Can I Trade my Old Bond for a New One when Interest Rate Goes Up?

Actual Question:

Should you sell your bond and buy a new one when interest rate increases?

Answer:

Dear Friend

It is quite obvious that when interest rates increase, it is smart to sell the old bond with a lower coupon rate and buy a new one with a higher interest rate.

However, is it as simple as it appears?

Can one actually make such a smart move?

Well, the answer is NO and YES.

Financial markets worldwide are supposed to be efficient. Any such opportunities are quickly capitalised upon till the benefit exists no more.

How can this happen?

The market price of your old bond will fall immediately after the announcement the increase in the interest rate. The fall in the price usually will more or less match the potential gain.

However, ‘Value Investors’ also find that the markets are not as efficient as they are supposed to be. They always find a few stocks with excellent intrinsic values trading below their fair price. They also find that many good stocks as well as poor one trading at valuations that cannot be rationally justified. So you may indeed find an opportunity, though rare, to profit by selling the old bond and buying (subscribing) a higher interest rate denominated bond.

Thank you,

With Best Regards,

Anand

What Stocks to Buy in June 2017?

This month we have liberalised the rules for buying stocks a bit.

Why?

The market sizzling and making stocks highly expensive across the board, and if we don’t loosen a bit we will not be able to:

• Buy anything
• Do justice to some of the good stocks that had suffered price hammering in the global commodity markets.

We have set a liberalised yet strict rules that besides being a member of our ‘Portfolio 2K15’, the stocks shall satisfy the three criteria prescribed below:

• The Price to Book Value (P2BV) Ratio shall be less than 1.50. This means we will allocate money to a stock under this rule to only those stocks that are available at or at a discount to the price to book value ratio of 1.50. This is liberalisation from a stringent 1.00 earlier.
• The Price to Earnings (PE) Ratio shall be below 15. This is again liberalisation from the tough hurdle of 10 earlier.
• The product/ combination of PE*P2BV shall be less than 22.50 (1.5*15)
• The Dividend Yield shall be more than 0%. However, a mere good dividend yield is not sufficient. In addition, the scrip must have passed at least one of the three previous tests. Meaning if the share proves expensive under the P2BV, PE and PE*P2BVcriteria, it is ineligible for allocation merely on the grounds of an attractive dividend yield.

The total investible sum is taken as multiples of 10,000, that is Rs.20,000, 40,000 or 120,000 and so on, depending on the investible surplus available with the investor.

The basic unit of 10,000 is equally distributed among the four criteria at Rs.2,500 each or multiples thereof.

This month all the stocks constituting our Portfolio 2K15 qualified, however MOIL Ltd., though managed to qualify after many months, could not earn enough allocation even to buy a single share!

Summary:

Now let us examine the eligible candidates separately under each of the three criteria in detail.

Price to Book Value (P2BV) Ratio:

PE Ratio Criterion:

PE*P2BV Criterion:

Allocation based on Dividend Yield Criterion:

In conclusion the above stocks are those that can be bought in the month of June 2017. MOIL Ltd., though qualified could not muster enough allocation even for buying a single share.