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Fixed Income

NHAI Bond Yields

The recent issue of tax-free bonds – that is, the interest is tax free – by the National Highways Authority of India (NHAI) has listed on the NSE. There are two bonds – a 10 yr at 8.2% and a 15 yr at 8.3%. You can also buy these bonds now, if you have a broker (The codes are NHAI-N1 and NHAI-N2).

Note: Please read the excellent comments by Anon. The interest rate is a weird beast which I’ve had to use XIRR to calculate.

Since the interest is paid once a year on Oct 1, every passing day accumulates interest inside the bond, so the price keeps going up. The bonds are Rs. 1000 each, so if the yield remains the same, they will go from Rs. 1000 on Oct 1 all the way to Rs. 1082 (on the 10 yr) on Oct 1 the subsequent year. (Actually it will be till Sep 16, which is the record date, but I’m not going there!). Interest will be paid and the bond price will fall by that amount (Rs. 82 in this case).

Here’s a sheet that shows you updated calculations based on current prices:

I’ve included the yield calculation for the 30% and 20% brackets (I doubt the 10%’ers will care)

The listing has been good, at 1032 / 1041, which is about 3% higher. That’s not great by equity standards , but for bonds it’s a nice deal. Let’s wait for the three others (PFC, IRFC and HUDCO) to list as well.

(Bookmark this page – it will update prices automatically, you can come back next month to check, if you like)


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  • Anon says:

    It’s surprising that we continue to use dirty prices (prices inclusive of accrued interest), instead of clean prices, in the retail segment – for bonds. Goes against common sense and makes it difficult for people to compare pricing across periods. SEBI needs to mandate uniform price quotations for the wholesale and retail market. Just dosen’t make sense for bonds to be quoted inclusive of accrued interest.
    In the spreadsheet, you’ll need to adjust the trade date to the actual settlement date. So, while the trade takes place today, the actual settlement is t+2. Therefore the correct date to be used would be Today + 2 (or whatever the settlement date is if t+2 happens to be a holiday) This is a minor issue, but important all the same.
    I think the bonds also had an interest on application money component at a significantly lower rate of 4% p.a. (Remember these bonds came in December, but allotment date is Jan 25 – so the interest for this period too needs to be paid as per the prospectus).
    In case this money has not been paid to investors, but will be paid with the first coupon – we need to adjust for that too. I’m not sure about this, but going by my experience with government entities issuing bonds, it’s highly likely the interest on application money will be paid out later.
    The low rate paid out on the interest on application money actually spoils the “holding period returns” for investors who applied in the primary market.
    You may want to educate your readers by analysing that too 🙂

    • I agree about dirty versus clean – it’s terrible that you can’t use price as a standard comparison. Standardization requires some more effort too – like standardized face values (some bonds are 100,000 and others are 1000 for instance) or in multiple interest per year versus single interest per year (the anomaly that makes govt bond yields about 10bps lower nowadays than if you actually compare them to a corp bond) That bond portal I talked about is something I want to do to just break this concept down to simple and standardmetrics.
      About the settlement date – here is my query. What matters is when your money is taken from your account, right? In most retail cases, brokers need you to have the money in your account by the end of the day (for others I think they can give the money on T+1). So the settlement date will just mean the day the money leaves your account, when you’re buying. For selling, it means when you get the money which is mostly T+3 for retail (T+2 for an institution). So I’m not sure what date to take, really; the time difference of three days makes things a little hazy.
      For these bonds, interest for any day, at 8.2%, is only 22 paise for the 1000 rupee bond. Now this is huge if you consider a 5 crore trade (More than Rs. 10,000 in the interest differential for a day. But to the retail guy, and for a regular retail day, the bonds will probably trade at way lesser liquidity and avg trade size, and this may not be significant. Just saying, though in theory it’s important to work the numbers.
      I will see if I can put in a quick javascript based “enter your settlement date” kind of solution, and another to enter a price and see the effective yield on the bond – that helps in putting in a bid or ask if the security is illiquid.
      In NHAI, the interst on theapplication money is the same as the rate on the bonds (8.2% and 8.3%). The final tranche prospecturs has this:
      “We shall pay interest on application money on the amount allotted, subject to deduction
      of income tax under the provisions of the Income Tax Act, 1961, as amended, as
      applicable, to any applicants to whom Bonds are allotted pursuant to the Issue from the
      date of realization of the cheque(s)/demand draft(s) or 3 (three) days from the date of
      receipt of the application (being the date of submission of each application as duly
      acknowledged by the Bankers to the Issue) whichever is later upto one day prior to the
      Deemed Date of Allotment, at the rate of 8.20% per annum and 8.30% per annum for
      Tranche 1 Series 1 and Tranche 1 Series 2 Bonds respectively.
      We may enter into an arrangement with one or more banks in one or more cities for
      direct credit of interest to the account of the applicants. Alternatively, the interest warrant
      will be dispatched along with the Letter(s) of Allotment at the sole risk of the applicant,
      to the sole/first applicant.”
      From :
      This means the holding period returns only have TDS on them, no lower rate, but they’ll be paid directly (not as part of the first coupon); so they won’t muddy first year prices. But yes, some of the others may have that lower rate on application money, which will be interesting to see.
      Many thanks again, great info. Looking forward to hearing from you!

