SBI Bonds 2011: Review Analysis & Details for investment in SBI Bonds

It is being termed as a once-in-a-lifetime offer for safe investments - yes, the SBI Bonds or State Bank of India Bonds are here and the period of subscription is now open.
And why not, the offer is from an institute which has shown consistent profitable performance for more than 100 years. Coming from such institution, these bonds have the backing of the government as the bank is a public sector bank. These bonds will also offer a high rate of return which makes them more attractive. This article, provides review, analysis, details, expert opinion and risk factors of investments in SBI Bonds 2011

SBI Bonds 2011: Review Analysis & Details for investment in SBI Bonds

Let's start with some basic details first:
What are the subscription or application dates for the SBI Bonds 2011?
The application period or subscription period for SBI Bonds 2011 is open on 21st February and will close on 28th February 2011.

Will the SBI Bonds be available only in demat form?
Yes. The bonds will only be available in demat form. So investors who are still with the pen-and-paper format cannot apply for these bonds. And this has caused a major problem. Due to the nature of these bonds issued only in demat form, the applications for subscription to these SBI bonds are limited to only 126 branches of SBI bank across the country. This has a major setback for small investors from small towns where the SBI branches are not equipped to handled demat applications. Ultimately, many common and small investors will miss out on this issue.
Interestingly, although demat account it mandatory for investing in SBI bonds, one has to submit paper based applications at the designated 126 branches. That means, even if a person sitting in a small town in Maharashtra has a demat account, he can only apply for these SBI bonds by travelling to the nearest SBI Bonds application collection branch (there are 7 in Mumbai) and then get to apply for these bonds.
This is going to be a major bottleneck for investments in these SBI Bonds.

What are the different options available for investing in SBI Bonds 2011?
There are 2 options for investments:
1) 10-year SBI Bond at 9.75% - Series 3
2) 15-year SBI Bond at 9.95% - Series 4

with call options on both the above types of SBI bonds.

Is there any reservation of allocation for SBI Bonds as per the investor category?
Yes, 50% of the issue is for retail investors, rest is split between HNI and investment institutions.
There is also a green shoe option of Rs 10,000 crore and that is only for retail category.

Which exchanges will trade these SBI Bonds?
Both NSE and BSE will trade the SBI bonds

Lead Managers to SBI Bonds?
Citigroup, Kotak SBI Capital market are the lead managers to the issue. Datamatics financial services are the registrar.

Any tax benefit available from SBI Bonds?
Please note that these SBI bonds dont offer any tax savings or tax benefits

Final Thoughts about the SBI Bonds?
The SBI Bonds are one of the safest options available in the Indian Debt Market. The bank itself is owned by Government of India and has been a profitable organization since more than 100 years consistently. That takes away the risk part of these bonds, which have been rated "CARE AAA" by CARE rating agency, which indicate these bonds as a safe investment.
Offering an attractive rate of return almost 10% is something which is another benefit for investor. Overall recommendation is that investors must apply for these debt instruments from the safest organizations in India.
The only bottleneck is the paper based application procedure at very few selected branches across the country and the first-come-first-serve allotment method, which does not guarantee sure shot allotment for each application.
Although there are unconfimred news - but that too is a healthy sign for investors - that these SBI bonds are trading at a big premium of upto Rs. 320 per bond in the grey market. Taking the face value of these bonds at 10,000, that is 3.2% already. Investors who are looking for a safe investments and can apply for these bonds conveniently, are highly recommended for investment

Fixed Income Securities Market & Credit Risk Valuations

In our previous article, we had mentioned about Fixed Income Securities Market: Introduction, Example, Market & Other Factors. In this article, we will discuss about Fixed Income Mathematics, Valuations topics of Bonds or Fixed Income Securities, Calculations for Fixed Income Securities and how the market for Fixed Income Securities works?, but the focus will be more of credit market-related topics.
Let's start with the fundamentals:

Issuance Or Origination (Creation) Of Debt Securities Fixed Income Securities: the process of issuance of Fixed Income Securities, underwriters distributors and all the parties involved.

