Aug 22, 2009

NCDs – Top 10 FAQs

Photo by Chris M *

In continuation of part 1: Should You Invest in NCDs? in which I explained the reasons behind immense popularity of Non-Convertible Debentures (NCDs) and how to invest in them, this post answers some oft-repeated questions about NCDs: what is a NCD? How is it different from a FD? What are the tax implications of investing in NCD? What are the risks involved in investing in NCD? Knowing the answers to these frequently asked questions (FAQs), will help make the investment decision easier for you.

NCDs -Top 10 FAQs

1. What are NCDs?
Non-convertible debentures (NCDs) are debt instruments with a fixed tenure issued by companies to raise money for business purposes. Unlike convertible debentures, NCDs can’t be converted into equity shares of the issuing company at a future date.


2. What’s the difference between NCDs & FDs?
Following are the differences between an NCD and an FD:

i). Liquidity: In contrast to a NCD, FD can’t be sold in the market. As NCDs are listed on a stock exchange, you can sell them any time you want. However, bank FDs are also highly liquid and can be encashed before maturity with minor penal charges.

ii). Safety: While NCDs are secured debt, corporate FDs are altogether unsecured and bank FDs are secured to the extent of Rs one lakh only.

iii). Taxation: There is difference in taxation aspect also. In addition to interest income, there can be capital gains if you sell the NCD before maturity. However, unlike FDs, there is no TDS in case of NCDs.

iv). Interest rate risk: Unlike FDs, NCDs carry interest rate risk due to changes in market interest rates.


3. Is investing in NCDs better than parking funds in corporate and Bank FDs?
NCDs vs. Corporate fixed deposits: Yes, of course NCDs are better than company FDs for the above stated reasons. Though usually the interest rates on NCDs and company FDs are more or less the same, what tilts the balance in favour of NCDs is the risk-return factor. Furthermore, there is also potential to earn capital appreciation from NCDs if there is a downward movement in the interest rates.

NCDs vs. Bank fixed deposits: Again, NCD is better than a bank FD because the interest differential is quite significant which comes at just a slightly higher risk. In other words, risk-return ratio is in favour of NCDs.


4. From companies point of view, FDs are better than NCDs? So, why do TATA CAPITAL & Shriram Transport came up with NCDs and not FDs? In other words, why only NBFCs are issuing NCDs while manufacturing companies (TATA Motors issued FDs alongside the TATA CAPITAL NCD issue in Feb 2009) prefer issuing FDs?
Simply, because some NBFCs are not allowed to issue fixed deposits. Why?

In 2009, till date there are only two issues of NCDs. First NCD issue was by TATA CAPITAL (TCL) in Feb 2009 and the second was by Shriram Transport in July 2009. Please note that both the companies are registered as ‘non-deposit taking NBFCs’ and therefore are not allowed to issue Public deposits / Fixed Deposits as per RBI guidelines.


5. What are income tax implications? How the returns from NCDs are taxed?
There can be two types of income from NCDs:

First is the interest income from a NCD and tax treatment is exactly similar to any other interest income such as interest income from FDs. In other words, interest income from NCDs will be subjected to tax at normal rates by including it in ‘Income from other sources’.

Next is capital gains. If you decide to sell the NCDs on the stock exchange, capital gains can also arise. If NCDs are sold with in a period of 12 months from the date of allotment, short term capital gains / loss (STCG) will arise and if you decide to sell NCDs after a period of 12 months, the resulting gain or loss is called long term capital gains / loss (LTCG).

While short term capital gains on sale of NCDs would be taxed at normal rates, long term capital gains on sale of NCD (a listed security) are taxed at concessional rates u/s 112 of IT Act.

Long term capital gains on listed securities are taxed at the rate of 10% without indexation or 20% with indexation whichever is lower. However, as the benefit of cost indexation is not available in case of bonds and debentures; therefore, long term capital gains from NCDs are always taxable @ 10.30 per cent (including education cess of 3%) without indexation.


6. Why there is no TDS on interest income from NCDs?
As per changes made by budget 2008 in section 193 of the IT Act, w.e.f. June 1 2009, there is no tax deduction at source from any securities issued by a company in a dematerialized form and listed on a recognized stock exchange in India.

