Why buying a bond at the right price is important?
Bonds are fixed income securities that give steady returns for a fixed period. Given that at the time of investments you lock in to the returns if you plan to hold the bond to maturity, it is extremely important to be sure that you are investing in the bond at the right price or yield. Bonds issued in the primary market comes with a fixed coupon, which is also the yield on the bond. Bonds sold in the secondary market also carries a fixed coupon but yields can differ from the coupon rate as prices change due to changes in the interest rates.
Difference between coupon and yield
Taking an example of a bond that carries a coupon of 9% and was issued in the primary market at a face value of Rs 100. This bond is offered in the secondary market at a yield of 8.5% with price at Rs 103. If you invest in this bond, you still get coupon of 9% but the total return to you is 8.5% as you bought the bond at a higher price.
The question you need to ask is whether the yield of 8.5% or equivalent price of Rs 103 is the right yield/price to buy the bond. When you buy at 8.5% yield, you are locking in to the return of 8.5%, this cannot be changed.
How do you determine the right yield/price of bond in the secondary market?
Unlike equities, there are very few online prices available for bonds and you would need to search for reported trades in BSE/NSE to see if there are any traded prices for the bond you wish to buy. You can also check for movements in gsec yields, which you can get online from CCIL, to determine whether bond yields are rising or falling. However, this involves effort on your part to check various sources for prices.
Your financial advisor should help you determine the right price of the bond or online platforms like INRBonds will give you the right price of the bond.
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