Many a time, we see in the news that some company or government is issuing the bonds.
The bonds are different from stocks. These are known as fixed-income investments.
What is a Bond?
A bond is a written and duly signed promise to pay a certain amount of money on a fixed date or after fulfilment of a certain condition. In financial terms, a bond is a debt security in which an authorized issuer offers regular or fixed payment of interest with the principal in return of the money taken by the issuer from the investor. The issuer is obliged to pay this amount at a fixed later day.
Roughly we can say that a bond is an official document given to the lender by a borrower on lending the money as an investment.
Bond is Different from Stocks
A bond is like an agreement between lender and borrower. In bonds, the investor lends money to the borrower. While in stocks, an investor holds ownership in the company. A bond has a fixed period of time for repayments while in stock investment, there is not any due time. The invested amount in stock increases or decreases based on the performance of the company. In bonds, the repayment is fixed at the time of investment.
Bond comes under the fixed income category while stocks come under the variable income category.
Features of Bond
A bond has the following features:-
- Face Value: This is the amount of money which will be at the time of maturity. The face value is used by the issuer as the reference amount to calculate the interest payment.
- Coupon Rate: The coupon rate is the rate of interest that the issuer pays to the holder of the bond. This rate is fixed throughout the life of the bond.
- Maturity Date: Maturity is that fixed date on which the issuer will pay the specified amount to the holder of the bond.
- Issue Price: This is the price at which the issuer actually sells the bonds.
Types of Bonds
In terms of issuer, there are following types of bonds:-
- Corporate Bond: These bonds are issued by companies. A company issues bonds as a fund-raising activity in order to meet its financial needs.
- Government Bond: Government bonds are issued by the government. These are either taxable or tax-free saving bonds. To raise money for its development schemes, the government issues bonds to public members.
- Municipal Bond: This is the bond which is issued by the state governments or municipalities.
In India, Reserve Bank of India (RBI) issues following types of bonds:-
- Treasury Bills: Short-term maturity period, generally one year, no interest paid to investors.
- Cash Management Bills: Highly flexible short-term, less than 91 days, securities, issued when cash is needed by the government.
- Dated Government Securities: It has a varied rate of interest with a specified date of maturity. It is sold by RBI through auctions. It has the following types:
- Fixed Rate Bond
- Floating Rate Bond
- Zero Coupon Bond
- Capital Index Bond
- Bond with a call or put option.
- State Development Loans: These bonds are issued by the state governments in order to meet their budgetary requirements.
Infrastructure Bond
When the government or a company needs to raise money for the expansion of their project, they issue the infrastructure bond. These are issued by the government or government authorized companies or NBFCs. The money raised through the infrastructure bond is invested only in a government-funded infrastructure project. These are the tax-saving bonds.
How to Invest in Bonds?
There are two ways to invest in bond in India:-
- Go through a registered investment advisor or
- Indirectly invest in bonds through debt mutual funds.
So, investment bond is a very good fixed income scheme. This is a defensive investment strategy where the risk factor is very low with the investment.
Disclaimer: This is just an educational post and it never recommends or suggests its readers for any investment. Also, the bond is related to the securities and read all the details carefully or contact any registered investment advisor.
Tags: #Investment, #Bonds, #Savings