As both the recent issues of NCDs were compulsorily in the DMAT form and listed on the NSE, so there is no TDS applicable on them.

However, NCDs allotted to non-resident Indians (NRIs) will be subject to tax deduction at source as per section 195 of the Income Tax Act.


7. Whether NRIs can invest in NCDs?
Yes, NRIs can invest in NCDs provided the company issuing NCDs allows them to invest in it. For instance, unlike TATA CAPITAL NCD offer, Shriram Transport NCD offer was also open for non-resident Indians (NRIs).


8. Do we require a DMAT account for investing in NCDs?
Yes, because all the recent issues of NCDs were compulsorily in the dematerialized form.


9. Is PAN also mandatory?
Yes, quoting PAN number in the NCD application form is compulsory irrespective of the amount involved as per SEBI guidelines.


10. Can I invest in NCDs through stock exchange?
Yes, of course you can invest in NCDs once they start quoting at the stock exchange. For example TATA NCDs are listed on both NSE as well as BSE.

The NSE codes are TATACAPNI, TATACAPN2, TATACAPN3 and TATACAPN4. The BSE symbols of the TATA Capital NCD are as follows: scrip ID is TCAPNCDI, TCAPNCDII, TCAPNCDIII and TCAPNCDIV and scrip codes are 934777 to 934780. To view the current quotes of TATA Capital NCD on NSE, open nseindia.com and enter TATACAP in the ‘Get Quote’ box.

However, please note that you won’t get them at the face value due to fluctuations in the market interest rates which affect the prices of NCDs. For example, TATA Capital NCD is currently quoting on NSE at (closing price as on 20 August 2009) Rs 1101.76 (N2), Rs 1121.76 (N3) and Rs 1124.37 (N4). The BSE closing prices of the NCD as on August 20, 2009 are Rs 1092.10 (TCAPNCDII), Rs 1129 (TCAPNCDIII) and Rs 1123.85 (TCAPNCDIV). There was no trading in NCD option1 (monthly interest payment option with a face value of Rs 1 lakh) on both NSE and BSE (TATACAPNI / TCAPNCDI) on August 20, 2009.

Next part (part 3) will take a peek at various risks factors affecting NCDs. Meanwhile, if you got any questions to ask, write them in comment box.



Also see:

1. Should You Invest in NCDs?

2. L&T Finance NCD - Review

3. PPF Returns Calculator

3. Interesting Interest Information about FDs

40 comments:

  1. You mentied at point 5, that there will be two type of incomes

    Suppose I invest Rs 100,000(Rs 1 lakh) and then sell the NCD after 22 month for 125,000. Say i choose the option cumulative option at 12% interest. In this case I will not get any interest but I gain 25000.

    Will the entire profit of 25000 will be long term capital gain capital gain?

    Or is it 12000(assumed interest for 1 year) is interest income and 13000 as capital gain?

    Or the assumed interest for twenty two month is interest income. Anything above that will be capital gain?

    Or any other caclulation?
    ReplyDelete
  2. Rajiv, you’ve asked a good question!

    Well, right now I don’t have the answer. I’m also in doubt regarding the right way to tax income from “cumulative securities” which are quite similar to “Zero coupon bonds” / “Deep discount bonds” (in substance but not in legal form).
    ReplyDelete
  3. Hi, Could you please let me know whether NCD's have lock in periods...and wat it really means.If it has then what are the implications of selling NCD's before the lockin period duration.
    eg. L & T Finance NCD which is the latest in offering has a min lockin period of 5 years. So what if after purchasing them I tend to sell it after say one year. Am i allowed to do so or not ??
    ReplyDelete
  4. NCDs don’t have any lock-in period. You can sell them any time once they are listed on a stock exchange.

    You’re mistaking the tenure of L&T Finance NCD as lock-in period. After L&T Finance NCD is allotted to you and credited to your DMAT account, you don’t have to wait even for a single day to sell it. Once listed on NSE, you can make an exit on the first day itself.
    ReplyDelete
  5. I used Kotak securities demat account to apply for tata capital NCD-IV. I would like to sell the same. is there a way to sell it online?
    How do i place order to sell NCD over exchnage?
    ReplyDelete
  6. The trading process of NCDs on a stock exchange is exactly similar to stock trading. You just need to place an order with your broker.

