Tax Free Bonds to be issued by AAI

The Airport Authority of India (AAI) is going to issue tax free bonds to the tune of Rs. 1,000 crores shortly, and AAI is going to be the first company in a while to issue tax free bonds.

I think the primary reason for this is that the yield on these bonds is capped to the yield on Government securities of equal duration, and those yields dipped earlier this year.

As Shiv wrote a few days ago these yields are rising back again (Read: Why government bond yields have suddenly started rising?), and I feel that you can expect a rate of around 7.5% for a 10 year bond when AAI issues these tax free bonds.

Since AAI is a mini ratna, and a government owned company, there is some sort of an implicit guarantee that the government will honor AAI’s bondholders in case it falls into trouble so then the question of whether to invest in this issue will be driven primarily by how much interest rate they can offer, and since that interest rate can’t be more than the equivalent G-Sec yield, you have a fair idea on how much that yield is likely to be as well.

At around 7.5% – the tax free rate will be definitely lower than rates offered by bank fixed deposits, but then of course those aren’t tax free. I think you’d be able to get about a percentage or slightly more in a good bank for a comparable duration.

If you buy debt mutual funds right now then there is a risk that they go down in value as the yields go higher, and the listed bonds are already trading at a premium and we will have to compare their yield to this to see if AAI tax free bonds are lucrative or not.

Other than this, I can’t think of any other suitable comparisons, and I think if the yield is decent, this might present a good opportunity for investors to allocate some of their assets too.

I’ll have a more detailed post when the issue details are out, and if you have any particular things that you want to see covered in that post please leave a comment or if you have any thoughts on this please leave a comment.

6 thoughts on “Tax Free Bonds to be issued by AAI”

  1. George not sure if I understood your logic how is 9% taxable better than 8% taxfree ? It should be atleast 11% taxable to match the returns

    I guess gsecs are the true sovereign bonds compared to these so it can be classified as more safer but these bonds are from govt owned institutions as well

  2. Hi ,

    I think the GSec are trading between 8.3-9 % in market. One can buy this securities directly through IDBI online system and need not look for debt fund. Considering that the rate of GSec which are risk free is better than looking at Tax free bonds offering 7-8%. Though the Govt support is there for these Tax free bonds, they are not secured as much as the Government Securities. If some one to trade when the interest rate goes down, GSec will be more liquid and will provide better return considering that price difference and coupon accumulated are paid.

  3. Manshu – Guess all of the ones in 2011-12 were 8% tax free. The ones from 2012-13 are 7.7% not looking at YTM though. Probably that may skew this idea.

  4. Manshu:
    Given that I can buy last year’s bonds at 8% on the exchange, why would I buy these bonds that give me 7.5% ? I dont see the logic.

    1. Which one is 8% right now Vivek? I haven’t looked at their yields for a while now, but yes, if in fact it is lower than the ones that are on offer today then it will not make any sense.

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