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BONDS & DEBENTURES

CORPORATE BONDS
CONVERTIBLE DEBENTURES
NON CONVERTIBLE DEBENTURES
CURRENT NCD'S
CORPORATE BONDS

 

Corporate bonds are debt securities issued by private and public corporations. Companies issue corporate bonds to raise money for a variety of purposes, such as building a new plant, purchasing equipment, or growing the business. When one buys a corporate bond, one lends money to the "issuer," the company that issued the bond. In exchange, the company promises to return the money, also known as "principal," on a specified maturity date. Until that date, the company usually pays you a stated rate of interest, generally semiannually. While a corporate bond gives an IOU from the company, it does not have an ownership interest in the issuing company, unlike when one purchases the company's equity stock.

Download Circular on Corporate Bonds - Reporting Platform (.zip)

 

Need For Corporate Bonds

One of the announcements in the Budget 2005-06 was to appoint a high level expert committee on corporate bonds and securitization to look into the legal, regulatory, tax and market design issues in the development of corporate bond market.

 

A committee was formed under the Chairmanship of Dr. R.H. Patil to look into the factors inhibiting the development of an active debt market and recommend policy actions necessary to develop an appropriate market infrastructure for the growth of an active corporate bond market.

 

A few of the recommendations for the development of an active secondary market for corporate bonds are:

  • Establish a system to capture all information related to trading in corporate bonds as accurately and as close to execution as possible and disseminate it to the market in real time.
  • Clearing and settlement of transactions in this market must adhere to the IOSCO standards.
  • Based on increase of awareness amongst the participants to introduce online order matching system.

yields

Yield is a critical concept in bond investing, because it is the tool used to measure the return of one bond against another. It enables one to make informed decisions about which bond to buy. In essence, yield is the rate of return on bond investment. However, it is not fixed, like a bond’s stated interest rate. It changes to reflect the price movements in a bond caused by fluctuating interest rates. The following example illustrates how yield works.

 

  • You buy a bond, hold it for a year while interest rates are rising and then sell it.
  • You receive a lower price for the bond than you paid for it because, no one would otherwise accept your bond’s now lower-than-market interest rate.
  • Although the buyer will receive the same amount of interest as you did and will also have the same amount of principal returned at maturity, the buyer’s yield, or rate of return, will be higher than yours, because the buyer paid less for the bond.
  • Yield is commonly measured in two ways, current yield and yield to maturity.

 

Current yield

  • The current yield is the annual return on the amount paid for a bond, regardless of its maturity. If you buy a bond at par, the current yield equals its stated interest rate. Thus, the current yield on a par-value bond paying 6% is 6%.
  • However, if the market price of the bond is more or less than par, the current yield will be different. For example, if you buy a Rs. 1,000 bond with a 6% stated interest rate at Rs. 900, your current yield would be 6.67% (Rs. 1,000 x .06/Rs.900).

 

Yield to maturity

It tells the total return you will receive if you hold a bond until maturity. It also enables you to compare bonds with different maturities and coupons. Yield to maturity includes all your interest plus any capital gain you will realize (if you purchase the bond below par) or minus any capital loss you will suffer (if you purchase the bond above par).

Valuation of Corporate Bonds

 

Yield is a critical concept in bond investing, because it is the tool used to measure the return of one bond against another. It enables one to make informed decisions about which bond to buy. In essence, yield is the rate of return on bond investment. However, it is not fixed, like a bond’s stated interest rate. It changes to reflect the price movements in a bond caused by fluctuating interest rates. The following example illustrates how yield works.

  • You buy a bond, hold it for a year while interest rates are rising and then sell it.
  • You receive a lower price for the bond than you paid for it because, no one would otherwise accept your bond’s now lower-than-market interest rate.
  • Although the buyer will receive the same amount of interest as you did and will also have the same amount of principal returned at maturity, the buyer’s yield, or rate of return, will be higher than yours, because the buyer paid less for the bond.
  • Yield is commonly measured in two ways, current yield and yield to maturity.

 

Current yield

  • The current yield is the annual return on the amount paid for a bond, regardless of its maturity. If you buy a bond at par, the current yield equals its stated interest rate. Thus, the current yield on a par-value bond paying 6% is 6%.
  • However, if the market price of the bond is more or less than par, the current yield will be different. For example, if you buy a Rs. 1,000 bond with a 6% stated interest rate at Rs. 900, your current yield would be 6.67% (Rs. 1,000 x .06/Rs.900).

 

Yield to maturity

It tells the total return you will receive if you hold a bond until maturity. It also enables you to compare bonds with different maturities and coupons. Yield to maturity includes all your interest plus any capital gain you will realize (if you purchase the bond below par) or minus any capital loss you will suffer (if you purchase the bond above par).

CONVERTIBLE DEBENTURES

MEANING OF CONVERTIBLE DEBENTURES

These debentures can be termed as a debt security or loan. They can be converted into equity shares after a stipulated period. The conversion of debentures into equity shares is at the option of the holder. However, under special circumstances, the issuer holds such conversion rights.

 

ABOUT CONVERTIBLE DEBENTURES

Business firms issue such securities to avail tax benefit. The company can get the advantage of the tax deduction on the interest paid to the investors. This reduces the cost of capital of the company. However, at the time of conversion, the company issues additional shares.  This brings a decline in the value of the equity shares due to stock dilution. There are many types of debentures which a company can issue. Two popular types of them are:

CONVERTIBLE DEBENTURES

These are debentures in which the company requires an interest-bearing loan. Once the stipulated time passes, it can be converted into equity shares. The interest on these debentures is generally low. The debenture holders can opt for receiving the interest and principal amount at the time of maturity. Alternatively, they can opt for converting the debentures into equity shares

 

TYPES OF CONVERTIBLE DEBENTURES

 

FULLY CONVERTIBLE DEBENTURES

Under these securities, the whole value of debentures is convertible into equity shares of the company. The ratio of conversion is determined at the time of issue of these securities.

 

PARTLY CONVERTIBLE DEBENTURES

These securities differ from fully convertible ones. Under them, only some part of the debentures is eligible for conversion into equity shares. Again, the ratio of conversion is determined at the time of issuance of these securities. A part of the debt can be converted into equity shares after the approval of debt holders.

 

 

NON CONVERTIBLE DEBENTURES

Non Convertible Debentures (NCDs)

Investors want investment options that manage liquidity and risks while offering substantial returns. Debentures are long-term financial instruments issued by a company for specified tenure with a promise to pay fixed interest to the investor. Debentures are of two types, namely convertible debentures and non-convertible debentures (NCD).Non-convertible debentures (NCD) are those which cannot be converted into shares or equities. NCD interest rates depend on the company issuing the NCD.

NCD investment can be held by individuals, banking companies, primary dealers other corporate bodies registered or incorporated in India and unincorporated bodies, Non-Resident Indians (NRIs) and Foreign Institutional Investors (FIIs). Invest in secured NCD to get multiple investment benefits.

 

CURRENT NCD'S
NCD & BONDs

Bonds/ NCD’s are the products offered by various private and public sector corporates through public issues or on private placement basis. Bonds issued under specified categories will also offer Tax free returns as well as Tax exemption to the investors. The coupon rate offered varies based on the rating of the corporate raising the debentures. Being long term, these bonds are listed on exchange and can be traded on the exchange on listing if invested in Demat mode.

Issue Name Opening Date Closing Date Price (Rs.)
Indiabulls Consumer Finance Limited May 30, 2019 Jun 21, 2019 1000