    In addition to DMAT account, you must be having a securities trading a/c with Kotak Securities. Just place the sell order with them either online or over a phone.
    ReplyDelete
  7. Replying toShambu's comment

    You cannot sell NCD online through Kotak securities. You need to call on their call and trade and they will place offline order.

    Even that is not very easy. When you call them, many times their executive dont know what to do? They will tell you that you dont have any shares of Tata Capital. They really dont understand difference between NCD and shares. Now when you tell them that only offline order is possible for this, they will ask you to hold the line for sometime and then ask you for ISIN code and scrip code.

    And the order is not visible to you online. You cannot see if the order is traded or not.
    ReplyDelete
  8. Hey thanks for your prompt response to my early query...
    1) In addition to that could u please tell me what maturity period means in case of NCDS's like for eg. L&T Finance came out with NCD's of variable maturity period and interest rate.
    2) It would be great if u could throw some light on whether the specified interest rate is obtained on which amount . Is it the amount which we invest during the NCD application or the amount (value) of our investment in the NCD in terms of current market price.
    eg. I buy NCD @1lakh during initial offer period and after listing the net value falls to (say) 80,000/- so will I be getting interest on 1 lakh or 80,000/- at the time of payout period.

    Thanks in advance.
    ReplyDelete
  9. Can an NRI buy an NCD over the exchange? or is that also not possible?
    ReplyDelete
  10. No, NRIs can’t buy NCDs from the secondary market if the issuing company doesn’t allow NRIs to invest in them.
    ReplyDelete
  11. Shavanas, to know about maturity period, ask any of your friends or colleagues.

    Answer to your second question: The issuing company is not concerned with the market movements of the NCD price for the purpose of payment of interest or redemption of NCD. The interest is paid on the face value / issue price of the NCD and on maturity also, the company redeems the NCDs at the face value.
    ReplyDelete
  12. Replying to Shanavas

    In L & T Finance NCD, there are four option with two options having maturity of 5 years, 1 option having maturity of 88 months and 1 having maturity period of 10 years. The rate of innterest varies from 9.51 - 10.24, depending upon the option you chose.

    In NCD, company have their commitment. If you dont want to trade in market, you can keep these NCDs till maturity period. Company will pay you interest as promised by them and full amount invested by you. You know in advance what you get if you keep these NCDs till maturity

    But If you dont want to wait till maturity, there is another option. You can see this NCD in open market. In that case you will sell the NCDs at the price at that time.

    How the pricing works: You know the company is goin to give me say 10 percent interest. But right now the interest rate fallen in the market. But still as the company has promised you to pay 10%, they need to fulfill their commitment. If you sell someone he will get 10%, whereas the market rate is 8%. So he will get 2% extra than market rate. When he is getting extra, he will share this with you. So you may get some premium when you sell the NCDs. If the interest rate rise, you may have to sell it at loss. But in any case, you have the option to hold it for time period and get whatever company promised.
    ReplyDelete
  13. This comment has been removed by a blog administrator.
    ReplyDelete
  14. Hi Fisher,
    Regarding NRI buying NCD in secondary market. Is there any reason why NRIs cannot buy NCDs in the secondary market? Also can I know the source of this info, because I searched quite a bit regarding this and all I could find is that NRIs can invest in NCD but on a non-repatriation basis. By your answer, I would then be able to buy Shreeram Transport NCDs but not Tata Capital or L&T NCDs.
    ReplyDelete
  15. Vinod, in my view, investment by NRIs in NCDs of companies (which had not issued NCDs to NRIs in the public offer) through secondary market route might amount to the contravention of the Foreign Exchange Management (Borrowing and lending in rupees) Regulations, 2000.
    ReplyDelete
  16. Hi Fisher, thanks for pointing me to this. I will admit first off that I am not an expert like you. As a matter of fact I just started looking at NCDs. Just my 2 cents worth, in this case why I think it is not an issue is because when an NRI buys from the secondary market, he is neither lending to the said company nor is the said company borrowing from him. Ofcourse I could have missed something and I am saying things without reading all the rules. In my personal capacity, I have asked my broker to buy 20 NCDs of Tata Capital. Lets see what happens. Thanks once again.
    ReplyDelete
  17. If i Buy Tata Capital NCD option 1 paying monthly interest current price is as on Sep 7th 09, Rs 1,10,500 what will be the monthly interest i get. Is it safe to buy 10L worth of these NCD to generate Monthly income. So monthly income will be for another 4years 6 months as tentatively 6 months are over of 5 year perion am i correct

