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Of Bonds And Capital Gains


wealthymatters.comFor any drop in interest rates by 100 basis points, or 1%, very broadly you can see a capital appreciation of 5% on a 5-year bond, 7% on a 10-year bond and 10% on a 15-year bond.The higher the duration of the bond, the greater the capital appreciation.

Since bonds like NHAI and SBI come from the government, they track benchmark 10-year Gsec rates.The 10-year yield now stands at 8.25%. Suppose this were to drop by 100 basis points over the next one year, then it is possible that the NHAI 10-year bonds with a face value of Rs 10,000 could gain Rs 700 per bond and trade at Rs 10,700 and the 15-year bonds will trade at Rs 11,000. Thus for a 15-year bond, an investor could make a capital gain of Rs 1,000, or 10%.

However it is betterĀ to buy these bonds with an objective of holding till their maturity, and not merely for capital gains. This is because bond markets are not well developed in India and show very little activity. So, exiting many bonds could be a problem. Also there are very few products with a maturity of 10 to 15 years, hence the market prices may not reflect the true price.

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