RBI is on the spree of rising the interest rates and it has done so for past 13 times since March 2010. High interest means high rates for loans and thus minimum loan taking for industry development and ultimately leads to high inflation due to poor growth.
Each side has its flip side and we can benefit from this scenario and same is appended below:
Just two years prior, investors were ready to buy corporate bonds of 8.50% coupon rate. Today we are getting bonds with similar risk at coupon rates of as high as 12.50% and guess what, they are trading at discount with the yield-to-maturity (YTM) of more than 13.00%. Thus this is the right time to invest in the bonds and remember to always go for long term bonds though your investment horizon may be for the shorter time frame.
Thus we can say with authority that now is the right time to buy the bonds and reasons are as listed below:
Peak Interest rates : We are not going to see these high rates in near future.
CRR is likely to come down in near future : We may see CRR cut soon and thus once you buy long term bonds now, you might gain in short term due to decrease in yield. Let’s take a hypothetical example.
- A bond has 12.50% coupon rate with 10-years YTM of 13.00%. The Rs. 1000 bond must be trading currently at Rs. 972.87. Suppose you buy it today and after 1 year our economic condition improves and interest rate comes down. Taking a conservative view, let’s assume 9-years YTM after 1 year for similar bonds is 12.00% (down 1 % from now). In this case the bond price will shoot to Rs. 1026.64.
- So, your gain after 1 year will be the coupon payment of Rs. 125 plus the capital appreciation of Rs. 53.77. This sum up to profit of Rs. 178.77 on the payment of Rs. 972.87 resulting in 1 year percentage profit of 18.38%
Now the question arises is that which is the correct bond to buy and we can say the best bond is to buy bonds or NCDs of known and established companies because the risk factor is low in such bonds and it helps you take advantage of decrease in YTM.
A word of caution
This is a perfect scenario where you can go for the bonds but every investment has associated risks with it and thus investment in bonds also needs to be undertaken with caution and after due diligence and this post should be just taken as a friendly advice which needs to be corroborated from your own financial advisor.
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