    N2 option is trading at 1121.99, from when do i get Quarterly interest. 2 Quarters are over so the 1st holder whoever sells to me would have received the Interest if i am correct

    N3 option is tradding at 1138.5, but as this pays annual interst i get my 1st annual interest of Rs 120 on a face value of 1000 at 12% annualised. So the seller who sells it to me gets 138.5 as profit on his 1000 purchase price whereas he does not get any interest for holding for 6 months, where as in N1 & N2 they get interest for 6 months they have held on to

    N4 the Cumulative option is trading at 1141.09. here i get a maturity value of 1762.3 after 4.5 years as 6 months has already elapsed.

    Kindly guide me as to which is best option to buy as of now.
    Also is it safe to invest larger amounts of say 5-10L for purpose of investment alone
    ReplyDelete
  18. Vinod, irrespective of whether you buy a NCD directly from the company or from the market, it amounts to lending to the company and you become the creditor of the company.
    ReplyDelete
  19. Hi Fisher..
    That's interesting, I wonder how though. Anyways nothing like a practical lesson I guess. As mentioned I have already placed an order of 20 TATA CAP NCDs to my broker. I guess if there is a problem, someone should catch it somewhere and the transaction should fail.
    ReplyDelete
  20. Prabhu, sorry for the delay in response.

    Based on the information provided by you and assuming that 6 months have elapsed since the deemed date of allotment of Tata Capital NCDs, the yield till maturity (YTM) works out to be approximately 8.52% p.a. under option 1 (Coupon 11% p.a.), 8.24% p.a. under option 2 (coupon 11.25% p.a.), 9.72% p.a. under option 3 (coupon 12% p.a.) and 10.14% (coupon 12% compounded annually) under option 4.

    If you want a regular income from NCDs, go for option 3 which provides you with extra returns of more than 1% p.a. as compared to option 1 and 2.

    But if regular income is not a requirement, go for option 4 which provides you with the maximum returns among all the four investment options.

    Your second question about the total amount to be invested in Tata Capital NCDs can’t be answered based on the information provided by you. It depends upon many factors such as your existing asset allocation, your risk appetite, time horizon, tax liability and other investments opportunities available to you.

    P.S. The rates of NCDs are subject to daily changes, so you’ll have to rework the calculation at the time of making investment if there is change in the market rates of the Tata Capital NCDs.
    ReplyDelete
  21. 1)I had asked if N1 option, monthly income option,monthly income is for 4.5 years as 6 months have elapsed, is that correct. Also based on todays NAV 0f 111000 and monthly interest of 916 on face value of 100000 at 11%, Interest we get is 9.9% and not 8.52% as mentioned by you if my calculations are right

    2) Option 2, N2 Quarterly interest is 28.13 at 11.25%, so Interst we get if we buy at 1140 is 9.9% again. But my Query was as 6 months have passed i.e 2 Quarters are over from date of allotment we get interest for only the rest 2 Quarters of the year. Am i correct?

    3) Option 3, N3 Annual interest is 120 on face value of 1000 at 12%, So Interest works out to 10.41% at present purchase cost of 1153, My Query was as 6 months have passed will i still get interest for complete year? Is interest given to the person who holds these bonds in the Book of records on the date of declaration? If thats the case suppose i buy the NCD just a week before the Annual interest is declared, still i get the interest of full year,But the Interest is already reflected in price i buy?

