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Sunday, November 25, 2001













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Sardar Sarovar Narmada Nigam Deep Discount Bond: Sell

Recommendation: Sell

Reshma Krishnan

Sardar Sarovar issued this bond in 1993 at a face value of Rs 5,000.

The bond matures in 2013 at Rs 1,11,000. The complex put option structure enables an investor to redeem the bond at certain stages. The bond has put options at the end of the seventh, 11th, and 15th years, when it can be redeemed at Rs 12,500, Rs 25,000 and Rs 50,000 respectively. The bond now trades at Rs 21,985.

The bond price has been rallying steadily through the year on the back of the decline in interest rates. It has appreciated by almost 30 per cent since January. The prices of fixed-rate bonds appreciate on the back of an interest rate cuts as investors are already locked onto higher coupons than the prevailing levels. This makes the older bonds that much more attractive.

The first put option has gone. The next can be used in 2004, when the bond can be redeemed at Rs 25,000. Acquired now, the yield on this option would be an unattractive 4.50 per cent. If the put option is exercised in the 15th year (2008), the yield, based on the current market price, would be 13.29 per cent. The YTM is 14.66 per cent.

While the 15-year put option looks most promising, after accounting for transaction costs, a yield of 13.29 per cent is not really attractive, considering the holding period of almost seven years. On the other hand, the bond, bought at the issue price of Rs 5,000 in 1993 and sold now, would have fetched an investor a return of 20.28 per cent. So, investors can use the recent rally to exit the bond.


Section  : Bonds & FDs
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