State Bank Of India 9.95% (SBIN-N5) Bond – Should you invest 9% Yield Bond?

One of my readers recently asked the current yield on State Bank Of India 9.95% (SBIN-N5) Bond is around 9%. Should we buy it or not? As the yield is high and maturity is in 2026, why not we consider right? Let us see the suitability and risk involved in such bonds.

State Bank Of India 9.95% (SBIN-N5) Bond

Features of State Bank Of India 9.95% (SBIN-N5) Bond

Let me share the State Bank Of India 9.95% (SBIN-N5) Bond features which is available at NSE website.

SeriesN5Coupon Rate9.95%
ISININE062A08058Issue DescriptionBOND 9.95% PA Ret. S4
Issue date16-Mar-2011Maturity Date16-Mar-2026
Face value (Rs.)10,000.00Bond TypeRegular
Next IP Date02-Apr-2016Credit RatingAAA;AAA/Stable

If you go by features, it looks fantastic right? The reasons are as below:-

  • The Bond is from the biggest bank of India i.e. State Bank of India.
  • Coupon Rate is 9.95%
  • The maturity date is in another 6 years.
  • Credit Rating AAA.
  • NRIs are not eligible to hold these bonds.

Hold on…Let us calculate the YIELD. Let us calculate the Yield of the bonds by using the SEBI website. After entering the data it looks as below.

State Bank Of India 9.95% (SBIN-N5) Bond

Here, I have input the value of the last traded price of this bond. It is Rs.11,181, face-value Rs.10,000, and maturity date is 16th March 2026. Hence, I considered 6 years and a coupon rate at 9.95%. You notice that there are two YIELDS mentioned here. One is the CURRENT YIELD and the second one is YIELD TO MATURITY.

Now one more risk here is that this bond have a CALL option on 16th March 2021 (once it completes 10 years). In all probability, the SBI Bank will exercise this option. If it opt for call option, then your investment will turn negative. Because your YTM turn negative.

What is the difference between Current Yield and Yield to Maturity?

When a bond is issued, the issuing company or bank will determine its duration (here it is 15 years), face value (here is it Rs.10,000), and the rate of interest it pays, known as coupon rate (this bond offering you 9.95% coupon). These three features are fixed for the bonds.

Remaining things like credit rating or the bond price fluctuates in the secondary market based on the demand and supply. In this particular bond case, as currently, the interest rates are lower, obviously those who are holding these bonds are selling over the face value. Because this series offering you a 9.95% coupon.

Those who invested in these bonds at the time of issue, for them the cost of investing is Rs.10,000, and return on investment is 9.95%. However, due to the demand, the price is increased now to Rs.11,181. Hence, those who are willing to buy the same bond must pay a higher amount than the face value.

Because of this, your investment on these bonds will not be 9.95% but you have to calculate the yield on these bonds.

The current yield of the bond is calculated based on the current market price to the coupon rate one will receive from these bonds. The formula to calculate is as below:-

Current Yield=Annual Coupon Payment/Bond Price

Current Yield=9.95%/Rs.11,181=8.89%

You noticed that to calculate the current yield, the maturity of the bond does not matter to us. Hence, it is the CURRENT yield. It varies on a daily basis based on demand and supply.

Yield to Maturity or YTM is like you are buying this bond at current price and holding it till maturity.

The total amount of return generated by a bond based on its face value, purchase price, duration, coupon rate, and the power of compounding interest. Hence, YTM will take into account the future cash flows (in the form of coupon) and the time left for the maturity also.

This will remain the same up to the maturity for YOU (if you purchased it today at the market price). Hence, you have to consider YTM than the current yield for your return consideration.

State Bank Of India 9.95% (SBIN-N5) Bond – Should you invest?

I hope you understood the basic features of State Bank Of India 9.95% (SBIN-N5) Bond and what are the current yield and YTM of this bond. Whether we should invest in these bonds?

# Call Option:-

There is a call option on 16th March 2021 (after the completion of 10 years). If Bank exercised it (probability is high), then you end up in negative YTM. Hence, be cautious while buying such bonds.

# Liquidity:-

You are not holding the SBI Bank Fixed Deposit. You have to hold the SBI Bank Bond. Hence, if you wish to sell it, then you must not approach the State Bank Of India. But you have to approach the secondary market to sell. Based on the demand and supply, you are able to sell. Usually, they treaded very low in the secondary market. For example, yesterday there were around 583 trades. Hence, if you are in need of money, then you end up selling at a discounted price.