    4) Option 4, N4 Cumulative yields 1762.3 at 12% Compounded annually on face value of 1000, so net interest we receive is 9.83% compounded yearly on present cost of purchase of 1153 for a period of another 4.5 years, at 9.83% after 4.5 yeas we get 1762.3 if held on till maturity.

    5) How safe it is to invest bigger amounts in these NCD?

    Hope you answer all my Queries in detail one by one.
    You could also email me the reply at sudheerdr2000@yahoo.com
    ReplyDelete
  22. Prabhu, I can understand your confusion. Don’t worry, I’ll clarify.

    First, let me answer your questions one by one:

    1. Right

    2. Correct

    3. Yes, if you buy Tata Capital NCD option-3 even one week before the record date / book closure date (and not declaration date), you’re entitled for the full year interest. Debt securities are quoted cum-interest i.e., the interest accrued till the date of buy / sell is already reflected in the price.

    4. The correct figure is 9.89%.

    5. The safety / risk of the instrument remain the same irrespective of the amount of investment made. In case of NCDs there is default risk, reinvestment risk, interest rate risk, call risk etc.

    So, you’ll have to do risk management / mitigation on your own by spreading out your investments across different asset classes (e.g., equity, debt, gold, property etc) and further diversify among various instruments under a single asset class in accordance with your goals, risk taking ability and time horizon.


    What you’ve written is more or less correct. I don’t dispute it. But what you’re considering is ‘Current Yield’ which is not a correct way to measure returns from NCDs / Bonds. Why? Because, it shows only half the picture.

    Let me explain it. If we assume that you’re going to get back your entire original investment (i.e., the principal amount) at the time of redemption, your calculations are perfectly correct. However, it is not so. For example, if you buy Tata Capital NCD option 2 from the market at a price of Rs 1140, you’re going to get back only Rs 1000 at the time of redemption by the company after 4.5 years. In other words, you’ll incur a capital loss of Rs 140 at the time of redemption which is not reflected by the current yield.

    Now, you can go back to my previous reply.
    ReplyDelete
  23. DEAR SIRS,

    I HAVE TATA CAPITAL NCDs (OPTION - IV).

    I HAVE GONE THRU YOUR SERIES OF QUERIES AND VARIOUS ANSWERS THERETO. HOWEVER I FEEL MY CERTAIN QUERIES RAMAINED UNANSWERED OR RATHER I MIGHT GOT CONFUSED . PLEASE ACCEPT MY APOLOGIES IF MY QUERIS ARE FOUND TO BE REPITATIVE

    MY QUERIES ARE AS UNDER:

    1) AS PER OPTION-IV , I AM ENTITLED COUPON (%) 12% PA TO BE COMPOUNDED ANNUALLY WHEREAS MY YIELD ON REDEMPTION IS 12%, THEN WHAT IS MY EFFECTIVE RATE OF GAIN IN INTEREST?
    2) SECONDLY, WHY EFFECTIVE RATE IS NOT MENTIONED DIRECTLY
    3) I HAVE PUT OPTION FOR 36 MONTHS. HOW DO I EXERCISE IT?
    4) INTEREST EARNINGS ON NCD IS TAXABLE.BUT I DONOT WANTTHE SAME TO BE TAXED ON MATURITY (WHICH MAY BE 36 MONTHS OR 60 MONTHS). INSTEAD I WOULD PREFER IT TO DECLARE ON ACCRUAL BASIS EVERY YEAR SO THAT I NEED NOT BURDEN MY TAX LIABILITY ON ITS MATURIY. IS IT ALLOWABLE TO DECLARE ACCRUED INTEREST AS MY INCOME FROM OTHER SOURCE ON NCDs EVERY YEAR TILL MATURITY ?
    5) IF YES, THEN FOR SOME REASON (OR, TO MAXIMISE MY CAPITAL GAIN) IF I SELL THEM BEFORE MATURITY ( THAT IS BEFORE EXERCISING 36 MONTHS CALL / PUT OR BEFORE 60 MONTHS), WHAT WILL HAPPEN TO MY DECLARED ACCRUED INTEREST INCOME? WILL IT GET DEDUCTED WHILE COMPUTING MY SHORT TERM CAPITAL GAIN OR LONG TERM CAPITAL GAIN?

