Secondary Bonds Promise Rich Pickings

Uncertain about the equity market? Try the secondary bond mart where 10-year papers are trading at a good premium to their issue price, and offer a potentially good harvest on redemption.

A case in point is the Industrial Development Bank of India's (IDBI) Deep Discount Bond. Issued at Rs 2,700 in 1992, the paper is now trading at a premium of Rs 10,823. The next redemption opportunity for the issue is in March 2002 at Rs 12,000.

High net-worth investors, who have a few lakhs lying around and nowhere to put it, can explore this investment option.

It's final redemption date is 2022, but who's going to look that far in the future?

According to an analyst tracking the debt market, there are two factors which dictate prices in the secondary market: the coupon (which is a major driver) and availability of the paper. "The premium comes due to the large coupon," he said, pointing out that lack of sufficient supply in the market would also drive up prices.

"The IDBI and ICICI bonds are currently being quoted at 70 to 85 basis points above government securities of similar maturity. This is a good investment opportunity for the high net worth investors as they are also highly liquid securities," said another analyst.

The ICICI Deep Discount Bond is another paper which is also trading at a premium but not so substantially. The bonds, issued at Rs 5,200, are at present trading at Rs 10,650. The final redemption of the issue is in 2021. Analysts attributed the modest premium to the availability of the ICICI paper.

Most of the investors in these bonds are mutual funds, banks and provident funds. Retail investors will not stand a chance since sale opportunities are available only in lots of a few lakhs.

The liquidity of such papers in the secondary market is fair enough. While most of the papers being traded were issued quite sometime back and so have high coupon in tandem with the prevailing interest rates then, similar papers if issued now would have coupon between 9.5 per cent and 10.25 per cent depending on the maturity profile.