The struggling stock markets around the world and softening interest rates give investors an opportunity to invest in debt market. Liquidity is always a concern in bond market however, they are considered to be safe investments as compared to equity due to fixed returns, pre decided maturity, first preference for recompensation on account of liquidation of the company.
Bonds are issued by corporate/Public Sector Unit/FIs/Banks to raise capital through public issue or private placement. After issuance of bonds in the primary market, bonds can be traded in the secondary market on the following two platforms:
Trading Government bonds
The entities allowed to trade on this platform are banks, certain kind of FIs and primary dealers (PD). Retail investors can approach the PD/ banks to buy the bonds. The banks that can be approached are IDBI Bank, PNB Gilts, SBI- DFHI. In order to start the trading you will have to open the demat account with the entity to undertake the transaction, undergo KYC process and complete certain other formalities. When you order to buy the securities bank will debit your account to purchase them and transfer it to your demat account.
Trading Corporate Bonds
Like conventional shares, bonds are traded on the NSE & BSE. For trading one needs to have a demat account, a bank account and a brokerage account. The brokerage may vary from 1% to 1.5%. Except for some highly rated bonds, the trading volumes of these bonds are low so and so liquidity is always a problem. The procedure for buying/ selling is similar to that for government bonds.
Trading Prices -Dirty Vs Clean.
There are two type of prices on which trading is done viz. dirty price and clean price. Trading of bonds in capital market (CM) is done at dirty price and trading in the Wholesale Debt Market takes place at clean price. Dirty price is the price of the bond including accrued interest and clean price is the price of the bond excluding accrued interest. At NSE bonds are traded at dirty price i.e the buyer of the bond will have to pay accrued interest to the seller of the bond
Factor affecting the decision to buy/ sell a bond
Decision on the basis of yield % : Price of the bond also fluctuates like stock market and so is the yield. Yield is the return that you get on a bond and can be calculated as: coupon amount (Interest amount)/ Price of the bond. When price of the bond goes down, yield increases as the interest amount remains the same. Similarly when the price of the bond goes up, yield decreases. Hence, while buying the bond yield should be considered and not the coupon rate as yield can be different for the same coupon rate.
Buy or sell: A bond buyer will always expect high yields thus, a buyer will be ready to buy a Rs 1000 bond with coupon rate of 10% in Rs 800 which will fetch her an yield of 12.5%. A seller shall wait for the prices of bonds to rise to encash more profits.
Decision to invest or not on the basis of prevailing interest rates: The price of the bond is influenced by prevailing interest rates. When the interest rate increases, newer bonds will be offered at higher rate of interest compared to older bonds – hence prices of old bonds will decrease. Thus rising interest rate implies lower prices and higher yields for existing bonds. When interest rates fall, it will make the existing bonds that are offering higher interest rates more attractive. This in turn pushes up their price and brings down the yield. Thus, bonds are considered to be better investment opportunity when the interest rates are low.
