A mixed basket

Reshma Krishnan

THE sentiment in the bond market seems to have improved slightly in the last fortnight with the rupee witnessing some stability.

In the last couple of months, the falling rupee and the RBI's decision to hike interest rates weakened the bond market. Among the bonds that traded fairly high the last fortnight are those issued by the State Bank of India, Supreme Petrochem and Hindustan Development Corporation.

State Bank of India

In December 1993, the SBI issued a non-convertible plain vanilla bond at a face value of Rs 1,000. It now trades at Rs 1,025 at a coupon of 15 per cent, payable semi-annually in January and July each year. It is to be redeemed in 2004, when the principal Rs 1,000 will be repaid.

If held to maturity, the NCD will yield a return of 16.07 per cent. Even after accounting for transaction costs, this is attractive vis-a-vis most fixed-deposit schemes. The risk element is also on the lower side, as the bond is rated triple `A'. It is also a fairly liquid, allowing an investor exit opportunities. It has been trading in the Rs 1,015-1,050 range in the last two months. Investors should consider investing in this bond at the current price.

Supreme Petrochem

Supreme Petrochem issued partially convertible debenture in February 1994 at a face value of Rs 25, of which Rs 10 was converted into equity. The non-convertible portion has a value of Rs 15 and a coupon of 15 per cent. The principal can be redeemed in three stages in equal installments of Rs 5. Redemption began in April 2000, with the next two due in 2001 and 2002. The interest is payable annually, in January. The bond trades at Rs 11.20, 12 per cent above its current face-value of Rs 10.

If held to maturity, this bond will yield 10.35 per cent, and if transaction costs are taken into account, this figure could be lower. This is, therefore, not attractive. The bond has been trading in the Rs 11-11.50 range the last couple of months. It is rated `BBB', indicating adequate safety. Investors can stay clear of this bond and existing investors might consider liquidating their positions once the price rises.

Hindustan Development Corporation

This company also issued a partially convertible debenture (PCD) in January 1992 at a face value of Rs 150. This was converted in two stages with a total value of Rs 100. Therefore, the face value of the NCD was Rs 50, redeemable in equal installments commencing 1999. There are three payment dates left of Rs 10 each, payable in March 2001, 2002 and 2003. The NCD had a coupon rate of 14 per cent, payable semi-annually.

The bond is rated default, which means that the company has defaulted in making a payment or is expected to default. Therefore, investing in this bond carries a high element of risk. The bond now trades below its face-value at Rs 21.30. The prices have been fluctuating in the Rs 16.50-21.85 range over the last two months. Though the yields are high, this bond can be avoided unless the investor has an appetite for risk and is willing to take on the possibility of default.