    I SHALL BE VERY MUCH GRATEFUL IF I GET EXPERT GUIDANCE ON THE ABOVE ISSUES.

    RAM GP
    ReplyDelete
  24. Ram, your first two questions are not clear. Kindly be more specific as to what exactly you want to know. I’m answering your last three questions:

    3.Put option of 36 months means that on expiry of 36 months, you’ve right to sell the NCDs back to the company at the initial issue price of the NCD irrespective of market price of NCD. And, if you exercise it, company is bound to buy-back / redeem it.

    For exercising it, you’ll need to inform the company within 30 days of the expiry of 36 months from the deemed date of allotment.

    4. Yes, you can show the interest on NCD (Cumulative option) on accrual basis provided you’re treating your other interest income (such as interest on FDs) in a similar manner for tax purpose.

    5. Your declared interest income can’t be deducted while computing short term or long term capital gains.
    ReplyDelete
  25. Hi Fisher...

    Thanks very much for this...
    ReplyDelete
  26. Hi Fisher,

    I have L&T NCD worth 25000 with N2 scheme at the coupon rate 9.62%.so as per my understanding i will get the intrest 9.62% of 25000 in each six month starting from the listing date to the date of maturity directly in my linked account.
    Please confirm whether my understading is correct or not.

    However could you please let me know in brief that what is the amount i will get in maturity which is 5 year and does it automatically credited to my account or i have to do something to get the amount.

    I have asked all these concerns to my friends but they dont have any idea about it,so could you please put some light on it then i will be gratefull to you.

    Thanks and Regards
    Santanu
    ReplyDelete
  27. Hi Santanu,

    Your understanding regarding payment of interest is very correct.

    On maturity of NCD, you will receive back your 25K. It will be automatically credited to your account.
    ReplyDelete
  28. Hi Fisher,

    I am not convince with your answer that i only receive back 25k at maturity

    Its being mentioned in the prospectus that coupon rate is 9.62% where as yield on redemption is 9.85%.
    However redemption amount is face value plus any intrest that may have accrued payable on redemption.

    Therefore as per my understanding if the market value of each NCD at the time of maturity is 2000 then i will get 2000*25...please correct me if i am wrong.

    If my understanding is correct then my another concern is reagring yield on redemption percentage(9.85%).

    Please clarify my above concern.

    Thanks and Regards
    Santanu
    ReplyDelete
  29. Oh Santanu, you’re incorrigible! No problem – let me explain.

    An interest rate of 9.62% payable / compounded half-yearly is equivalent to an interest rate of 9.85% payable annually.

    Let’s make it a bit easier. Suppose your total investment is Rs 1 lakh. Now after six months you’ll receive Rs 4,810 (@ interest rate of 9.62%). Now if you reinvest this Rs 4,810 for further six month at the same rate of interest, then at the end of year you’ll receive Rs 4,810 plus Rs 231 (interest on Rs 4,810). So your total interest income for the year becomes Rs 9,851.

    I hope it is now clear.
    ReplyDelete
  30. Thanks for the nice article. Some clarifications considering TATA CAPITAL NCD
    1. If I invest 1 lakh in cumulative option, after maturity (5 years) I must receive 176222/- Rupees. Right?
    2. I assume broker/exchange will not deduct any tax on my maturity amount automatically, I must manually declare the interest as income while doing tax calculation. Right?
    3. What is the reason behind NCD price going down on one day compared to previous close price?
    4. Will this NCD be closed after 5 years? in that case, if I invest today, then i can keep only for next 4 years? Right?
    5. Is there any way to get more returns from NCD (put/call)
    ReplyDelete
  31. Srinivas: I don’t like repetition. All your questions are already answered by me. So please take some pains to read the post before asking any further questions.

    In addition to this post there are two other posts: “Should you invest in NCDs?” and “L&T NCD: A Review” Click on the links given just above the comment section.

