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Debt Advice.
(From Business Today (India))
Byline: Narendra Nathan
To the contrary, debt fund investors are a pampered lot for the moment. And with a lot less nail-chewing to do, too. Unlike equity fund investors, who've seen their NAVs zoom, crash and zoom again, it has been smooth sailing so far for debt fund investors. Annual returns have been consistent-in the range of 15 per cent odd-for the last several years.
Now, given the common knowledge of falling interest rates, how did they manage that? Price appreciation of old assets. Every time current rates (on new loans) go down, the secondary market demand for old better-paying bonds rises-and so do their prices (which therefore translates, by the way, into lower 'yields'). Assume you have paid (or 'lent' rather) Rs 100 for a one-year bond with a 10-per cent interest 'coupon rate' (so you are to get Rs 110 after a year). If interest rates suddenly fall, and the new bonds being issued are suddenly at 8 per cent (giving just Rs 108 after a year), another investor would be willing to pay something over Rs 100 (and under Rs 101.85, at which price this deal's 'yield' will touch 8 per cent) to acquire your higher-coupon bond in a secondary market transaction.
That's how debt asset values rise. And with banks and the like flush with funds searching for safe idling spaces, the demand for bonds-government bonds particularly-has been higher than ...
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