Bond Baba: The Sudden 12% Yield That Appeared


BondBabaMyMailToday, something strange happened. Bond Baba noticed that there was a Shriram Transport Finance Bond, very short term, that looked quite attractive.

The SRTRANSFIN-NF bond is the one in question. It’s a bond that matures on 1 December 2016, and will pay you Rs. 2,000 when it does.

The price? It was quoting at Rs. 1,920 today.

We’ve been talking about it for about two weeks now at #bonds-and-funds on Slack. If you are a trial member, you get access to Slack when you subscribe (Buy now!)

At a purchase price of Rs. 1,920 today (26 July 2016) we will get Rs. 2000 on 01 December 2016. Here’s the prospectus. In the prospectus, people have invested Rs. 1,000 in the “Reserved Individual Portion” and will now get Rs. 2000 after 78 months, on 1 December 2016.

How Much Can You Earn?

If you invest Rs. 1920, you get Rs. 2000. That’s a profit of 80. Meaning: 80 / 1920 = 4.17%.

You get this profit in 128 days. That means, to annualize the profit, you get a yield of 4.17% * (365/128) = 11.88%.

That’s pretty good for the risk of a Shriram Transport whose other bonds are trading as low as 9.5%. And the risk is lesser as you’re closer to maturity, and the stock price of the company itself is soaring.

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Why Would Someone Sell This Bond? Well, if you’ve bought this bond when it was issued (June 1, 2010) you have held this investment for about six years now. The yield, even if you sell it at 1920, is 11.18%. That’s not too bad, actually, and holding it a little longer will not give them a substantially higher return at 11.24%.

Is there Liquidity?

Today, we noticed there was about Rs. 10 lakh worth bonds trading at 1920 – and mentioned it on the Slack channel. Soon that liquidity was taken, but it has been visible over the last few days at around the 11.5% yields. At close today, there was around 114 shares available at 11.35% yields.

The NSE doesn’t give you the yields so you have to do the calculation yourself.

The Bond Baba Save-Taxes-Through-Bonus-Stripping Trick

Wait, you say. I get 11.5% but I have to pay taxes and then I only get 8%!

But you don’t have to. You can buy shares that give a “bonus” and strip-out that bonus to offset such taxes. See our previous Bond Baba post. That post took the example of HPCL. But now, you have a 1:1 bonus in Bajaj Finance, and a lesser known Symphony too has announced one more.

If a share is worth keeping for a year, then it’s worth using for bonus stripping as well. And a strip can let you keep the full 11.5% you earn on such bonds. Of course, Bond Baba isn’t very sure of what Sri Sri Jaitley will do – if he introduces long term capital gains tax on shares, all this work is then useless. But still, that risk apart, you have a chance to make the interest rates work for you.

Bond Baba doesn’t recommend buying a bond. He only tells you how to evaluate such bonds for investments.  So don’t blindly buy. Tomorrow the 1920 price is a 11.97% yield. On Friday, the same 1920 is a 12.16% yield. How? That, my dear friends, is your homework. Bid knowledgeably.