I see on kite the following details for Tamilnadu SDL 2034 with indicative yield at 7.47% and the asking price is 105 rupees.
My questions,
If the buy price is 105 then I should buy 1000 units with a total price of 105000 instead of 100000. This means I am paying 5000 rupees of premium for a pretax interest of 7470 rupees. This means my profits before tax is only 2470 that is 2.47% per year. Is that right ?
If pretax returns are so low, what makes one to invest in them? Is the reasoning behind this is during interest low rate regime the prices of the gsec and sdl shoot up and gives larger gains?
If I would want to hold it till the mature date, should I still be buying the bond ? Please any reasoning available as to why?
Indicative yield is not the coupon interest which you get. 7.47% is the ytm which you will indicatively earn if you hold it till maturity. Purchasing a bond higher than the par value is not ideal but series of coupon payments over the years is what it will offer.
Suppose you purchase it at 105 and rates fall after that, then the bond price will increase so you might see some capital gains. But I wouldn’t suggest you look at that aspect. Invest in bonds to earn coupon interest and hold it till maturity in this case.
But I have already paid 5000 rupee on the purchased bond as shown in kite. If 7470 is my almost close to earn value per year then in literal terms I have made 2470 rupees which is very low. I get it- this is for the first year. So from the next year onward the interest is based on the yield to maturity number. So I incur 5000 rupees of loss in the first year but in the long term holding it wouldn’t matter much. Sir, if the same money is parked in FD at 8% for similar time frame, would the GSEC and SDL make sense in this case ?
Sir , how much are the yield differences ? 2-3% over 7%?