Bonds are generally issued by an organisation falling in the private or government category to raise funds to accomplish one or more purposes. Bonds have been around for more than a century and have proven to be a reliable way to invest money for a certain period.
Bonds are relatively safe investment options that yield a fixed income. It works as an additional source of income for an investor. The rate of interest is paid annually. In some case, the interest is also paid monthly.
The global bond market had
a total outstanding value of
$123.5 trillion
(₹ 9,44,32,66,95,00,00,000.00)
The size of the
Indian bond market stood at
$2 trillion
(₹ 15,29,27,40,00,00,000.00)
The global bond market had
a total outstanding value of
$123.5 trillion
(₹ 9,44,32,66,95,00,00,000.00)
The size of the Indian bond market stood at
$2 trillion
(₹ 15,29,27,40,00,00,000.00)
As a common man and non-expert, you might be wondering, “What are Bonds?” Well, there is no need to wonder. Here is a quick explainer for bonds.
A bond is a debt security representing a loan to the issuer, typically a government entity or corporation.
Bonds are used by companies, central government, and municipalities to finance their projects.
The borrower pays the lender a fixed interest rate and the par value upon maturity.
Consider it similar to taking out a personal loan from a bank, but you are the lender (investor), and the borrower is usually a government or organisation (issuer).
‘Bonds’ are the commercial term. Understanding Bonds can be a daunting task for many of the common people. We at BondsIndia have strived to make the complex terms easy to understand for you. There are a few basic terms used commonly by the investors. You can have a close look at the basic terms for a better understanding.
Below are a few basic terms used in bonds:
It is the date on which the bond issuer repays bond investors for the money they have lent them. Bonds come in various maturities: short, medium, and long.
It is often known as par value and is the amount of money the bond will be worth when it matures. The face value is also used to calculate interest payments payable to bondholders. The most frequent par value for bonds is Rs. 1,000.
The fixed rate of interest paid by the bond issuer to its bondholders is known as the coupon.
After the bonds have been issued, they are traded in the market. So the price at which they are quoted in the market is known as the current price.
The yield on the bond is the rate of return that an
investor gets for holding the bond. While the coupon
is fixed, the yield is variable and is determined by
the secondary market price of the bond and other
factors.
Current yield, yield to maturity, and yield to call
are all types of yield.
The annual income (interest) from a bond is divided by the security’s current price to get the current yield.
Yield to maturity (YTM) refers to the rate of return that an investment will provide if held until its maturity date.
Yield to call (YTC) is the rate of return that a bondholder will receive if the bond is held until the call date, which happens before the maturity date.
It is the date on which the bond issuer repays bond investors for the money they have lent them. Bonds come in various maturities: short, medium, and long.
It is often known as par value and is the amount of money the bond will be worth when it matures. The face value is also used to calculate interest payments payable to bondholders. The most frequent par value for bonds is Rs. 1,000.
The fixed rate of interest paid by the bond issuer to its bondholders is known as the coupon.
After the bonds have been issued, they are traded in the market. So the price at which they are quoted in the market is known as the current price.
You might be wondering about the ‘’Types of bonds available in India’’ in which you can invest?
There are many different types of bonds available in the Indian market. They are classified on the basis of issuer, coupon rates, and tenure. Depending on the issued bonds, bonds come with varying interest rates and risks.
It is a debt security issued by the central or state government to raise money to fund projects.
Know MoreIt is a medium or long-term debt issued by public sector companies to raise capital for projects.
Know MoreIt is the bond type issued by corporates to raise funds from investors. It is relatively safe investment.
Know MoreIt is issued by the government enterprises. The income generated by the interest is non-taxable.
Know MoreIt is a debt security. It trades at a deep discount and does not pay interest during the bond life.
Know MoreIt is a fixed income debt security that can be converted into stocks of the same company by the holder.
Know MoreIt is the right alternative to investment in physical gold providing interest income on the investment.
Know MoreIt is a bond type with no maturity, but the agreed interest is payable until the issuer calls them back.
Know MoreIt is a fixed income bond designed specifically to support environment or climate related projects.
Know MoreIt is considered more secure in comparison to asset-backed securities and pays interest annually.
Know MoreMarket Linked Debentures (MLDs) are the debt securities that are linked to performance of the market.
Know MoreSDL are issued by state government in order to meet budget expenses. They are low risk investments.
Know More
The Indian government, either the central or state governments, may require funds for their operations, such as infrastructure, public projects, etc. thus, they issue bonds known as government bonds
The government (issuer) guarantees principal repayment as well as interest payments. As the government (central or state) backs them, they are considered the safest.
Government bonds have a long maturity, usually between 5 and 40 years.
These bonds pay a fixed/floating interest rate; however, they provide lower returns as they carry less risk.
Investors who are wary of taking risks, sometimes known as risk-averse investors, and who want to ensure the highest level of protection for their money might invest in government bonds.
Companies issue corporate bonds to fund their needs, such as expansion, equipment purchases, land purchases, construction of a new factory, etc.
These bonds are often medium to long-term investments with more than one year of maturity.
Companies pay investors monthly interest payments at predetermined intervals and their principal amount when the bonds mature.
Companies issue debt because it allows them to raise funds at a reduced cost and without diluting their stock.
Corporate bonds have a larger default risk than government bonds and provide a higher yield.
A corporate bond can be classified as investment grade or non-investment grade, depending on its credit rating.
PSU bonds are issued by public-sector companies, such as PSU banks, power sector companies, railways, etc., with a government stake of more than 51%.