  • Anon says:

    Let me write pointwise this time to segregate the issues.
    1) Interest on Application Money : My sources in the industry had told me that this was @4%. Maybe they were referring to some other issuance. It could also be that this offer doc is only an initial draft and they have changed it in the final offer doc. Let me check and reconfirm.
    2) Settlement Date : You are right – for small amounts a day’s interest here or there makes little difference, but my objective was different – to point out what is the correct method. Had no intention to get into an argument on the minutae of semantics on this. I presume if we uniformly use t+2 in our calculations we would be right most of the time (at least within statistical significance). The minor complication of when I pay my broker and when I get money from my broker is obviously best ignored. As long as we use dates on which money flows of the settlement at the clearing house happen, we should be ok.
    3) Interest Payment Date : On going through the offer doc I realised there is an even bigger complication that has been ignored (one that actually makes your worksheet incorrect). The interest payment dates do not coincide with the allotment / maturity date. Interest payment is on Oct 1 of every year.
    This actually complicates matters, not just for our calculation purposes, but, also for people trading in the market (more so, since dirty prices are being used). We will have to build out the actual cash flows and then use first principles by discounting it back to present date to calculate yield. (The wholesale market uses the XIRR function in Excel to get around this whole problem of broken dates – You’ll need to use that in case you wish to keep it simple. XIRR has it’s problems, but then the whole market uses it, so it should be ok i guess)
    Trust these organisations to complicate matters. No wonder people don’t understand bonds.

    • Thanks again! In response:
      1) This should be the final doc (filed with SEBI with things like issue expenses and so on). Do let me know what you find.
      2) Settlement date: Gotcha – though it’s a little unwieldy. By first principles, the settlement date makes sense from the day the money leaves your account (if you’re a buyer) or when the money reaches your account (if you’re a seller). On OTC, the dates match. On exchanges, there’s a small lag, for retail the lag can be three days. So a seller sees a three day difference and thus a potentially T+2 in general does work but it doesn’t for, say, Thu or Fri, or for days before holidays. In either case, the yield differential is tiny. Plus these are dirty prices, so you have to back off the interest till the settlement date, not just today, and that can get even more complex.
      Am keeping it simple – I suppose if there is a way to calculate the yield with different settlement dates, that should suffice. At this point the difference is about 0.006% if you use T+2 and you need to consider embedded interest of 0.44 paise on the bond.
      3) Very good point about the interest payment date. This does complicate matters. Let me see how I can get an XIRR working. Darn! That’s a good point about why ppl don’t understand bonds. I barely get by!

