RBI Floating Rate Savings Bonds 2020: Should you buy?

Published on / By M. Pattabiraman Twitter: @pattufreefincal

Published: June 27, 2020 at 8:49 am

Last Updated on June 28, 2020

The RBI 7.75% bonds (2018) have been replaced by RBI Floating Rate Savings Bonds 2020 according to a Finance Ministry announcement. We look at its features and discuss who should buy it and when.

What are Floating Rate Savings Bonds 2020? A floating-rate bond has a variable interest rate, unlike a fixed-rate bond. When interest rates increase,  the interest payout increases and vice-versa. In a fixed-rate bond, the coupon rate is constant the value of the bond (for those who wish to sell mid-term) would vary as per market forces. In a floating rate bond, the current market price of the bond is quite close to its face value (Rs. 1000 above), but the interest rate payments will change with rate movements. Debt mutual funds use these bonds to lower interest rate sensitivity of the NAV: How Floating Rate Debt Mutual Funds Reduce Interest Rate Risk

What is the interest rate of Floating Rate Savings Bonds 2020? The initial coupon rate is 7.15%. The Interest rate for next half-year will be reset every six months, the first reset being on January 01, 2021.

What is the benchmark? Prevailing National Saving Certificate (NSC) rate with a spread of 35 basis points over the respective NSC rate.

What is the tenure of the bonds? Seven years from the date of issue. Premature redemption shall be allowed for specified categories of senior citizens

Who can buy these bonds?  The bonds can be held individually or jointly by resident Indians; on behalf of a minor as father/mother/legal guardian; HUF. NRIs cannot invest.

Is there a cumulative option for Floating Rate Savings Bonds 2020?  No. The interest on the bonds is payable semi-annually on 1st Jan and 1st July every year.

Is the bond tradable? No.

How to buy? Via State Bank of India and other nationalised banks, as well as four private sector banks

When will the bonds become available? Will be announced shortly by the RBI

Is a floating rate bond better than fixed-rate bond?  In general no. If the rates fall, the issuer benefits. If the rates increase, the buyer benefits. The effective yield due to this premium (possibility of higher coupon rate) would be lower in a floating rate bond.

Is the interest from Floating Rate Savings Bonds 2020 taxable? Happily. As per slab.

Floating Rate Savings Bonds 2020 vs tax-free bonds? Considering the high cost of the tax-free bonds in the secondary market – see: Tax-free bond vs RBI 7.75% bonds: Which is better? – the floating rate bonds are a better bet.

Who should buy Floating Rate Savings Bonds 2020? Only those who need income. Since there is no cumulative option, it cannot be used as a 7 year FD. However note that, although we may be close to the bottom of the interest rate trough and rates are expected to increase soon (when economic activity revives), over seven years, there could be one more rate drops. So these are not a source of “regular” income.

Under the present circumstances, these bonds are a reasonable bet for those looking for a secure income. They can also be used by senior citizens provided they have the necessary liquidity.

 

