State Bank Of India 9.95% (SBIN-N5) Bond Call Option – What if the Bank exercised in 2021?

State Bank Of India 9.95% (SBIN-N5) Bond is currently trading at Rs.10,969 and yields to maturity are showing as 8.61% as of 28th August 2020. During the current low-interest regime, people are obviously looking for this investment as attractive. However, they are all forgetting the call option of 2021. What happens if the bank call the bonds?

Long back, I have written a post on this. You can refer the same for detailed understanding and feature of this particular bond “State Bank Of India 9.95% (SBIN-N5) Bond – Should you invest 9% Yield Bond?“.

State Bank Of India 9.95% (SBIN-N5) Bond Call Option – What if the Bank exercised in 2021?

How many of us actually understand the call or put options of the Bond market? Sadly few. Because we are blindly chasing the yield than the risk involved in the bond market.

A callable bond is a bond in which the issuer has the right to call the bond away from the investor for a price determined at the time that the bond is issued.

Let us take an example of this State Bank Of India 9.95% (SBIN-N5) Bond. SBI is paying you the 9.95% coupon on this bond. However, if you look at the current interest trend and in fact the FD rates of SBI, you notice that this coupon rate is costing heavily to SBI. Hence, the bank may call the bond from the investor from future obligations of high coupon rate payment. Then issue the fresh bond in the market at a lower coupon rate (matching the current interest rate trend).

A puttable bond, allows the investor to sell the bond back to the issuer, prior to maturity, at a price that is specified at the time that the bond is issued.

Let us take an example of this State Bank Of India 9.95% (SBIN-N5) Bond. SBI is paying you the 9.95% coupon on this bond. Assume that the current interest rate trend is high and there are many bonds available in the market which may be offering you the higher coupon say like 11%, then will you hold this low yield bond? Obviously you are losing the earning due to holding of this low yield or low coupon bond.

Hence, when the bond feature provide the put option, he will exercise and sell it back to the issuer.

Simple to say, the call option gives the right to the issuer to call back the bond and save his future high coupon obligation (when the interest rate is falling). At the same time, the put option gives the right to holder of the bond to sell the low yielding bond to the issuer back (when the interest rate is going up).

The current situation is favorable for State Bank Of India 9.95% (SBIN-N5) Bondholders but not the issuer (SBI Bank). Hence, obviously SBI bank may exercise the call option which is immediately after the completion of 10 years i.e 16th March 2021.

If such an event happens, then what will be the yield for those who are trying to buy the State Bank Of India 9.95% (SBIN-N5) Bond at today’s price of Rs.10,969?

Let us input the values as below in Bond Calculators and you will find the results as below. I am not sure whether during the call option the SBI Bank will repay just the face value or face value with a year coupon. Hence, let us consider both options to arrive at a possible yield.

# Scenerio 1 – You just receiving the face value at call option.

Face Value-Rs.10,000

Current Price-Rs.10,969


Callable Date-17th March 2021 (Immediately after the 10 years completion) and this means the year left to call is around 0.57 years.

Then the yield to maturity is around -14%. Therefore those who are buying today the bond at Rs.10,969 will end up in negative returns of around -14%.

# Scenario 2 – You are just receiving the face value at call option and one-year coupon of Rs.995=Rs.10,000 (face value)+Rs.995 (one yar coupon)=Rs.10,995. In this scenario also, the yield to maturity will be around 1.3%.

But if you look at the volume traded, traded volume as of 28th August 2020 is 1,579. I can understand the knowledge of those who are selling currently. But there are few buyers also. This surprises me. Who is buying this bond especially when the call option is just around 6 months away?

Look at the price movement of the bond since it’s inception, you notice that there is no such a huge fall in price even though the probability of call option is so near.

State Bank Of India 9.95% (SBIN-N5) Bond Call Option
Courtsey :- Edelweiss

Conclusion:-Buying SBI Bank Bond is not the SAME as investing in SBI Bank FD. Both are entirely different products. However, many fail to understand this. In fact many buy such bonds only because it is by SBI, coupon rate is high and maturity is in 2026. Beware before jumping into any bond investment.

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  1. Hello Basu Sir ,

    Thanks for keeping us informed. Got the info on the same from your previous blog on the same, which is why I stopped from purchasing this one.

    On the other hand while checking on the other cheaper bonds I came across a Edelweiss Housing Finance Limited Bond of 1000 face value with 10% coupon rate maturing in 2026 is trading below 760 rupees. Is it wise to invest in this one being at 24% discount considering the bond rating has been reduced from AAA to A+ in 2 years. These were Secured and Non Convertibles. Considering the NBFC performances, what would be the risk reward ration in purchasing this one? 24% discount + 10% per annum making it 84% returns in 6 years. Luring enough. But, waiting for your suggestion as always. In case of insolvency, what could be the no of years to sell and get back the principal amount through selling the assets.

    • Dear Balaji,
      The rating downgrades itself an indication that why it is trading at a discounted price. Also, secured bonds do not mean you will get the money instantly. You have to wait for the proceedings to complete. Hence, better you stay away from such low rated bonds.

  2. I am sorry to say that wheneverI sent tne comment and expected the answer, I never got the same.
    I hope that I will get the answer for this. This query does not pertain to the subject of Blog but an other one.
    I have one query regarding filling of 112A Sch in ITR2 form which is related to CG from equity funds. In case of SIP instalments, the value of acquisition without indexation (it is higher of acquisition value and lower of sale value and value on 31/012018) will depend on acquisition value which is different for installments purchased on different dates.
    In the column of Table 112A one can fill only one value of acquisition, consideration and value on 31/01/2018.
    But for installments showing zero LTCG and negative LTCG, the vale of acquisition is different for both the cases. Similarly for positive LTCG the value of acquisitions is different.
    But one can fill only one value of acquisition in the Col 8 of 112A. If we fill the combined value of acquisition for all installments purchased before 31/01/2018, it leads to wrong value of LTCG.
    Similarly in case of installments purchased after 31,/01/2018 where one has to consider only sale and initial purchase value to calculate LTCG ,how can compute this value for all installments using Table 112A. There is no other col for filling these values of LTGS in CG Sch. of ITR 2. Pl suggest the response after consulting your expert.
    T L Dhami
    Mob: 9899808036.

    • Dear Dhami,
      Each comment has to pass through the approval by the admin of the blog to avoid spamming. Regarding your doubt, you can email me rather than commenting on the post which is not relevant to your doubt.

  3. very rightly analysed in detail and putting every thing in clear terms.
    Sir, what is the difference between SBI Bank Bond and SBI Bank FD. Except that these Bonds may be either secured or unsecured ( I do not know whether the above referred 9.95 – 2021 bonds are secured or not – may be you can throw some light on this) and therefore the carrying risk is different. SBI Bank FD is also secured only upto Rs. 5,00,000 and not beyond that.
    So , in the event of SBI going insolvent, what is the difference between SBI Bank Secured Bond (upto Rs. 5 lakh) and SBI FD (Upto Rs. 5 lakh).

    • Dear Kamal,
      In case of default, the insurance company will come into the picture and pay you the amount of Rs.5 Lakh FD. However, in case of default, they have to sell the assets and give it back to you (if they have it).


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