# Taxation:-

Coupon what you receive on a yearly basis from this bond is taxable as per your tax slab. Also, as per my knowledge, there is NO TDS on such a coupon. However, if you sell in the secondary market before maturity, then you have to pay the tax on such capital gain. If you sold these bonds within a year, then the capital gain is taxed as per your tax slab. However, if you hold it for more than a year, then you have to pay 10% marginal tax or 20% with indexation benefit.

Hence, if you consider the post tax returns or YTM, then the returns are not so great.

# RISK:-

Are they safe as it is by one of the biggest trusted banks in India? Also, maturing within in another 6 years? Let me clarify. These are UNSECURED BONDS. Hence, if a bank goes bankrupt then you will be under the mess.

Do remember that these are UNSECURED Bonds. Unsecured bonds are the bonds that are not backed by some type of collateral. There are no buildings, equipment, vehicles, or other assets backing up the bond for safety. If the bond issuer defaults (here SBI) on the unsecured bond, the bondholders could receive nothing from their investment. They would be left up to the court system to sue the bond issuer for their investment.

Also, this particular bond issue is treated as the TIER II Bond (A type of bond category). Let me quote what RBI’s Notification in this regard states.

The issuing bank shall not be liable to pay either interest or principal, even at maturity, if

  • the bank’s CRAR is below the minimum regulatory requirement prescribed by RBI, or
  • the impact of such payment results in the bank’s CRAR falling below or remaining below the minimum regulatory requirement prescribed by RBI.

Hence, if the bank’s financial condition worsens, then the bank is in no obligation to pay you both principal and interest.

#Volatility:-

Do you think in the secondary market they are stable? As I told you, demand and supply depend on the interest rate movement and other factors. Hence, this bond is also volatile in the secondary market and can be viewed from the below image. Just concentrate on the recent fall in the price of the bond due to the liquidity crunch in the market.

State Bank Of India 9.95% (SBIN-N5) Bond
Source:-Edelweiss

Do remember that this bond is not eligible for pledge to avail the loans. Hence, even if you wish to pledge the bonds with the State Bank Of India, then SBI will not pledge it’s own such bonds 🙂

Conclusion:-Considering the issues of Liquidity, Taxation, and the Risk associated with such bonds, I suggest you stay away from such bonds. Even though SBI is a trusted banker and the possibility of going bankrupt or loss is minimal, I still suggest you stay away from such risky instruments just to earn around 0.5% to 1% higher returns.

Refer our posts related to Bonds:-

46 Comments

  1. Thanks for the info, I was stupid to buy this today and exited soon as I saw your blog post. Thanks a lot. (I know I will lose some charges but it will be worst if SBI calls the off the bond)

    Can you suggest any website to find full bond info?

    Reply
    • Dear Alen,
      You can search with ISIN code and find the information from NSE website.

      Reply
  2. This analysis is wrong example that call option is just next year and so high risk.

    We have lot of good Tier 2 bank bonds available. Every instruments have risk and so bonds . Let’s find out how many banks ( governed by RBI ) were gone default in past decades.

    RBI takes care of recovery and other process. Banks are back bone of financial system. RBI won’t let it down.

    Reply
    • Dear Sunil,
      Thanks and if it is not risky for you then you are free to INVEST 🙂 If can’t understand the concept of yield, then I can’t help.

      Reply
  3. There are more questions here which will be helpful for many to get clear picture on bonds. Please, lets discuss in detail.

    1. Safety: ( Unless no call options nearby ) PSU and Old PSU Bank bonds – Tier II are safe and secure.
    > PSU are backed by GOI or StateGovts. Old PSU Banks have more assets and governed by RBI

    2. Insulate from Interest Movement:
    > One who holds until maturity can get insulated from interest movements

    3. Basic Details:
    > Basic Details of bonds can be found in nseindia with ratings.

    4. Bond Documents: Where to find all bond documents with details on interest duration, cumulative or payout and call option date etc
    > ? ( Karvy can be approached )

    5. Reinvestment: How to do reinvestment of interest received
    > ? ( Reinvestment risk exists that, the market value of the unit would be higher at time of reinvestment, so to explore right bonds again )

    6. Bonds vs FD
    > Bonds are safer than FD being an agreement between issuer and borrower.

    7. Bonds vs PSUBankMF
    > PSU&Bank MF is better to go if you hold for long time, however the interest rate movement will have huge impact on NAV

    Reply
    • Dear Sunil,
      Bonds are SAFER THAN FDs??? Great interpretation 🙂 PSU and Banking MF are better to go? Wait for my next article 🙂

      Reply
  4. Where can I find all available bonds with details like cumulative or non cumulative. Bond document with underlying risk and other details

    Why banks don’t provide option to buy bonds in internet banking

    Reply
  5. Suggest some others safe and good bonds for long term. Also other better option like pension schemes from LIC.