 --Underwriting/Distribution of New Issue

 --Pricing (Setting the Offering Yields) of New Issues

Market Pricing Of Credit The Treasury Yield Curve And Credit Or Sector Spreads Fixed Income Securities:

 --Yield Curves and how they are used to price Fixed Income Securities

 --Yield Curves Theory and usages in Fixed Income Securities

 --The Fed (Federal Reserve System) and Interest Rates and how the risk free rate affects the pricing and trading of Fixed Income Securities

Credit Risk: Measurement, Mitigation And Investment Considerations Fixed Income Securities:

 --Measuring or Quantifying Credit (Default) Risk

 --Use and significance of Credit Ratings

 --How to Mitigate or Minimize the Credit Risk

 --Penny Stocks vis a vis Junk bonds - Features of so called High Yield Securities

Bond Prices And Yields Fixed Income Securities:

 --Bond Quotations and how to read and understand them

 --Bond Prices

Quantifying And Managing Interest Rate (Price) Risk Fixed Income Securities:

 --Yield to Maturity (YTM): Factors Determining Sensitivity of Price to Change in YTM

 --Quantifying Price Sensitivity to Changes In Market Yields

 --Callable Bonds

 --Applications of duration

Debt Retirement Bond Redemptions Fixed Income Securities:

 --Scheduled repayment of principal

 --Early Retirement Of Principal

 --Other Debt Retirement-Related Issues

Fixed Income Securities Mathematics: Bond Mathematics, Calculations, Valuations & Examples

In this article, we will discuss about Fixed Income Mathematics, Valuations topics of Bonds or Fixed Income Securities, Calculations for Fixed Income Securities and how the market for Fixed Income Securities works?
Let's start with the basics:
Fundamental or Basic Concepts of Fixed Income Mathematics:

- The difference between Interest Rates, Yields and Rates of Return Compared

- Interest Rate Calculation Conventions - Simple Interest Versus Compound Interest

- Time Value of Money - The basic of Bond pricing - Present Values and Future Values

Fixed Income Market Pricing and Yield Conventions:

- Pricing Coupon and Zero Coupon Bonds

- Day Count Conventions

- Accrued Interest

- Pricing Money Market Instruments

Yield Curves and their uses:

- Types of Yield Curves and their Constructions

- Applications of Yield Curves to Fixed Income Pricing and Analysis

Mortgaged Backed Securities:

- Pass Through Security Pricing and Yield Conventions

- Quantifying Prepayment Speed


Fixed Income Futures:

- T-Note and T-Bond Futures Contracts

- Eurodollar and T-Bill Futures

While attending such a course which involves calculations and mathematics, one should always have a calculator available

Fixed Income Securities Market: Introduction, Example, Market Participants & Types of Fixed Income Securities

In this article, we will discuss about Fixed Income Securities Market, The types of Fixed Income Securities, The Market Participants for Fixed Income Securities and how the market for Fixed Income Securities workds?

-- Participants of the Fixed Income Securities: :
? Investors of the Fixed Income Securities: These may be long term or short term investors and may inlcude retail investors (small amount investments) to large investors (million-billion dollar amount investments)

? Issuers of the Fixed Income Securities: The banks, organizations, governments who actually issue new Fixed Income Securities

? Sell-side of the Fixed Income Securities: These are broker dealers who make the markets and fulfill the demands of

? Service Organizations of the Fixed Income Securities:

-- Bond Concepts or Fixed Income Securities Concepts: There are certain concepts on which any product is based, same goes for the financial products. The Fixed Income Securities are based on the concepts of Interest Rates(heavily) and minutely on other factors like inflation, other macro-economic factors, etc.

? Interest Rates

o Conventional Yield Measures

? Ratings

? Term

? Yield Curves

-- Fixed Income Securities : In this section, we cover the basic types and characteristics of the Fixed Income Securities.

