How To Buy Bonds Directly – I understand that we closed the previous chapter by saying that we will be talking about Index Funds next. However, I take a detour to introduce how one can invest directly in bonds.
Why am I doing this now? Since we just discussed debt funds and their regulations, given the similarities between debt funds and bonds, I thought we would expand this discussion and talk about bonds as well.
How To Buy Bonds Directly
In addition, the bond investment platform is built and ready to use, so this chapter will help you understand how to use the platform.
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Remember that when you invest in any type of mutual fund, you are investing in a mutual fund where the fund manager invests your money in a variety of bonds and debt. With the platform, you can now invest directly in bonds, just like a fund manager would.
You can see on the main page that we are talking about high quality PSUs and corporate bonds. The highest quality here means the highest credit rating.
At any given moment, the platform lists all the bonds you can invest in. As of today, the following bonds are available to you –
In addition to these tags, other information is also available to you. Some of them are simple and interesting, while others are not.
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On the platform, you can see an overview of the most important parameters that you can consider before investing. The average investor does not need any information other than the above.
However, for the sake of this chapter and its completeness, let’s go into the details of this REC link. The ISIN of this bond is INE020B07HO1, the ISIN key here and you will find all other information related to this bond.
Let’s start with the first item from the left. As we can see, this is a safe case. A secured loan is a loan secured by collateral. A common example is a gold loan.
In a gold loan, you pledge gold and borrow money from it. When you repay the loan, the gold lien ends and you get the gold back. In case you default on the loan, the lender is free to take your gold and cover their losses.
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For this reason, if you look at it from a lender’s point of view, secured debt gives the lender more comfort compared to unsecured debt.
Every company has something called “capital structure”. Capital structure is like a kind of leaderboard that allows you to create a list of stakeholders who have the highest demands on the company’s return and capital structure.
Senior secured debt is right at the top of the capital structure, while common stock (equity) is right at the bottom. Between senior debt and equity, there are other players such as unsecured debt, convertible bonds, fixed debt, etc. etc. liquidation of the company. This significantly increases the safety of the borrower’s capital.
The section after this is self-explanatory when it comes to the release date. Think of it as the date a company’s IPO or NFO debuts in the MF market.
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December each year until the bond matures. The company pays interest every year. Some bonds pay interest annually, quarterly, and some pay monthly.
Now that you know these details, I suggest you take another look at the COIN image. Everything mentioned in the snapshot should be clear except YTM.
Time to Maturity, or YTM, is one of the most important concepts to understand when dealing with bonds. While a bond’s coupon is important, as a bond investor you should be more concerned about the YTM than the coupon itself.
I think the concept of YTM is best understood if we look at the trades we are familiar with. With that in mind, let’s create a hypothetical case.
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You’re excited because the average commercial rental yield in your research is around 15%, so the deal your friend is offering is outstanding. You ask your friend for more information.
He says the real value of the commercial property is 3 crores. You can’t bat an eyelid; you pay 3 crores in cash and buy the property.
However, at the end of 12 months, you can prove that the virus will hit the world, people will start working from home, and then the real estate market will lose its luster.
You decide to sell the property and cash out. Let’s assume that the real estate market remains the same; therefore, the property is sold at a price, i.e. 3 crowns.
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The question is, how much did you make for this whole project? In other words, what was your net return? Forget about taxes and fees for convenience.
Everything remains the same except that at the time of purchase you bought the property for 3.3 crores instead of 3 crores. What is the remaining yield?
Everything remains the same except that at the time of purchase you bought the property for 2.9 crores instead of 3 crores. What is the remaining yield?
Note that in all three cases the rental yield was fixed at 20%, which did not change at all. But the net yield is variable based on transaction values.
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Clicking on the yellow invest button opens the next screen of the platform, which provides more information about the bond.
I’ll assume you’re familiar with most of the information on this screen, just for added interest. The concept of interest earned is simple to understand.
We know that the REC bond pays a coupon of 8.01% on the face value of Rs.1000/-. Coupon value in rupees is Rs.80.01/-.
Coupon Rs.80.01/- payable once a year or once in 365 days. We know the payment date is 1
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May 2020; 172 days since the last coupon payment. Therefore, by holding this bond for 172 days, the holder of this bond has the right to –
The observed payment amount is Rs.1115.47/- which includes accrued interest. Therefore, you can divide the payment cost into two parts:
This is because when you buy a bond, you have to compensate the seller of the bond for the interest they earned while holding the bond. Thus, additional interest is included in the cost of repairs. Also note that when REC pays the next coupon, you as the current bondholder will receive the full coupon amount of Rs.80.01/- (thus offsetting the accrued interest you paid to the seller).
The cash price is also called the “gross price” of the bond, while the cash price minus the added interest is called the “net price” of the bond.
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If you’re reading Varsity now, you don’t know me one hundred percent. I’ve mentioned this in several places with the caveat that 100% equity is not the best way to build a long-term portfolio. I always knew I had to fix it and start saving my little money. I just moved forward with my asset allocation plans.
The index fell by 40% in less than a month. All benefits are cancelled. For the first time since I started investing in the markets, I saw that ten year SIPs are also doing poorly. I don’t think that happened in the 2008 market crash. Check out this chart; I found this on a price research site –
Maybe this is a strong enough reason for me to start diversifying assets. It might be a good idea for you, too, if you haven’t thought about endowment.
I think of these assets; You can create any combination of portfolios with different asset allocation patterns to achieve any portfolio objective.
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In the following chapters, I’ll discuss portfolio construction and how you can build portfolios to meet your goals, but before we do that, we’ll discuss index funds. Treasury bonds generate high yield, interest in buying government bonds. he followed suit. Let me show you how to buy government bonds online. I will then share buying strategies to help you maximize your returns and make a profit.
Treasury bonds are a risk-free investment that you hold until maturity. Treasury bonds are issued by the US government to finance projects or day-to-day operations. As inflation and expected inflation rise and fall, so does the yield on Treasury bonds.
The first way to buy government bonds is through TreasuryDirect. TreasuryDirect.gov allows you to buy government bonds directly from the government every time a government bond is issued. Hopefully you all already have a TreasuryDirect.gov account because you all decided to buy I Bonds in 2021 and 2022.
The $10,000 of I Bonds we bought in late 2021 and another $10,000 we bought in early 2022 were good investments. The worst people are limited to $10 purchases,
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