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12 Mar 2021

Should you invest in 7.2% 10 year PSU or 7.2% 5 year NBFC Bond?

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In the last 2 months, corporate bond yields have increased, largely due to worries about inflation and government borrowing. Bond yields have increased by around 60bps to 80bps, which means that investors will get higher returns on bond investments at present than if they had invested 2 months back. Bonds of various maturities and various credit qualities are giving returns of anywhere between 6% to 9% and higher. How do you choose between various bonds available in the market for investments?

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Arjun Parthasarathy

Corporate bond yields have gone up

In the last 2 months, corporate bond yields have increased, largely due to worries on inflation and government borrowing. Bond yields have increased by around 60bps to 80bps, which means that investors will get higher returns on bond investments at present than if they had invested 2 months months back.

Bonds of various maturities and various credit qualities are giving returns of anywhere between 6% to 9% and higher. How do you choose between various bonds available in the market for investments.

 

 

Choice of bonds of similar yields

If you plot a graph like below that is showing choice of bonds available at similar yields, you can see that you have more than one bond to choose from. The question is which is the best choice for you? You can see that highest safety bonds (PSU Bonds) come with longer maturity period while lower safety bonds (NBFC) have shorter maturity. Both the bonds offer the same return if held to maturity.

 

 

 

 

Choose between credit risk and interest rate risk

When you choose highest safety PSU bond with 10 years maturity for investment, you are exposing yourself to interest rate risk, which means that if interest rates move up, your bond will see fall in price and you may be holding a low yielding bond for a longer period of time.

If you choose lower safety NBFC bond in relation to PSU bond with 5 years maturity for investment, you are exposing yourself to credit risk, which means that if bond fundamentals fall on high impact of bad loans, your capital is at higher risk. Interest rate risk is lower as bond matures in shorter period of time.

 

Study your choices before making the investment decision on bonds

 

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