Bonds
Bonds are issued by the Government or a corporation when they want to raise money from the Public. Here the people or Investors give a loan to the issuer and they agree to pay it back with a specific value on a specific date with interest payable under the guidelines of RBI (Reserve Bank of India).
It is also called a loan agreement between the Issuer and lender. When an Individual buys a bond they lend Money to the Corporate or Government for a specific period. The issuer pays back the amount after a certain period with Interest payable. Allneeds provides different types of bonds issued by the Central Government, State Government, or corporations.
There are 10 Types of Bond based on their Issuer, Time of Maturity Period, and The Interest Rate offered. It is also classified as treasury, Fixed and Floating Rate, Corporate, zero coupon, high yield, etc.
Following are the different types of Bonds available in India.
Treasury Bonds: These bonds are issued by the Central Government. It is also considered as safest Bond because there is no credit risk. It is issued for a period of 10 to 30 years for a fixed rate of Interest.
Municipal Bonds: Municipal Bonds are issued by the State Government to raise funds for the development of different state projects, schools, hospitals, and highways. It is normally tax-free bonds issued for short-term and long-term maturities.
Corporate Bonds: These types of bonds are issued by Companies or corporations for the use of funds in Business Development. These funds are riskier than Treasury Bonds. These types of bonds have higher rates of interest depending on their credit ratings and market conditions.
High-Yield Bonds: It is also known as junk bonds. Companies that issue high-yield bonds have lower credit ratings. They offer high yields with higher risks.
Mortgage-Backed Securities: Real Estate Companies normally issue this type of bond backed by an underlying mortgage. These bonds are safer than corporate bonds and also carry less credit risk.
Floating Rate Bonds: The Interest rate of these bonds depends upon a change in repo rate by RBI. It protects the investor with interest rate risk which is adjusted as per market rates. So the floating rate bond interest rate depends upon macroeconomic parameters and market fluctuations.
Zero-Coupon Bonds: The investor who wants a fixed return for a specific period can go for Zero-Coupon Bonds. Where Zero-Coupon Bonds are issued with a discounted price from the face value. So that they get a fixed return on maturity I.e. the difference between the issue price and the face value.
Callable Bonds: The Callable Bonds can be redeemed before maturity at a premium price. They have flexibility in managing their debt obligations.
Convertible Bonds: The issuing company of this type of Bonds can convert these bonds into shares or company stocks at a per-determined conversion ratio.
Inflation-Protected Bonds: The Government issues these types of bonds to protect from Inflation. