SEBI Directs MFs to Value AT-1 Bonds Based on Yield-to-Call

Current Context: The Securities and Exchange Board of India (SEBI) has directed mutual funds to value Additional Tier-1 (AT-1) bonds based on the “yield-to-call” methodology.

• This decision aligns with the recommendation from the National Financial Reporting Authority (NFRA) to ensure consistency with market practices.
• AT-1 bonds are perpetual bonds issued by banks to raise regulatory capital.
• They do not have a maturity date but include a call option, allowing the issuer to redeem them after a specific period.
• This change is expected to make it easier for lenders to raise funds through these instruments and could increase demand for AT-1 bonds from mutual funds.

Question:

1 According to SEBI’s latest guidelines, What is the new valuation methodology mandated by SEBI for Additional Tier-1 (AT-1) bonds?

• A) Yield-to-Maturity (YTM)
• B) Yield-to-Call (YTC)
• C) Current Yield
• D) Price-to-Earnings Ratio

Answer: B) The Securities and Exchange Board of India (SEBI) has directed mutual funds to value Additional Tier-1 (AT-1) bonds based on the “yield-to-call” methodology.