There are few consultants on social media who’re exhibiting the yield to maturity of sovereign gold bonds and luring you to spend money on present outdated sequence of SGB. Making use of YTM to sovereign gold bonds is misguiding.
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Yield To Maturity of Sovereign Gold Bond – Misguiding Idea!!
Whether or not we’ve to use yield to maturity for sovereign gold bonds? The straightforward reply is NO. Simply because the title BOND is related to the product doesn’t imply that sure bond calculations will be utilized right here.
Whenever you spend money on a bond, then you definately pay the worth for it whereas shopping for. Through the preliminary subscription interval, it could be on the face worth and after that, it could be on the buying and selling worth. Through the holding interval of the bond (based mostly on the function of the bond), you could obtain the curiosity at a sure interval. At maturity, you’re going to get again the face worth (not the worth at which you bought in a secondary market).
Let me offer you an instance. Assume that the ten years authorities of India bond whose face worth is at Rs.1,000, coupon charge (annual curiosity cost) is 8%, and presently buying and selling at Rs.900. Then YTM or yield to maturity means when you purchase the bond on the present worth of Rs.900 and holding for as much as maturity, then it’s nothing however the return on funding. It means you’ll obtain an 8% annual coupon and in addition at maturity, you’ll obtain a face worth of Rs.1,000.
Nonetheless, within the case of sovereign gold bonds, the examples stay the identical because the above authorities bond. However the one large differentiator is that at maturity you aren’t receiving the face worth or the issued worth quantity. As an alternative, as per the RBI FAQs, “On maturity, the Gold Bonds shall be redeemed in Indian Rupees and the redemption worth shall be based mostly on a easy common of the closing worth of gold of 999 purity of earlier 3 enterprise days from the date of reimbursement, printed by the India Bullion and Jewelers Affiliation Restricted.”
It means it’s unknown to me the maturity quantity of SGB. The maturity quantity can be based mostly on the gold worth throughout the time of maturity.
Nonetheless, many web sites and influencers promote the outdated problems with SGB by exhibiting the calculation of yield to maturity. When it comes to yield to maturity, as we don’t know the longer term maturity worth we get, how can one enter the now and arrive at YTM?
Take, for instance, an internet site referred to as Wintwealth exhibiting the YTM upfront to advertise the present sequence of SGB as beneath.
When you click on on the hyperlink “perceive terminologies”, then there’s a hyperlink referred to as “Obtain YTM calculator”. The calculator exhibits beneath.
You seen that within the funding date worth, they’re placing Rs.4,830 (which they confirmed as the present SGB worth) and on the maturity date, they’re exhibiting right this moment’s gold worth. As an alternative, it needs to be the maturity gold worth which we obtain at maturity and is UNKNOWN TO US NOW!!
Utilizing such calculators few influencers unfold misguidance on social media (particularly on Twitter). Beware…because the maturity worth is unknown to us now, we are able to’t calculate the yield to maturity of sovereign gold bonds presently. We are able to simply calculate the present yield which relies on the coupon we obtain for the present worth however not the YTM.