Put in money now, earn interest later. That has been the rule so far. But now the rules are changing. Soon you will be able to earn interest the day you buy a bond!
The Industrial Development Bank of India (IDBI) plans to launch a new instrument -- IDBI Upfront Interest Bond -- offering the investors interest on the bonds upfront. Of course, the payment will be made on a discounted basis as the cash flow is ensured in advance.
"We are issuing these bonds for the first time in the country. The upfront payment will take into consideration discounted cash flow basis. IDBI can decide when to pay the interest on these bonds -- whether upfront or after some time," said a senior IDBI official. These bonds are being targeted at retail investors, mutual funds, corporates and high net worth individuals.
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The Upfront Interest Bond could see good response from banks and mutual funds, provided the pricing is right, said a senior dealer with a foreign bank.
The minimum ivestment in this bond is pegged at Rs 10,000 with multiples of Rs 1,000 thereafter. The financial institution had filed an umbrella prospectus of Rs 1,500 crore with a greenshoe option of an equal amount with the Securities and Exchange Board of India. The filing will be valid from September 2002 to August 2003.
The first tranche of bonds is likely to hit the market by the end of next month. Last year also IDBI had filed an umbrella prospectus of Rs 1,500 crore along with a greenshoe option of an equal amount. It had mopped up Rs 1,263 crore from the market on an issue of Rs 950 crore.
It also plans to issue a new bond linked to insurance -- IDBI Insurance Linked Bonds- as part of its Flexi-bonds series.
The Insurance Linked Bonds will provide group/life/accident insurance cover to the investors. IDBI will tie up with LIC, New India Insurance, United India for providing these insurance policies. The cost of insurance will be build into the YTM of these bonds.
Another of its bonds -- Anytime Encashment Bonds -- which is slated to be launched is at a slight variance as against the Growth Interest Rate Bonds which was launched earlier.
The institutions had in the last two issues of the Growth Interest Rate Bonds given a put option to the investor for encashment after two years and up to one month prior to redemption.
The Anytime Encashment Bond is known as an American option. There will be interest both from the retail section and from mutual funds specially the cash funds, pointed out a money market dealer.
The other bonds in the umbrella issue include Regular Return Bonds, Growing Interest Bonds, Infrastructure Bonds, Floating Rate Bonds, Fixed Option/Floating Option Bonds, Education Bonds, Deep Discount Bonds/Money Multiplier Bonds/ Zero Coupon Bonds and Multi Option Bonds. IDBI offers an option of four different type of bonds in each issue.