Sovereign Gold Bond (SGB) discount myth
in response to such poorly researched articles such as
& room temperature IQ calculations on youtube such as
& 2nd stupidest online calculators such as
https://sgb.amitwani.dev/ ( the best stupidest remains
let me explain step by step valuation of the most traded SGB as on 23rd Mar 2022
Ticker : SGBJUL28IV (SOVEREIGN GOLD BONDS 2.50% JULY 2028 SR-IV 2020-21)
Date of Listing : SGBJUL28IV is listed on the national stock exchange and was issued on 14th July 2020 by RBI.
SGBJUL28IV Issue Price : 4852/-. The issue price of the bond is based on the simple average closing price [published by the India Bullion and Jewellers Association Ltd (IBJA)] for gold of 999 purity of the last three business days of the week preceding the subscription period, i.e. July 01 – July 03, 2020.
Interest on SGBJUL28IV : 1.25 % of two semiannual payments , 1.25*4852/100 = Rs. 60.65 , paid semi-annually on 14th July and on 14th January periodically till the maturity date.
Maturity or redemption date : 14th July 2028
Please do read the Bond Valuation Overview (With Formulas and Examples) to understand the pricing mechanism of the bond
important snippet from the above article copied here ( & thank you very much Mr. Dave Ahern , who has similar interest to us in terms of Star Wars )
How Do You Calculate the Value of a Bond
As we value a bond, several factors are the annual or semi-annual coupon payments and the bond’s face value.
The formula adds the present value of the expected cash flows to the bond’s face value’s present value. Below is the following formula for our valuation.
Now, don’t worry, we will help you decipher all the above Greek!
Relating to the symbols from above:
C = future cash flows or coupon payments
r = discount rate or yield to maturity
F = face value of the bond
t = number of periods or years
T = time to maturity
doing a step by step valuation as per above guide the SGBJUL28IV fair value stands at 4656 , and the current VWAP stands at 4672
thus there is no discount !!
here is the excel with step by step instructions
remember the “no-arbitrage” principle that there is no such thing as a free lunch. In other words, the financial markets will not allow you to get a risk-free profit.