Understanding Bonds – Part 2

After the introduction of the basic concept of the bonds, today we are trying to explore characteristics of a bonds.

Face Value / Par Value:

The face value is also known as the par value or principal. It is the amount of money a bond holder will get back once a bond matures. Corporate bonds normally have a par value of Rs 1,000, but this amount can be much greater for government bonds. Now the confusing part is that the price of the bond. A newly issued bond usually sells at par value. After issuing, its price would be fluctuates due to many economic conditions till the maturity date. If it trades above the face value, it is said to be in premium and when it trades below from the face value, it is said to be in discount.

Maturity Date:

The maturity date is the date on which the investor will get back face value or par value from the issuer. In general, maturity date can be range from one day to 30 years or even more than 30 years depend on the bond’s term and condition. Obviously a bond that matures in one year is much more predictable and less risky than a bond that matures in 20 years. So the longer the time to maturity, the higher the interest rate. If all things are being equal, a longer term bond will fluctuate more than a shorter term bond.

Coupon rate or Interest rate:

Coupon rates or interest rates both are same. It is the amount the bondholder will receive as interest payments till maturity date as per predefined condition maintained in the bond. Most bonds pay interest in every six months, but many pay also monthly, quarterly or annually. The coupon is expressed as a percentage of the par value or face value. For example if a bond pays a coupon of 10% and its par value is Rs 1,000, then it will pay Rs 100 of interest in a year.

If coupon rate fix till the maturity then this bond is called as fixed coupon bonds. When the interest rate (coupon rate) is linked to the market rates through an index then it is known as floating rate bonds.

Issuer:

It is the most important factor to know ‘Who is the issuer of the bond?’.The issuer of a bond is a crucial factor to consider before purchase any bond. First check the issuer's stability and credit for getting paid back coupon and face value. For example, the Indian government is far more secure than any corporation. Its default risk (the chance of the debt not being paid back) is extremely small. That is the reason Indian government securities are known as risk free assets. The reason behind this is that a government will always be able to bring in future revenue through taxation. If the issuer is non govt organisation, it must continue to make profits, which should be more than guaranteed coupon and face value.

There are also a bond rating agencies which helps investors determine a company's credit risk at the time of purchasing bond. Blue chip firms have a high rating, while risky companies have a low rating. There are many popular rating agencies. Few of them are Moody, Standard and Poor , Crisil and Fitch Ratings.

If the company falls below a certain credit rating, its grade changes from investment quality to junk status. Junk bonds are the bonds whose issuer companies in some sort of financial difficulty. Because they are so risky, they have to offer much higher yields than any other debt. So every time investor should not be in trap of higher coupon rate from these type of junk bond companies. It is better to be avoid such type of bond.

In next part of the bond series we will discuss about bond yield, price in more detail.

Regards,

Arvind Trivedi

Certified Financial Planner

New guidelines for Health Insurance

IRDA has come up with momentous regulations which will change the health insurance industry workings if the draft is implemented without watering it down. TPAs' role will get marginalized and hence they may try to scuttle the implementation in its current form

Insurance Regulatory and Development Authority (IRDA) has finally issued draft health insurance regulations addressing several areas of concern. The draft covers product design, renewability, portability, file and use procedures, protection of policyholders' interest, servicing of health insurance policy, third party administrators (TPA), contract between insurer and hospitals and so on.

The important points in IRDA guidelines are related to following:

• Entry and exit age - All health insurance policies shall provide for entry age at least up to 65 years. All health insurance policies shall not have an exit age for renewal of the policies, once the proposal is accepted, provided the policy is continuously renewed without a break.
• Cumulative bonus to be mentioned in the policy document
• Mediclaim denial grounds to be given in writing
• Reward a favourable claim ratio
• Refund on pre-insurance med check-ups - A proposal resulting into a policy shall reimburse at least 50% of the medical exam cost.
• Separate grievance cell for senior citizens
• Increase in premium must be in writing and must be justified
• Claims independent of multiple fixed benefit policies - The insurer shall make the claim payments independent of payments received under other similar polices.
• If two or more policies are taken by  an insured during a period from one or  more  insurers,  where the  purpose  of  such  policies  is  to  indemnify  the  treatment costs, the insurer shall not apply the contribution clause but the  policyholder shall have an option to chose insurer with whom the claim is to  be settled. In all such cases, the insurer shall be obliged to settle the claim without insisting for contribution clause.
• Insurers  may  provide  coverage  to  non-allopathic  treatments  provided  the treatment has been undergone in a government hospital or in any institute recognized  by  the government.
• Any  product  that  is  being  offered  in  the  market  by  insurance  companies shall not be allowed to be withdrawn  in respect of the existing customers of  the  product,  unless,  the  existing  customers  are  given  an  option  to switch to a similar product under specific written consent.
• Uncomplicated one page customer information sheet to cover key benefits, exclusions and grievance mechanisms.
• Renewal cannot be denied randomly
• Waiting period for pre-existing diseases (PED) be clearly specified
• Claim settlement within 30 days
• Insurer to make direct payment to the hospital and policyholder (not through TPA). Cheques will have to be written by the insurance company and send to hospital (for cashless) and policyholder (for reimbursement). It means that cheques cannot be held by TPAs as a float.
• ID card to have logo of the insurance company. In  case  the  policy  is  renewed,  provisions  to  be  established  by the  insurer  to  ensure  there  shall  not  be  any  need  for  re-issue  of  fresh cards provided there is no change in the details of the policyholder. It means auto-renewal of same ID cards.
• Agreement between the TPA and insurance company to be registered with IRDA
• Seamless transfer of policies services by an existing TPA to the new TPA
• Claim settlement - Specific ground of settlement and denial of claim must be mentioned
• All insurers shall have an agreement directly with the hospitals to establish the list of network providers. The insurer  shall  be  responsible  for  carrying  out  an empanelment  process  of  hospitals  or  health  care  providers  to  provide  cashless facility to the policyholder. The TPA role is effectively marginalised.

Regards,

Arvind Trivedi

Certified Financial Planner