    Reply
    • Dear Jig’s,
      You can explore Tax Free Bonds, PMVVY or RBI Floating Rate Bonds.

      Reply
  6. Desr Mr. Basu,

    I have invested in SBI N5 in July if call option is used how much interest will i get?
    Also is it likely that SBI will use this Call option which can effect its customers sentiments who had invested thinking 15 year ter.m

    Reply
    • Dear Jig’s,
      If they exercise call option, then they return the face value. Accordingly, your yield will reduce.

      Reply
  7. Dear Sir,

    Thank You for your explanation. I bought the SBI N2 series bond 2 weeks ago though I dont have enough knowledge on bond. I just want to know if I hold it till maturity , is there any risk that the maturity repayment in discount ?? What will happen if SBI exercise its call option as I didint able to understand how the YTM will go to negative. Will I end up with discount value of its face value ?

    Reply
    • Dear Sandeep,
      Risk is only when the bank default due to its wrong financial status. If SBI exercise the call option, then you have to handover with the yield of that period.

      Reply
  8. Sir, Thank you very much for the informative article.

    Reply
  9. Sir me aaj 2nd july 2020 ko SBI N5 BOND purchase karta hu too march 2021 me muze interest kitna milega means 9month ka ya pure 12 month ka.

    Reply
  10. Dear Basu Sir,

    Can you please provide some more insight on what is this CALL and PUT option when it comes to Bonds. We understand these options in Option trading in equity. Hope that and this is totally different ?

    Reply
    • Dear Balaji,
      Call in the sense the issuer of the bond has a right to buy all the bonds. Same way, put in the sense the holder of the bond have a right to sell it to the issuer.

      Reply
  11. Sir,
    My son is having ppf account in SBI. For financial year 2019-2020 he thought of paying some amount for tax purposesvin March 2020. But due to lockdown he couldn’t do the same. Yester when he went to SBI they have collected rs. 500 for revival and penalty Rs. 50 besides 6000Rs. for tax purposes.
    Now is the bank right in collecting penalty and revival amount.
    If the bank is not right in doing so what should I do.
    Kindly give your advice.
    With regards.
    BSP Raju

    Reply
    • Dear Raju,
      The due date to deposit in PPF for FY 2019-20 extended already. I think bank is wrong. You can raise an issue.

      Reply
    • Basu Sir – Thanks for the post,

      Two questions:
      1) I was going through various websites and even NSE site, where did you found that bank has a call option in the year 2021. Is there a place where I can find all the bond details and conditions.

      2) Next IP Date is 02-Apr-2016, why this date is in the past, does this mean interest was not paid in 2017 and so on, also where can I find interest frequency.

      Reply
      • Dear Arjun,
        1) You can cross check this with Bank.
        2) Just ignore that information.

        Reply
  12. What are your views reg pnb 9.15% perpetual bonds

    Reply
      • I am still not able to understand the ultimate risk involved in buying a PSU bank’s Tier-I/Tier-II bonds, even if they are “unsecured”. I have gone through the RBI circular as linked with your post. And what I understand from the RBI circular is that these “unsecured” bonds can be written off in case the the bank’s “CRAR is below the minimum regulatory requirement prescribed by RBI, or the impact of such payment results in the bank’s CRAR falling below or remaining below the minimum regulatory requirement prescribed by RBI”. This only means that in case CRAR falls below the capital regulatory requirement as set by RBI, the Bank can write off the bonds.
        I am looking at these bonds from a practical perspective. Do you think that the GoI can default domestically. In fact, no sovereign country can ever default “domestically” because each country has the “legal and constitutional authority” to print money and pay back the debt (let’s not talk about the ramifications of such move by any country – let’s restrict our understanding and discussion to our point of discussion). And I am not at all discussing foreign/global obligations of a country because simply, there you cannot print dollar.
        Further to this, any PSU bank which is majorly owned by GoI also cannot default, even in terms of CRAR requirement. Please understand that GoI keeps on contributing and enhancing the capital base of all PSU banks for the last more than 10-12 years. And it is very simple. Since the PSU banks are majorly owned by GoI and therefore it becomes duty and obligation of GoI to subscribe to the capital of PSU banks and keep their CRAR, minimum, at the requirement level.
        Do we have any history of default by a PSU banks against their “unsecured” bonds – whether Tier-I/Tier-II/Basel-I or whatever it is.
        The only thing which happens is that these bonds are “rated” by credit rating agencies – domestic as well as global. And if in their framework, certain developments take place, they place the bonds in certain category.
        Whether it affects institutional investors like MFs / other banking/development institutions. Yes. Why, because these MFs and banks/institutions have a mandate to invest only above a certain grade of rating and therefore, whenever, ratings are revised downwards, they have to sell / readjust their portfolio accordingly.
        The recent case of Franklin Templeton writing-off their six debt schemes is a case pointer here. Did any of these six schemes have “solvency” issue? Not at all. Did these schemes have “liquidity” issue. Yes, each scheme had.
        So in my understanding, there is no harm in purchasing/keeping such unsecured bonds of PSU banks in one’s portfolio if one wants to keep them till maturity / put-call option by the issuer.
        Sincere request to kindly give your expert opinion/view on this.

