List of Secured Bonds

Secured bonds are issued by private companies and Public Sector Undertakings (PSUs). However, government bonds are unsecured as assets do not back them but are backed by the Sovereign credit rating.

Secured bonds have several benefits, as discussed below:

• As secured bonds are backed by an asset that works as collateral, repayment of the principal in the case of default is possible.
• Being a fixed-income security, they offer interest on the invested principal ensuring regular income.
• For companies, issuing secured bonds is a cost-effective way of raising capital as they offer lower interest rates than unsecured bonds.

As every coin has two sides, so do secured bonds. Below we have listed a few drawbacks of secured bonds:

• If the value of the collateral falls below the principal or becomes unsalable, investors can face a loss.
• If your primary purpose is not regular income and you don’t plan to hold the secured bond until maturity, it is subject to interest rate risk.
• Few secured bonds have a lock-in period, which makes premature redemption challenging.

A yield is a number that shows the returns of any bond. Many times it is referred to as Yield to Maturity (YTM). You receive interest payments based on the coupon rate. You can calculate the YTM using the below formula:

YTM = [Annual Interest + {(FV - Price)/Maturity}]/[(FV+Price)/2]

Where,

YTM = Yield to Maturity
Annual Interest = Coupon payment that you receive annually.
FV = Face Value
Price  = Current Market Price of the Bond
Maturity = Number of years left till maturity

Let’s take an example to understand it better. Assume you invest in a bond having the following characteristics:

So, if we plug in all the values in the above formula, the YTM for the bond in the example works out to be 10.8%:

YTM = [70 + {(1000-850)/5}] / [(1000+850)/2]

However, if we change the bond's current market value to ₹1,100, then the YTM works out to be 4.8%. From this, we can understand the relationship between YTM and bond prices. As and when YTM increases, bond prices decrease and vice versa.

However, a lot of people often confuse YTM with coupons. A coupon is a predetermined rate when you buy the bond, while the YTM is the prevailing market rate of the bond.

Secured bonds are taxed similarly to other debt securities excluding tax-saving bonds. Any interest the investors earn on the secured bonds is taxed as per the individual tax slabs.

Any period above 12 months for listed secured bonds is considered long-term, and the same for unlisted secured bonds is 36 months. Any gain before the abovementioned period is deemed Short-Term Capital Gains (STCG). Otherwise, it is considered a Long-Term Capital Gains Tax (LTCG).

In the case of STCG, the gains are added to the investor’s income and taxed as per individual tax slabs. Whereas in the case of LTCG, gains are taxed 10% without indexation for listed and 20% without indexation benefit for unlisted, plus any surcharge.

For those looking to earn relatively higher returns than fixed deposits by taking relatively higher risk, secured bonds are for you. However, for people who cannot compromise on safety, even if it means lower returns, then fixed deposits are better.