IFCI Millionaire Bond: Pare exposures

Recommendation: Pare exposures

Reshma Krishnan

IFCI issued this instrument in 1996 at a face value of Rs 5,000 as a deep discount bond (zero coupon bond).

This means IFCI makes no payments through the duration of the bond period. The interest payouts are factored into the face value. The bond matures in September 2026 and will be redeemed at Rs 5,00,000. It now trades at Rs 10,585 and is a liquid bond.

If held-to-maturity, the bond will give a YTM of 16.86 per cent. However, there is a risk attached to holding the bond to maturity due to the lengthy maturity period. Taking into account IFCI's recent bad debt problems, there is some uncertainty over holding an instrument so long. The returns may not be worth the risk attached to the investment. Therefore, investors may consider staying away from this bond.

Had this bond been purchased at the issue price of Rs 5,000, it would have resulted in a yield of 17.10 per cent if sold at the current market price. Investors should consider exiting the bond now and take advantage of this yield and, possibly, re-invest when prices fall. Since the bond is fairly liquid, investors should find opportunities to trade.