    After reading all the three posts, if any doubt still remains, you’re most welcome to ask me.
    ReplyDelete
  32. Thanks for the response.
    But I didnot find proper answer for question 2,3,4?
    ReplyDelete
  33. Srinivas: ok, here’s the point-wise reply:

    2. For TDS on NCDs, see question no 6 of this post.

    3. See question 10 of this post and point no 4 (good liquidity) of “Should you Invest in NCDs”.

    4. Yes, you’re correct.
    ReplyDelete
  34. Hi Fisher,

    Thank you so much for your help and support.

    Now the coupon rate and yield on redemption is clear to me.

    Sorry to disturb you again!!!!

    However the Redemption Amount is not clear to me.Could you please help me to understand that....its mentioned in the prospectus as below

    "Face Value plus any interest that may have accrued payable on redemption"

    I am completely new to NCD so please help me to understand the above statement.

    After going through your comments ,I have the follwing concerns.

    1.I have the NCD with N2 option which is semiannual,therefore the intrest amount will be paid directly to my account in every six month.If i take your example in to consideration then i will get 4810 for evry six month directly in my account.But you have mentioned that if i reinvest that amount..this is not clear to me..is it possible to reinvest the semiannual intrest just like cumulative scheme(reinvest of annual intrest)..if yes then please guide me how to do this?

    Thanks in advance for your help and support.

    Thanks and Regards
    Santanu
    ReplyDelete
  35. Santanu: You’re intelligent enough to go through a prospectus but at the same time silly enough to pose such questions.

    Again, my advice is to discuss it with your friends. And, if they don’t answer, then enroll yourself in the CFP certification.

    In future, I might open a finance school to teach people like you.
    ReplyDelete
  36. fmps,debentures(ncds) and bonds are listed on nse/bse-however my broker icicidirect.com does not allow trading in these catagory(except tata ncd-we cannot buy shriram transport ncd or larsen and turbo ncd despite they r listed on nse/bse,active trading takes place in that counter) -pl lemme know which broker has trading platforms for same
    ReplyDelete
  37. Hello Fisher,

    First let me congratulate you on the wonderful job that you are doing to clarify little details. It is very refreshing to see someone who has real command over details.

    I guess it shouldn't be difficult but I am confused nonetheless while trying to calculate bond YTM for 11% monthly coupon NCD. Here are my questions:

    1) Finance calculator TI BAII that I am using does not have the option to compute 12 payment period in a year. Excel "Yield" function doesn't take more than 4 periods and Excel "Rate", "IRR" and "YIELDMAT" function gives an error #NUM

    I will be very interested to know how you came up with a YTM of 8.52% Per Annum for Tata Cap NCD Option 1 with a price of 110.5% for the remaining maturity period of 4.5 years. This is with reference to price quote on September 7, 2009.

    2) I am also trying to figure out how do they get to 11.57% Yield to Redemption in the prospectus for Option I. I am assuming Yield To Redemption is the same as Yield To Maturity and that all the tranches were issued at Par and the the Put and Call optionality are not considered. This question is related to the previous question in the sense that I can compute it once I know the answer to the previous question.

    3) I thought bond prices are quoted on clean basis i.e. without accrued interest rate. Therefore, 110.5% of par would be the clean price on September 7, 2009.

    I will really appreciate if you can help clear my doubts. I probably am missing something very simple but for now, I don't get it.

    Thanks for your help.

    --
    Hari
    ReplyDelete
  38. Thanks for the info.I keep hearing about BONDs and NCD . Can you clarify the difference between a BOND and a FIXED deposit.

    much appreciated
    ReplyDelete
  39. I have been trying to calculate the annualized yield to maturity and getting different numbers based on the formula used.

    For example for Tata NCD IV:

    Coupon Rate : 12%
    Annual Cumulative
    Face Value: 1000
    Duration : 5 Years

    Value at Maturity = 1000 (1.12) ^ 5 = 1762.34

    Now using the YIELDDISC formula in excel the effective annual yield on the discount bond will be equal to 15.28%.

    Any comments on the calculations above.
    ReplyDelete
  40. Hi fisher ,
    Your information is very valuable.Just wanted to know if i want to purchase the TATA CAPITAL NCD for the half yearly return is right time to buy or i should wait for the credit policy.If i would hold it till maturity what would be the effective rate of return.

    Thanks

    Anand
    ReplyDelete

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