As the government backs these bonds, they carry less risk, thus lower return than corporate bonds.
They come with medium to long term obligations.
Continue to invest in PSU bonds for a longer period since you will get better returns despite market price swings.
Tax-free bonds are exactly what their name implies: they are tax-free. As a result, the interest generated by investors on these securities will be tax-free under section 10 of the Income Tax Act.
The government issues these bonds for a specified purpose, such as infrastructure or housing projects. Municipal bonds are an example of this type of bond.
Tax-free bonds have a 10-year or longer maturity and have very low default risk. Thus, they provide a lower rate of return than corporate bonds.
Further, because they have a long lock-in time, they are illiquid.
Bonds that pay no interest to the investor are known as zero-coupon bonds.
Why would an investor invest in such an instrument, you might wonder?
A bond is a form of debt financing, and they are not the same thing as stocks. Organizations issue bonds with the aim of raising funds for a variety of needs like purchase of machinery, purchase of land, company expansion, construction of a new site or a factory, and more.
When the issuer issues bonds, it borrows money from investors who buy them in the bond market.
The investors receive regular interest payments from them for the amount they have loaned, and they pay back the principal when they mature, typically after several years.
For more information, go to our knowledge centre page
A bond market is the market where investors can buy debt instruments issued by either government enterprises or private sector organizations.
The bond market in India plays an essential role in the country’s economic development, and the government is taking steps to enhance the bond market.
Earlier, foreign investors did not have full access to the government bond market. However, the Indian government has announced a plan which will allow international investors to buy government bonds with no restrictions.
The inclusion of India in the global bond index came as a result of this new strategy.
India is anticipated to be included in global bond indices in early 2022, which might bring over $40 billion in capital from investors in 2022 -23. Furthermore, allowing foreign investors to invest in government bonds is a good decision that demonstrates India’s confidence in its stability.
A market-making institution for corporate bonds was proposed in the most recent budget.
This will have several advantages, including providing much-needed liquidity to the bond market and allowing investors to feel more comfortable with bonds.
The Indian bond market has diversified dramatically during the previous two decades, contributing significantly to the development of the country’s infrastructure.
However, compared to the equity market, India’s bond market is still in its early phases, with much room for expansion.
As discussed above, the Indian bond market consists of numerous sorts of bonds.
There are two types of markets in the Indian bond market. They are as detailed below:
The primary bond market is a bond market segment where new and seasoned issuers, including corporations, municipalities, and governments, sell securities to investors.
The secondary bond market includes bonds that have already been issued. These bonds can be traded between investors on exchanges or over the counter.
Secondary bond markets are used by investors to trade existing bonds, instead of purchasing newly issued bonds.
These bonds can be purchased through a broker, who acts as a middleman between the purchasing and selling parties.
The Indian bond market includes both government and private-sector bonds, but the government bonds dominate the Indian bond market.
Government bonds are believed to be quite safe and have a lot of liquidity.
Are bonds are good investment in 2022?
Whether it is 2022, 2023, or any other year, investing in
bonds can be a good decision. There are varied types of bonds.
You can earn interest every six month or annually.
Bonds are considered a safe investment since they are stable and secure. This is because they provide a consistent return.
Bonds provide predictable income, i.e., investors know what they will receive (interest and principal amount).
It can help diversify a portfolio & reduce risk as the correlation between bonds and other investment options are less.
Bonds are rated by credit rating agencies which provide further assurance to investors regarding the investments.
Bonds are considered a safe investment since they are stable and secure. This is because they provide a consistent return.
Bonds provide predictable income, i.e., investors know what they will receive (interest and principal amount).
It can help diversify a portfolio & reduce risk as the correlation between bonds and other investment options are less.
Bonds are rated by credit rating agencies which provide further assurance to investors regarding the investments.
Investing in Bonds has become easier in India in recent years. Investors will need a Demat and Trading account to invest in bonds. Today, there are numerous platforms available to assist investors in purchasing and selling bonds.
You can create your account online at BondsIndia to buy bonds of diverse types. You can get started in just three simple steps.
There are several online platforms to choose from; choose the
one
that best suits your needs.
BondsIndia is one of the most reputable online bond platforms. It offers easy access to the bonds to invest in India, as well as detailed research and a hassle-free approach.
If you are not yet a member and would like to explore more about bonds,
Bonds are the debt securities issued by a government enterprise or a private entity to investors to raise funds for various purposes. Bonds are a sort of fixed-income security that works by paying back a certain amount to the bondholder regularly, known as the coupon rate until the borrowed amount is paid back.
A secondary market for bonds has its own limitless importance. The secondary bond market comprises bonds that have already been issued and are used by investors to trade existing bonds rather than buying new ones.
Investing in bonds in India is good as it provides a stable and secure return, which is also predictable as the interest rate is fixed. Further, it also helps us diversify our portfolio and reduce risks.
You can invest in bonds through BondsIndia, one of the most reputable online bond platforms. It offers easy access to the bonds and detailed research. At BondsIndia, you need to create your personal account and get ready to trade after completing your KYC in three easy steps.
Which bond is the best will depend upon an investors’
risk profile, tenure, and return expectations? Select
a bond that best suits your needs.
For the guidance on the best bond in India, you can
BOOK A FREE CONSULTATION with our Investment Expert.
Government bonds issued by the central and state governments are considered the safest investment instruments as the government backs them.
There are two ways to earn profit from bond
investments:
The first option is to keep the bonds until they reach
maturity and earn interest payments. The second
strategy to earn from bonds is to sell them for a
higher price than you paid for them.
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