Yield To Maturity of Sovereign Gold Bond – Misguiding Concept!!

There are few experts on social media who are showing the yield to maturity of sovereign gold bonds and luring you to invest in existing old series of SGB. Applying YTM to sovereign gold bonds is misguiding.

Refer to our latest posts on Sovereign Gold Bonds –

Yield To Maturity of Sovereign Gold Bond – Misguiding Concept!!

Whether we have to apply yield to maturity for sovereign gold bonds? The simple answer is NO. Just because the name BOND is associated with the product does not mean that certain bond calculations can be applied here.

When you invest in a bond, then you pay the price for it while buying. During the initial subscription period, it may be at the face value and after that, it may be at the trading price. During the holding period of the bond (based on the feature of the bond), you may receive the interest at a certain interval. At maturity, you will get back the face value (not the price at which you purchased in a secondary market).

Let me give you an example. Assume that the 10 years government of India bond whose face value is at Rs.1,000, coupon rate (annual interest payment) is 8%, and currently trading at Rs.900. Then YTM or yield to maturity means if you buy the bond at the current price of Rs.900 and holding for up to maturity, then it is nothing but the return on investment. It means you will receive an 8% annual coupon and also at maturity, you will receive a face value of Rs.1,000.

However, in the case of sovereign gold bonds, the examples remain the same as the above government bond. But the one big differentiator is that at maturity you are not receiving the face value or the issued price amount. Instead, as per the RBI FAQs, “On maturity, the Gold Bonds shall be redeemed in Indian Rupees and the redemption price shall be based on a simple average of the closing price of gold of 999 purity of previous 3 business days from the date of repayment, published by the India Bullion and Jewelers Association Limited.”

It means it is unknown to me the maturity amount of SGB. The maturity amount will be based on the gold price during the time of maturity.

However, many websites and influencers promote the old issues of SGB by showing the calculation of yield to maturity. In terms of yield to maturity, as we don’t know the future maturity price we get, how can one input the now and arrive at YTM?

Take, for example, a website called Wintwealth showing the YTM upfront to promote the existing series of SGB as below.

Yield To Maturity of Sovereign Gold Bond

If you click on the link “understand terminologies”, then there is a link called “Download YTM calculator”. The calculator shows below.

YTM of SGB

You noticed that in the investment date value, they are putting Rs.4,830 (which they showed as the current SGB price) and on the maturity date, they are showing today’s gold price. Instead, it should be the maturity gold price which we receive at maturity and is UNKNOWN TO US NOW!!

Using such calculators few influencers spread misguidance on social media (especially on Twitter). Beware…as the maturity price is unknown to us now, we can’t calculate the yield to maturity of sovereign gold bonds currently. We can just calculate the current yield which is based on the coupon we receive for the current price but not the YTM.

14 thoughts on “Yield To Maturity of Sovereign Gold Bond – Misguiding Concept!!”

  1. -bharatkumar Shah

    Can SGB unit interest stream be discounted at certain rate p. a., say 12 percentage, and deducted from SGB unit offer price, or market quote for arriving at underlying price of SGB unit, for comparision?

    1. Dear Shah,
      As the maturity price is unknown to us even if someone discounted it how can one arrive at YTM?

  2. While what you say is correct but for comparing an existing issue to a new issue that’s a fair assumption to make. All things equal the secondary issues have better yield. Whether that yield is correct or not is secondary but comparison to a new bond is fair.

      1. Dear BasuNivesh
        What you say is correct , but does it mean that YTM will be much more in reality than what these online websites are giving, as in future (at least five years or more), gold prices will definitely be much more than today’s price??

        1. Dear Arpita,
          How confidently you can say that in future the gold prices will be more than what you are buying today? Read my articles about gold related. I have done research based on last 44 years data. You will surprise.

  3. I am aged 53 years.
    I want to get Rs.1 lakh monthly corpus post retirement.
    Kindly advise –
    Where to invest and how much amount.?
    I have only invested in HDFC Click to retire with 2,40,000/- per annum 5 years ago

    1. Dear Ramachandra,
      You are asking me to do the RETIREMNET PLANNING!! It is hard for me to do the planning in mere few words without knowing much about your financial life.

  4. Good evening sir
    I want to book profit from my small cap & mid cap fund and invest in “Equity savings fund” because both equity and debt portion is there.

    Sir kindly elaborate how they work sir

    1. Dear Siva,
      Just because the fund invests in equity and debt does not mean it is less risky and best than your small-cap and mid-cap. You must first understand where the fund invests and then take a call rather than blind call.

  5. Sir, can you explain how 2.5% interest will be applied to user who may wish to buy it from secondary market with some example calculation, may be in next blog or so. Another query is regarding any minimum holding period in case of secondary market purchases to receive tax free Capital gains? thanks.

    1. Dear Subramaniam,
      May I know in detail like what you wish to understand? Accordingly, I will write the next post on that topic. Regarding your second question, if you wish not to pay capital gain tax from SGB, then you have to redeem only on the 6th, 7th, and 8th year (automatic and end of bond tenure) of the bond issued years. If you sell it in secondary market, then obviously you have to bear the capital gain tax.

  6. Perfect analysis. Since the future redemption price is unknown as of now, and, therefore, there can’t be any YTM.

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