Do share if you found this useful
Use our Robo-advisory Excel Template for a start-to-finish financial plan! Now with a new demo video! ⇐ More than 700 investors and advisors use this!
Our flagship course! Learn to manage your portfolio like a pro to achieve your goals regardless of market conditions! ⇐ More than 2600 investors and advisors are part of our exclusive community! Get clarity on how to plan for your goals and achieve the necessary corpus no matter what the market condition is!! Watch the first lecture for free!  One-time payment! No recurring fees! Life-long access to videos! Reduce fear, uncertainty and doubt while investing! Learn how to plan for your goals before and after retirement with confidence.
Our new course!  Increase your income by getting people to pay for your skills! ⇐ More than 600 salaried employees, entrepreneurs and financial advisors are part of our exclusive community! Learn how to get people to pay for your skills! Whether you are a professional or small business owner who wants more clients via online visibility or a salaried person wanting a side income or passive income, we will show you how to achieve this by showcasing your skills and building a community that trusts you and pays you! (watch 1st lecture for free). One-time payment! No recurring fees! Life-long access to videos!   
My new book for kids: “Chinchu gets a superpower!” is now available!
Both boy and girl version covers of Chinchu gets a superpower
Both boy and girl version covers of Chinchu gets a superpower.
Most investor problems can be traced to a lack of informed decision making. We have all made bad decisions and money mistakes when we started earning and spent years undoing these mistakes. Why should our children go through the same pain? What is this book about? As parents, if we had to groom one ability in our children that is key not only to money management and investing but for any aspect of life, what would it be? My answer: Sound Decision Making. So in this book, we meet Chinchu, who is about to turn 10. What he wants for his birthday and how his parent’s plan for it and teach him several key ideas of decision making and money management is the narrative. What readers say!
Feedback from a young reader after reading Chinchu gets a Superpower (small version)
Feedback from a young reader after reading Chinchu gets a Superpower!
Must-read book even for adults! This is something that every parent should teach their kids right from their young age. The importance of money management and decision making based on their wants and needs. Very nicely written in simple terms. - Arun.
Buy the book: Chinchu gets a superpower for your child!
How to profit from content writing: Our new ebook for those interested in getting side income via content writing. It is available at a 50% discount for Rs. 500 only!
Did you know? We have more than 1000+ videos on YouTube to explore! Join our YouTube Community!
Want to check if the market is overvalued or undervalued? Use our market valuation tool (will work with any index!), or you buy the new Tactical Buy/Sell timing tool!
We publish mutual fund screeners and momentum, low volatility stock screeners .every month.
About the Author Pattabiraman editor freefincalM. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. since Aug 2006. Connect with him via Twitter or Linkedin Pattabiraman has co-authored three print books, You can be rich too with goal-based investing (CNBC TV18), Gamechanger, Chinchu Gets a Superpower! and seven other free e-books on various money management topics. He is a patron and co-founder of “Fee-only India,” an organisation to promote unbiased, commission-free investment advice. He conducts free money management sessions for corporates and associations based on money management. Previous engagements include World Bank, RBI, BHEL, Asian Paints, Cognizant, Madras Atomic Power Station, Honeywell, Tamil Nadu Investors Association, IIST Alumni Association. For speaking engagements, write to pattu [at] freefincal [dot] com
About freefincal & its content policy Freefincal is a News Media Organization dedicated to providing original analysis, reports, reviews and insights on developments in mutual funds, stocks, investing, retirement and personal finance. We do so without conflict of interest and bias. Follow us on Google News. Freefincal serves more than three million readers a year (5 million page views) with articles based only on factual information and detailed analysis by its authors. All statements made will be verified from credible and knowledgeable sources before publication. Freefincal does not publish any paid articles, promotions, PR, satire or opinions without data. All opinions presented will only be inferences backed by verifiable, reproducible evidence/data. Contact information: letters {at} freefincal {dot} com (sponsored posts or paid collaborations will not be entertained)
Connect with us on social media
Our publications

You Can Be Rich Too with Goal-Based Investing

You can be rich too with goal based investingPublished by CNBC TV18, this book is meant to help you ask the right questions, seek the correct answers, and since it comes with nine online calculators, you can also create custom solutions for your lifestyle! Get it now. It is also available in Kindle format.
Gamechanger: Forget Startups, Join Corporate & Still Live the Rich Life You Want Gamechanger: Forget Start-ups, Join Corporate and Still Live the Rich Life you wantThis book is meant for young earners to get their basics right from day one! It will also help you travel to exotic places at a low cost! Get it or gift it to a young earner.

Your Ultimate Guide to Travel

Travel-Training-Kit-Cover-new This is an in-depth dive analysis into vacation planning, finding cheap flights, budget accommodation, what to do when travelling, how travelling slowly is better financially and psychologically with links to the web pages and hand-holding at every step. Get the pdf for Rs 199 (instant download)
Free android apps