Even if your bond is listed, there may not be any buyers. Yield-to-maturity should not be confused with the current yield on the bond
The COVID-19 pandemic has led to a fall in incomes for many of us. One way to tide over a tight financial situation is to sell your investments. Now, equity shares are easy to sell. But what happens if you want to sell a bond or a non-convertible debenture? Bond markets are illiquid and absolute sale price has little meaning (unlike an equity share). Here’s how you should sell your bond.
Trading bonds on exchanges
Your first stop is the stock exchange. Check if your bonds are listed on the BSE or the NSE. Make sure you’ve entered the correct ISIN. Each debt instrument issued by a borrower has an ISIN. “A corporate could have multiple bonds in the market, so it is important for investors to know the correct ISIN. They should also check the scrip code from the dealer and the last traded price. The sell order may not go through if the selling price is higher than market price,” says Ashish Shah, founder of Wealth First.
Shah says it is also important investor is aware of ‘dirty’ and ‘clean’ price of the bond security. Dirty price accounts for principal and accrued interest.
Even if your bond is listed, there may not be any buyers. Typically, companies issue bonds sizes of around Rs 600-800 crore. There would be 3-4 options; only one of them would be for retail investors. All these bonds would be split across several maturities. Add to that the possibility of very few investors out there who might want to trade.
Your chances of finding a buyer are minimal. Still, if you find a buyer on the exchange, check the price yield on offer? Here’s where it gets a bit complicated. Say, you sell an equity share at Rs 500. If you had bought it earlier at, say, Rs 100, then your profit is Rs 400. It’s as simple as that. With bonds, it works differently.
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Look at the bond’s yield to maturity (YTM). A bond’s price is a function of its interest rate and market price. “Investors should check for YTM, which is nothing but return on investment. This should not be confused with current yield of the bond,” says Vikram Dalal, managing director at Synergee Capital Services.
A lower YTM results to a higher price and vice-versa, as yields and bond prices are inversely co-related. How do you check your bond’s YTM? Look at YTMs of similar-rated instruments. Dalal further explains, “Say, if fixed deposits offer 4 per cent interest, then a tax-free bond must not come with a YTM of, say, 6 per cent. Even a tax-free bond’s YTM should be similar. A bond whose YTM is, say, four percent comes with a higher market price than the bond whose YTM is, say, 6 per cent.” In other words, if your bond’s face value is Rs 1,000 and the buyer is offering you a price of Rs 1,300, you might think you are making a profit of Rs 300. In reality – and looking at your bond’s YTM – your bond could actually be worth Rs 1,400.
Using settlement platforms
Your next option is a settlement platform such as India Clearing Corporation or National Securities Clearing Corporation. These are platforms on which bond dealers trade. You need to find a broker to buy the bonds from you. If you trust your broker, you could enter into an off-market deal (more about that later), or go through a settlement platform.
Dalal adds that such platforms work safer because these is no counterparty risk. “Both the payments and the bonds being sold are routed through the settlement platform. If the buyer doesn’t honour the payment, the platform will credit back the bonds,” he says.
Or, you can do an off-market transaction where you give the bonds directly to the broker and he deposits the money directly in the bank account.
Bond buying offers in the market
At times, some brokers give offers to buy certain companies’ bonds from the market. If they offer you a good price (and, not to forget, a good YTM), then you could consider this option. But this path is laden with risks as, many times, we may not have heard of the buyer’s name or reputation.
Recently, certain bondholders of a government-owned firm and a former infrastructure financing company have received mails from an investment firm, giving them ‘exit’ offers. The mail offers to buy bonds at a discount.
Don’t be in a rush to sell. Do a thorough internet check of the buyer’s background. Ask distributors or financial advisors you know if they’ve heard of the broker who has approached you. If you find any red flags, stay away from such arrangements. At the least, you should try and get multiple quotes, as brokers would typically quote sharply discounted prices to investors, who are seeking exit.
Experts also warn investors not to get swayed by mails where investment firms show the issuer company in a poor light. “This could be to just instill fear among the investors, and nudge them to sell at discounted prices. It could also happen that investors that lack awareness don’t realise that their bond investment is actually liquid and tradeable in markets,” says Dalal.
If nothing else works, you can take a bank loan against your bonds.