such information/ data is complete and accurate in all respects as of date hereof or that it will
continue to be complete and accurate in future. However, the reasonable efforts has been made in this documents to
understand the flow of activities mentioned in this document. The content and presentation in this documents may differ
from actual view. By using this, you agree that the exclusions and limitations of liability set out in this disclaimer are
reasonable.
• The copyright and other intellectual property rights of this document vests exclusively with the Company. All layout, design,
original artwork, concepts and other Intellectual Properties, remains the property and copyright of Company and shall not
be used in any form or for any purpose whatsoever by any party without the express written permission of the copyright
holders.
• All other terms and conditions/ disclaimers etc. mentioned on the website or on any other related documents shall be
applicable to user from time to time.
• If disputes arises on the interpretation/ usage of website or flow mentioned in this documents then interpretation given by
the Company shall prevail and no any kind of action/suit shall be brought against Company.
• This disclaimer is to be regarded as part of this document. If sections or individual terms of this statement are not legal or
correct, the content or validity of the other parts remain uninfluenced by this fact.