      • Anon says:

        Yup, that seems like the final offer doc. So my info on the 4% int on application money probably relates to another issuance.
        For those interested in more detailed info, the hefty (600+ pages) shelf prospectus can be downloaded from BSE’s website

        • Anon says:

          Now I have the correct picture.
          Interest on application money for bonds “allotted” is @8.2% (or 8.3%).
          Interest on application money for amount refunded (not allotted) is @4%.
          So, if you applied for Rs. 15,000 worth of bonds and were allotted only Rs. 10,000 worth of bonds, the balance Rs. 5000 being refunded – you would be paid interest on application money @8.2% (or 8.3%) on Rs. 10,000 plus @4% on Rs. 5000.
          Of course, you will also be receiving the refund of principal amount of Rs. 5000.

        • Ah, you have it! It’s point 8.3.2 – I also got confused. Rough day!

  • Anon says:

    Ah! and one more thing.
    These are tax-free bonds.
    It would be comical if we have TDS on them.
    Just saying.

    • I meant the TDS on the application money that is due to be refunded. TDS only applies in that context.

      • Anon says:

        I only meant it as a joke 🙂
        In all probability they ‘will’ deduct TDS on the interest on application money for bonds that have been allotted. (Application money due for refund is Principal and no TDS is involved on principal repayment).
        Technically, the bonds come into existence only on allotment and therefore TDS will probably be applicable for payments that accrue before that. I’m not an expert on this. Maybe somebody who is can clarify.

        • Ah 🙂 Yes thanks – this language confirms TDS on the interest portion of application money due to be refunded:
          “We shall pay interest on application money on the amount allotted, subject to deduction of income tax under the provisions of the Income Tax Act, 1961, as amended, as
          applicable, to any applicants to whom Bonds are allotted pursuant to the Issue from the
          date of realization ….”

  • Anon says:

    Thanks for the kind comment.
    This is good work on your part too. Trust me, many professionals can not do this straight.
    Interesting choice of using reverse chronological order for dates and negative values for coupon and principal flows and positive ones for price. If I were to make the sheet I would have used chronological order, negative value for price and positive for coupon and principal flows. EOD we’d arrive at the same result, of course.
    I see that you also have another sheet tracking SBI bonds. Is that linked live too?
    Any reason you choose Edelweiss as your price source?

    • Thanks 🙂 On the reverse chron order and coupon/principal flows – I started off learning the concepts myself (no formal course) so in my head the first thing that comes is to look at the investment as an “object”. It receives money (+ve) and it pays out money (-ve). Don’t ask me why, I have no idea! 🙂 I should switch to the more normal way at some point.
      The reverse chron on dates was because I started off thinking of bubbling up the date in a different way (that is, if today is 5 mar 2013, the XIRR should still work). Then I found a better method, which it turns out works in chron order as well 🙂
      SBI bonds – same google doc, different sheet 🙂 It’s linked live as well.
      Edel : it was the first source where I could make proper use for Google’s ImportXML (NSE’s site SUCKS for this purpose) – but I suppose I could use it with any site now. Wanted it to be self sufficient.

  • DJ says:

    Isn’t the debt mutual fund long term tax rate (growth option) 10% irrespective of tax bracket? Aren’t the 20/30% tax bracket implications irrelevant because of that?

    • Anon says:

      This is not a mutual fund, but a straight bond.
      The interest income that you receive from the issuer (NHAI – in this case) is tax free.
      The other provisions of capital gain (short term or long term) would apply as they are to any other financial instrument.
      Please, also, take a look at my response to a question posed by Hari (another commenter) below.

  • Ekveer says:

    What are the google codes you are using to populate the google spreadsheet to fetch the price in real time?
    Please advise.

  • shankar says:

    This is fun, after a long time out of bond markets i see settlement date, interest date issues. I remember there was something called SBI step up bonds back in 99 that paid higher interest every year calculating that one’s price was more confusing. Almost feel nostalgic about the conversation 🙂

  • Hari says:

    Is it possible/OK to “interest strip” your short term capital gains by buying these around the record date?

