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POSTED BY ON September 22, 2013 10:01 am ONE COMMENT
Hello,
I bought the IIFCL tax free bonds last year at the coupon rate of 7.08%. I couldn\’t find anything on this in the site, and have some quick questions on this:
1. When I go to my trading account, I see the bond value is actually reduced (surprised why!?) by about 10% and I am actually in loss. Is that possible for a \”tax free bond\” instrument?
2. Is this is the current traded price of these bonds in exchange, in case I want to exit? Are there exit penalties if we exit via exchange?
3. Need some inputs to enable someone like me to think further if we should exit from these bonds and sell in exchange?, or should keep for the long term proceeds?
4. In general, do the payouts on the Tax Free Bonds have the \”growth option\” available, so the money could be compounded during the proceeds/settlement time after 20 years?
As always, thanks for your inputs and pleasure to be here in this forum.
[A]
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Hi.
1. The coupon rate is 7.08% which is quite less than the current bond yields which are over 8.5%. So the market value of the bonds will be less than the face value. If the interest rate falls, the value of the bond will increase.
2. Yes, this will probably be the last traded price in the exchange. You may put a limit sell order with whatever price you want, but will there be any takers for it?
3. What was the purpose of investment in these bonds? Did you invest for steady tax-free interest income or for trading? If you invested for income, hold on to the bonds to maturity. If you bought for trading, you’ll have to wait for interest rates to ease (another 18 – 24 months in my opinion) and then sell them at higher than face value.
4. It depends on the terms of the issue. I bought REC bonds and will be buying HUDCO bonds this year, and I believe the payout will be on a yearly basis. Of course, you have the option of investing the annual interest payments in some other avenue – fixed income or equity as you wish.