? Types & Characteristics of Fixed Income Securities

o Government securities

? Treasury bills

? Notes

? Bonds

? Treasury Inflation Protected Securities (TIPS, I- bonds)

? Agency securities

o Mortgage backed securities

? Agency

? Non-conforming

o Asset backed securities

? CMO

? Cash Flow

o Credit card receivables: Not for individuals, but this is for the banks issuing the credit cards and have an outstanding receivable from the credit card holders.

o Auto loans:

o Receivables:

o State and local government

? General obligation;

? Revenue

o Corporate bonds

? General obligation

? Indentures

-- Trading MarketPlaces:

? Traditional Exchanges

? Over the Counter

? Electronic Markets

? Quotes

-- Risks/Reward:

? Risks

o Default

o Interest Rate

o Inflation

o Liquidity

? Rewards

o Capital Gains

o Interest Income

o Entitlements

? Remedies in the Event of Default

Bond Fund: Introduction, Investments, Trading, Example & Risks of Bond Funds

So now that we have seen the fallback and downturns of the stock markets, suddenly all the great traders and investors in the world have become cautious about the thing called RISK and SECURITY of their investments. It is human nature, when markets were going up and up and above in the last 6 years, everyone just hopped onto the stock market investments. Trouble started when the stock markets fell apart and people became concerned about risks, and they started seeking protection of their capital looking for alternatives to security and stock investments. Bonds or related financial products like Bond Funds provide an alternative to that in a compartive less risk less return formula.
In this article, we will discuss the concept of Bond Funds, How bond funds are traded, How to invest in Bond Funds, An example of Bond Fund and the risks associated with Bond Funds.

Let's begin with the basics:
What is a bond fund?
Like any other stock based mutual fund which invests in stocks, a bond fund is a sort of mutual fund which takes money from individual investors and invests it in the different bonds available in the market.

What are the kind of returns expected from a bond fund?
A bond gives interest at pre-defined intervals - like quarterly, six months, annual, etc. Since a bond fund invests in multiple types of bonds, it can pay dividends to its investors. But this is at the sole discretion of the bond fund manager and it is not his obligation. Though generally the bond funds tend to pay dividends more frequently than the individual bonds.
Other form of return that can come from bonds is the capital appreciation, i.e. instead of paying the dividend, the money is reinvested. Hence, if investors are looking for long term capital appreciation, then they can benefit from this.

What are the different types of bonds and bond funds available for investments?
There are mutliple types of bond funds depending primarily on the underlying bond type investments:

- Government or Treasury Bond funds: The bond funds which invests in bonds issued by Government or Treasury. Considered to be the most risk free investments as they are backed by the goverment.

- Mortgage Bond Funds: These bond funds are backed by the Mortgage loans issued. Their income or interest to be paid is derived from the interest on the mortgage loans. However, there is a risk of default on the mortgage loan and hence they are comparatively riskier than Goverment or treasury bonds. We have seen examples in recent past when even government backed mortgage companies like Freddie Mac & Fannie Mae were in problems.

- Municiple Bond Funds: Another safe investment. They are the bond funds which invest in bonds issued by the municple corporations. They sometimes also offer tax benefits.

- Corporate Bond Funds: These bond funds are the riskiest of the lot. For e.g. Effect on Lehman Brothers Bonds after Lehman Brothers Bankruptcy. Though rating agencies like S&P and Moody's tend to give a rating to these corporates and bonds, there is no guarantee of anything. It all works randomly and we have seen the fates of Lehman Brothers going bankrupt.

-Regional bond Funds: You can also have bond funds that invest in bonds of a particular region, like Russian Bond Funds, Asian Bond Funds, South America Bond Funds, etc.

What are the advantages of investing in Bond Funds
Firstly, they offer Diversification. A bond fund will not invest in bonds from one single company, but from multiple companies, hence it will be less risky compared to individual bond investments. On the flip side, it comes at the cost of fund management charges and administrative charges.

Related: Tax-Free Municipal Bonds & Tax Free Bond Fund ETF & Low Cost Mutual Funds

Liquidity: Another major benefit. You can sell back your bond fund units anytime you wish. Copare that to your individual bond investment, it will force you to wait for the bond to mature before you can redeem your money.
Then there are the implicit benefits of professional money management, but they come at a cost.

What are the risks of investing in bond funds?
First - the bond funds come at a cost - load, administrative charges, fund management charges or whatever they can be called.
Second - Corporate bonds are risky - no one knows the in and out of company issuing bonds. Any instance like Lehman Brothers bankruptcy can happen anytime
Third - They do not shield you from inflation