Why is the money debited from my trading account for the purchase of G-bonds more than the allotment amount shown in Coin?
When you buy G-bonds through Non-competitive bidding (Non-competitive bidding means the bidder would be able to participate in the auctions of dated government securities without having to quote the yield or price in the bid) these bonds will allotted to you at the
weighted average
rate of all allotments to competitive bidders. This rate will be the
clean price
i.e price not including any
accrued interest
. This is what is shown on Kite as well (i.e
no. of units owned X clean price)
RBI generally re-issues a G-bond till a sizable amount becomes outstanding under that bond. For Re-issues, the settlement will happen at
Dirty price
(even in non-competitive bidding).
-
If an interest bearing security is bought or sold between two interest payment dates - the buyer has to compensate the seller by paying the seller, that part of the interest which is due to the seller (from the last interest payment date to the trade date). The calculation of the accrued interest is done according to the day count convention of the security market i.e for G-bonds RBI considers 360 days as number of days in the whole year & 30 days in a month.
So, you as a non-competitive bidder, will
pay the weighted average price (clean price) which emerges in the auction and in addition, also pay
interest accrued
from the last interest payment date to the date of re-issue of the security. (Accrued interest is calculated using coupon rate and time from last coupon payment).
This is because, on the Interest payment date, you will get paid the interest amount for the entire duration from the previous interest payment date. However, you would've purchased the bond in between and not owned the bond for the entire duration.This is similar to the price adjustments in stock when dividends are issued.
Let us understand this with an example -
7.72 % GS 2055 is a bond which is being re-issued. The auction for the re-issue happens on 19th October and the settlement happens on 22nd October. Now the interest payment dates are Oct 26 and Apr 26, and the last payment date is April 26, 2018. You place a bid for Rs 10000 and you get the allotment on 22nd October and the weighted average price (clean price) is 93.9
Now, when you get the interest payment on October 26th you will get the whole amount i.e (7.72% ÷ 2 x 10000 =
Rs 386
), even though you haven't held the bond since April 26.
Which is why, when the amount is blocked initially, the accrued interest is also considered. So, the amount which is actually blocked will be (clean price x units) + (accrued interest for these units). The accrued interest will be calculated as shown
here
on the RBI website.
Accrued interest will be - (7.72 ÷ 2) x (178 ÷ 360) = 1.908
*
7.72 is the coupon rate. It is divided by 2 as interest is paid semi annually. 178 is the no. of days for which the interest is accrued i.e last date of coupon payment up to date of issue (Apr 26 to Oct 21). For G-bonds RBI considers 360 days as number of days in the whole year & 30 days in a month.
The consideration blocked will be 93.9 + 1.908 = 95.808 x 100 units, this will amount Rs 9580
The amount shown will be - 9390, and the difference will be
Rs 188
.
This is the reason for the difference in the amount debited and the amount shown on Kite. You will receive this difference accrued interest component in your bank account on the Coupon payment date. Click
here
to know more about interest payment dates.
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