        Reply
        • Dear Kamal,
          The default of the Government of India is entirely different than the default of bank. Even though as per now, such events not happened. But due to the nearest call option and interest rate volatility, do you feel the worth of taking risk?

          Reply
  13. Dear Basavaraj Sir,
    Your article is excellent. I am holding this bond since inception & keeping in Demat account every year on 31st March received interest in my bank account.
    Now I have closed my Bank account actually forgotten that receiving SBI Bond interest in same bank account. This year I missed the interest.
    Kindly advice I should contact to whom OR what is the procedure to get the interest from them.
    Regards

    Reply
  14. Thank you for your detailed explanation and your opinion.

    Reply
  15. Dear Basu

    Please write your views on ‘RIGHTS ISSUE’ pertaining to Reliance Industries Limited.

    Thanks.

    Reply
    • Dear Bhuwalka,
      I am not an expert on direct stocks. Hence, I stay away from such events.

      Reply
  16. Your Blog is very interesting.
    I have question-Bonds from Sundaram Finance & Chola Manadalam Finance also carrying same risk? No colletral? If they are become defaulter, We will not get anything like deposit insured amount?
    Waiting your reply.

    Reply
    • Dear Solomon,
      It depends on the type of the bond. We can’t say without knowing the type of bond.

      Reply
  17. Hi Basu sir,

    I have asked you this question yesterday night only. Thank you for writing an excellent article with all the details on next day morning itself. I feel there’s no better adviser than you for a retail investor like me. I am in search of a good debt product other than FDs, PPF, SCSS and landed on this SBI bond. Few questions:
    1. If we invest in tier 3 bonds of SBI or any other major bank, is there risk of losing principal?
    2. If we hold this SBI N5 bond till maturity, will we get the last traded price as principal or face value as principal amount?

    Reply
    • Dear Vignesh,
      1) No such possibility. But riskier.
      2) It is the principal.

      Reply
      • Hi Basu sir,

        Do you mean the face value?

        Reply
  18. If this is your analysis and final comment on a debt paper issued by SBI, then, what is your comment and advice on 13.75% South Indian Bank Bond 2025, ISIN No. INE683A08051 issued on 24th January 2020 with a put/call option after 5 years, i.e. 24th January 2025. Since this paper is giving a very attractive coupon, therefore, some people who want to increase/maximise their debt portfolio return, would like to purchase such papers.
    Request your advice please.

    Reply
    • Dear Kamal,
      Considering the current low-interest-rate trend, why the bank is offering an attractive 13.75% coupon Bond? Look at the rating, it is currently “IND A/Outlook (Negative)”. Stay away from such risky bets.

      Reply
      • Sir since all scheduled commercial banks are tightly monitored and regulated by rbi, aren’t they risk free ?

        Reply
        • Dear Vignesh,
          Considering the current situation, the money you keep in your savings account is also risky. Hence, don’t assume that there is something SAFE.

          Reply
      • If I buy it and become an NRI after an year , do I have sell these?

        Reply
        • Dear Amit,
          There is no clarity on this. Hence, I can’t guide you.

          Reply
  19. Thank you for explaining this so much well. I’ve always been a bit confused about yields and coupons wrt bonds. Additionally this article is eye opening. One really needs to read and interpret the fine print. One query is there an online calculator for YTM?

    Reply
    • Dear Koel,
      Pleasure 🙂 Yes, the online calculator which I used is available on the SEBI website.

      Reply

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