    • Anon says:

      Good Question, Hari.
      Given that the quotes on the exchange are dirty prices, your cost of acquisition would (should) include accrued interest, and once the price falls after the record date for interest payment you could technically incur a capital loss, if you sell.
      This was the mechanism used for dividend stripping in mutual funds.
      However, the government has effectively closed this loophole. To claim the benefit of tax free income you will need to buy the bonds at least three months before the interest payment date (or the record date – i’m not sure exactly which one is mentioned in the Act) and hold it for another nine months after the interest payment date to claim any benefit.
      This long holding period effectively negates the benefit – since you would actually incur a capital gain instead of a capital loss (remember prices are quoted inclusive of accrued interest and you would have nine months of accrued interest built up) – unless interest rates have risen so sharply that the principal price itself falls substantially.
      Finally, this is what I think would happen and, I’m no tax expert. Please consult an expert if you’re not sure. Tax laws are seldom logical, so it pays to consult somebody who knows the subject well.
      Interesting angle you’ve brought up, though.

      • Anon says:

        Ok. I need to qualify my previous comment.
        Sec 94(7) of the Income Tax Act deals with this subject.
        As per that section the 9 months time frame (after the record date) is applicable only to mutual fund units.
        In other cases (which they call “securities”) that time frame is actually 3 months.
        So technically, you’ll have to hold these bonds for three months after the interest payment date to claim the benefit of tax free income. If you sell after 3 months and incur a capital loss (in most cases you will) you could use that capital loss to your benefit.
        Once again, don’t take my word for it. Consult an expert 🙂

        • That is correct in my opinion too, i.e. Either buy 3 mths before or sell 3 mths after. And its likely to be ‘record date’, going by the spirit of the law. But of course I’m not a tax expert either, do consult one!

        • Anon says:

          Let me clarify…
          It’s not “3 months before OR 3 months after”.
          It’s “3 months before AND 3 months after”.

        • Let’s look at the text – it says, where
          “a) any person buys or acquires any securities or unit within a period of three months prior to the record date;
          (b) such person sells or transfers—
          (i) such securities within a period of three months after such date; or
          (ii) such unit within a period of nine months after such date;]
          (c) the dividend or income on such securities or unit received or receivable by such person is exempt,
          then, the loss, if any, arising to him on account of such purchase and sale of securities or unit, to the extent such loss does not exceed the amount of dividend or income received or receivable on such securities or unit, shall be ignored for the purposes of computing his income chargeable to tax.]
          This means that you can’t strip dividend or interest if you buy 3 months before AND sell three months after. Conversely, the case is that if you either sell more than 3 months after, or buy more than 3 months before, then the rule doesn’t apply to you. My CA also had that interpretation in case of a certain set of transactions I had conducted with equity shares and dividend (since I had bought more than three months earlier, the clause didn’t apply to me, same with the bonus stripping law).
          Also 94 (7) applies only to tax-exempt interest or dividend; for regular interest, the law is much more broad in that you have to quite literally prove that you didn’t do a sell and repurchase just to avoid income tax.

  • Anon says:

