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.

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.

Series	N5	Coupon Rate	9.95%
ISIN	INE062A08058	Issue Description	BOND 9.95% PA Ret. S4
Issue date	16-Mar-2011	Maturity Date	16-Mar-2026
Face value (Rs.)	10,000.00	Bond Type	Regular
Next IP Date	02-Apr-2016	Credit Rating	AAA;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.

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.

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.

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