Can Investment in Corporate Bonds be made in India through Online Trading Account?

Actual Question:

Why are corporate bonds still traded OTC and not electronically?

Answer

Dear Mr.Marcos Jaramillo

A number of value investors, including myself, are keen to make bond investments in India, and always wonder whether one can invest in corporate bonds be made in India through an online trading account. In the US and other financially mature countries buying bonds online is easy and widespread. However, Indian bond market is still in a very nascent and under developed stage. There is a lot of discussion in the official and media circles about the need for the development of bond markets but progress on the ground is negligible.

It appears that online bond trading does take place in a limited way. I too have explored the possibility a few times but did not find any attractive capital appreciation opportunities, and therefore did not pursue the matter any further.

Since I do not have any direct personal experience of buying bonds electronically, I cannot say for sure whether the possibility exists, but a cursory glance at the following web pages does indicate it is possible:

1. I had seen corporate bonds being listed on the websites. Please see this link of bonds listed on BSE/ NSE. If bonds are listed on the stock exchange, I presume they are available for online trading. Here is the link: http://www.moneycontrol.com/fixed-income/bonds/listed-bonds/.
2. NSE lists bonds traded on the exchange as well as OTC Trades in two different pages, indicating that indeed it is possible to electronically trade bonds on the stock exchange. Here is the link: https://www.nseindia.com/products/content/debt/corp_bonds/cbm_reporting_homepage.htm.
3. My online trading account with Kotak Securities shows a menu option for bonds investment. Please see the screenshot below: 

Related Articles:

• Bond Definition
• What is the Relationship Between a Bond's Market Price and Its Yield to Maturity?
• What is the Better Investment Instrument Between Stock and Bond?
• How To Invest In Stocks And Bonds For Beginners - Video
• Is there a Legal Cap on Bond Rates?
• What is the Difference Between Bond and Share?

Conclusion

Markets in India for corporate bonds lack both the breadth and depth, and are still in the nascent stage of development, providing little opportunity for meaningful bonds investment. Even though I have not personally made bonds investment, more because of a lack of an attractive investment in corporate bonds, it appears that it is feasible for buying bonds electronically through the online trading account.

Thank you,

With Best Regards

Anand

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 is the Difference Between Bond and Share?

Share is a piece of ownership of a business. Bond is a piece of the loan of a business. Both are small pieces of a bigger cake, only the cakes are different.

Share

Share is the single unit of a large sum (share capital) invested by owners in the company. There are two types of shares, equity shares or common stock and preference shares or preferred stock. Equity or common shares being the most popular and widely owned we will concern ourselves with equity shares in this discussion.

As an investment, shares of excellent companies will yield excellent benefits of dividends and capital appreciation, over long periods of time and will generate enduring wealth.

As an investment, share alone can offer a shield against inflation.

Bond

Bond is a type of loan that is broken down into small pieces and issued to general public. Usually these are listed on popular stock exchanges are freely tradable in the open market. As in the case of any loan, following terms of agreement are pre-specified:

1. Face value of the bond
2. The rate of interest or coupon rate
3. Frequency of payment of interest – quarterly or half yearly or annually
4. Date of redemption or repayment or maturity

As an investment bonds yield a regular income. They are suitable for individuals and institutions who have a large corpus upfront and need a regular income for sustenance. They are not good for regular, middle class wage earners who have to build a corpus. Bonds do not offer any protection against inflation.

Differences between Share and a Bond:

Nature of Relationship	Owner	Lender
Return on Investment	Dividend	Interest
Mandatory Nature of income	Discretionary. Payable only upon declaration by directors.	Compulsory. No discretion in the hands of Directors.
Priority in Receipt of Income	Dividend can be paid only after interest is paid.	Interest is top most priority.
Capital Appreciation	Available	Not Always Available
Voting Rights	Available	Not Available
Priority in repayment during liquidation	Last, after all the obligations are met	After government and secured dues but before payment of capital.
Scope of Participation Surplus Assets after all obligations are met	Available	Not Available
Risk	Maximum Risk	Normal Risk
Rewards	Maximum Rewards	Limited Rewards
Liquidity of Investment	Liquid	Liquid only when listed on stock exchange.

To conclude, share is a piece of ownership of a business and bond is a piece of loan raised by the business. As an investment both serve different purposes. Shares offer inflation protection.