    I think we’re both talking the same thing. The difference in perception seems to relate to – what constitutes dividend stripping.
    Also, I’m referring to the conditions under which you can do “dividend stripping”. Sec 94(7) tells us about conditions when you can not do dividend stripping.
    To me (and this is how it is understood generally), dividend stripping refers to the process of
    a) Receiving tax free income (dividend or interest); AND
    b) Also incurring a capital loss (under the tax law).
    This provides you dual benefit – since not only is the income tax exempt (like they are in these NHAI bonds) but also gives you a tax shield (or ability to reduce taxes further) due to the capital loss.
    In the actual process several situations can arise, and let’s look at how Sec 94(7) applies to each.
    Case 1 : You buy within 3 months before the record date (say 2 months or 1 month before) and sell anytime after the actual tax free dividend / interest payment. In this condition any tax free income that you get will be reduced by the actual loss that you incur in buying and selling. In other words you are not able to take advantage of the tax shield – meaning dividend stripping is not allowed.
    Case 2 : You buy well before 3 months of the record date (say 4 months or 5 months) and sell within 3 months of the actual payment of tax free interest / dividend – even under these circumstances you cannot take the benefit of capital loss – meaning dividend stripping is not allowed.
    Case 3 : You buy well before 3 months before the record date and sell well after 3 months of the actual payment of tax free interest / dividend. Under these conditions you can take the benefit of both tax free income as well as the capital loss.
    Dividend / interest stripping does not come into the picture when the actual income itself is taxable. So, under normal circumstances you do not need to worry. Any capital loss incurred after claiming the taxable income should normally be allowed.
    Yes, Sec 94 does deal with general tax avoidance issues and Sec 94(7) deals with the specific instance of dividend/interest stripping. As for tax avoidance – you’d notice that it specifically deals with instances like selling first and buying back later, under which you have to prove that you didn’t do the transaction just to avoid tax. Buying first and then selling should normally be considered a legitimate activity and if in this process taxes are reduced they probably would be allowed without too much fuss.

    • I think there’s a discrepancy in what we are saying, though the gist of it is that div/interest stripping is not allowed. But here where the letter of the law is specific you are allowed to use the letter of the law. According to 94 (7) – where exempt income is specifically mentioned, and the criteria for the loss to not be allowed – dividend stripping is allowed if you have bought more than 3 months earlier, or sold more than 3 months later. I understand the spirit of the law is to prevent dividend stripping, but a judge has ruled that “intent” is not a factor in considering the loss incurred ( – note that it refers to a case before 94(7) was introduced, but the judges ruling to be noted is that just because a transaction is done in the knowledge that one will get a loss, it doesn’t become abuse of law and is legal) This may change with the direct tax code where “intent to avoid” is looked at differently, in an entirely new section.
      Which means that if you have bought three months earlier OR sold three months later – either case – 94(7) will not apply, and the loss will be applicable. A very useful list of all scenarios is here:

      • Anon says:

        Hmm… Ok I get what you mean.
        Sec 94(7) kicks in only if you buy within 3 months before the record date.
        In all other cases, it does not apply – So you can sell it whenever and you should be allowed the consequent loss that maybe incurred.
        In that sense, it is an OR condition – yes.

  • Alagappan Ramanathan says:

    In the XIRR calculation , the interest to be received on 01/10/2012 should be the interest calculated from 25/01/2012 to 30/09/2012 for 250 days @ 8.2 % and 8.3 % that will be 56.16 & 56.85.
    The person who is holding the bond on the record date is entitled to the interest from inception eventhough he may have bought the bond afterwards as he has already paid for the embedded interest up to the date of purchase .
    Please correct me if the above concept is wrong.

  • Sravani says:

    Hi Deepak,
    This is an excellent sheet where you gave us the actual yield on the bonds based on the current market price of the NHAI bonds. If you can publish a similar one for some or all the remaining tax free bonds like REC, HUDCO that will be great.

  • sridhar says:

    Need 2 clarifications :
    1) If i buy 100 N1 @ 1095 today, will this 100 bonds are Tax Free, or it is Tax Free only if i buy thru primary market.
    2) What is the lock in period for these bonds, for N1 it is 10 years & for N2 it is 15 years, is it right… If i wish to sell the same way i buy from any other person, is it possible. If there is no buyer then i should hold the bond for the said years(10 / 15 years)….Kindly clarify…

  • kt says:

    why are you adding embedded interest back to the yield… yield to any buyer today is only 7.6x% and not 8.2x%. you may want to correct the calculations. The number you get from XIRR calculation is what you get. and then apply a tax rate on that.

    • You’re right, but I never added the interest back. There was an error in that the calculation was only for pre-Oct-1 (would only apply for year 1 where you get interest only from 25 Jan 2012 to Oct 1 2012. Post that, the cash flow is different, which I’ve fixed. Thanks for the heads up!