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If one has bought a bond with few years left for maturity and if the yield to maturity (YTM) when the bond was bought was greater than risk free rate (government deposit rates), would it be ideal to hold the bond till maturity, irrespective of price change?

Are the follow assumptions correct?

  • Risk is reduced because of time left for maturity is less.
  • Possibility of risk free rate fluctuating considerably in short period of time is less.
  • Welcome Pranay, will you please add the relevant country tag to this question? – MrChrister Oct 1 '13 at 14:25
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Risk is reduced but isn't zero

The default risk is still there, the issuer can go bankrupt, and you can still loose all or some of your money if restructuring happens. If the bond has a callable option, the issuer can retire them if conditions are favourable for the issuer, you can still loose some of your investment. Callable schedule should be in the bond issuer's prospectus while issuing the bond. If the issuer is in a different country, that brings along a lot of headaches of recovering your money if something goes bad i.e. forex rates can go up and down.

YTM, when the bond was bought was greater than risk free rate(govt deposit rates)

Has to be greater than the risk free rate, because of the extra risk you are taking. Reinvestment risk is less because of the short term involved(I am assuming 2-3 years at max), but you should also look at the coupon rate of your bond, if it isn't a zero-coupon bond, and how you invest that.

would it be ideal to hold the bond till maturity irrespective of price change

It always depends on the current conditions. You cannot be sure that everything is fine, so it pays to be vigilant. Check the health of the issuer, any adverse circumstances, and the overall economy as a whole. As you intend to hold till maturity you should be more concerned about the serviceability of the bond by the issuer on maturity and till then.

  • Specifically how would you check the health of the government of India? Under what conditions will they go bankrupt? What adverse circumstances are you referring to? – dcaswell Oct 1 '13 at 23:28
  • @dcaswell - Check the credit ratings, check the fiscal deficit, balance of payments issues, inflation and the macro-economic factors. I willn't be worried about India per se, but if it was Puerto Rico, some strife torn African nation, Syria, Iraq I would be surely loosing my sleep. – DumbCoder Feb 10 '14 at 15:27

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