InvestorQ : What is the information I need to collect and evaluate before investing in a bond or any other debt instrument?
Dawn Cherian made post

What is the information I need to collect and evaluate before investing in a bond or any other debt instrument?

Answer
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1 year ago


Most of the said information can be available from the prospectus of the said issue (In case of and any required and relevant details can also be obtained on demand from the lead manager of the issue

Obtain all the relevant knowledge on the debt security like the coupon, maturity, interest payments, put and call options (if any), Yield To Maturity (at the particular price at which the trade is intended to be carried out) and the Duration of the Instrument.

Check the Yield to Maturity (YTM) of the debt security with the YTMs of other comparable debt securities of the same class and features. Remember to always check the YTM of the same class of securities with the same level of risk.

The Yield to maturity and the Price of the bond are inversely related. So, you will be able to obtain a higher yield at a lower price.

It is desirable to check on the liquidity of any corporate debt instrument before investing in it so as to ensure the availability of satisfactory exit options.

The Debt Markets are suited for investors who seek decent returns over a longer time horizon with periodic cash flows. There is also a tax exemption for interest earned on G-Secs up to Rs.3000/- under Section 80L of the Income Tax Act.

The investor should be well aware of the set of risks associated with the Debt Markets like the default risk (non-receipt or delay in receipt of interest or principal), price risk, interest rate risk (risk of rates moving adversely after investment), settlement risk (or risk of non-delivery of securities and funds in the secondary market) and the re-investment risk (interest payments fetching a lower return when re-invested) .

Investors in the Debt Markets should follow a process of judicious investing after a careful study of the economic and money market condition, various instruments available for investment, the desired returns and its compatibility with existing investment opportunities, alternative modes available for investments and the relevant transaction costs.

The above checklist should cover most of the key factors to be covered while evaluating any investment in bonds.