InvestorQ : Can you tell me about the floating rate bonds that the government of India is planning to launch in India?
Mary Joseph made post

Can you tell me about the floating rate bonds that the government of India is planning to launch in India?

Answer
user profile image
sara Kunju answered.
3 months ago


Very recently the government had announced the launch of its floating rate bonds bearing 7.15% coupon rate of interest. As the name suggest, this is a bond where the interest rates paid will be variable and will fluctuate with the bond yields in the market. If yields go up, the floating rate bond interest will be reset and such resetting will happen every 6 months.

Effectively, these floating rate bonds are being issued as a replacement for the erstwhile 7.75% taxable bonds that were discontinued earlier this year. However, it must be remembered that the 7.15% bonds entail payment of floating rates of interest. The rate will begin with 7.15% for the Jan-21 tranche and get reset every 6 months in Jan and Jul.

These bonds shall have a maturity tenor of 7 years and the interest on these bonds will be entirely taxable and payable half yearly to the investors. These bonds will have a face value of Rs.1000. These bonds will be profitable to the investors only when the interest rates go up. Normally, such upsides are capped as the cap clause is included in any debt document.

The key takeaway for the investors is if the yields move higher. In post tax terms, this bond pays just 5% at the 30% bracket, which is anything but attractive. The only hope is if interest rates move up then these floating rate bonds could be at an advantage. In the extreme event of yield hardening, this could be a good choice, but that is a distant possibility.