What is a Bond?

  • 11-Aug-2023
  • 2 mins read

A bond is a financial security that comes under a fixed-income asset class. It’s a financial instrument where you lend money to the government or corporations for a specific period at a fixed interest rate. It’s like giving a loan; you receive your initial money and some extra earnings over time.

Issuers of Bonds 

The following entities can issue bonds.

  • Government: Bonds issued by National, state, and local governments to raise funds for various projects such as infrastructure development, public services, and budget deficits. These bonds are often referred to as government bonds or sovereign bonds.
  • Corporate Organisation: Companies issue bonds to raise capital for business operations, expansion, research, or other financial needs. Through corporate bonds, companies can borrow money from investors.

Features of a Bond

  • Face Value: The face value is the amount the bond issuer will pay the bondholder at maturity. It is also known as the par value of the bond.
  • Coupon Rate: Interest rate paid by issuers to investors, typically annually or semi-annually.
  • Coupon Dates: Dates when investors receive interest payments.
  • Maturity Date: The issuer repays the bond’s face value, signifying loan repayment.
  • Issue Price: Initial selling price to investors; inversely related to interest rate changes.
  • Bond Duration: Measures price sensitivity to interest rate shifts.
  • Credit Quality: Influences coupon rate; higher risk can lead to higher interest payments.
  • Time to Maturity: Longer maturities often mean higher interest rates due to inflation and interest rate risks.

Types of Bonds

  • Callable Bonds: Callable bond is a bond that the issuer may redeem before it reaches the stated maturity date.
  • Fixed-rate Bonds: Fixed-rate Bonds are bonds with an unchanging coupon rate throughout the investment period.
  • Floating-rate Bonds: Floating-rate Bonds are bonds with variable coupon rates that change over the investment period.
  • Zero Coupon Bonds: Zero Coupon Bonds have no coupon rate; the issuer only pays the principal amount to the investor upon maturity.
  • Puttable Bonds: They allow investors to sell the bond and retrieve their investment before maturity.

How to invest in bonds in India?

You can invest in Bonds through various platforms like banks, post offices, mutual fund companies and trading apps like Bigul. Before investing, it is essential to research its risk and return.

Bonds play a vital role in the global financial system, as they act as a means for governments, corporations, and other entities to raise capital. Bonds are considerably lower risky than equities. To diversify their portfolios, certain investors can consider investing in bonds.

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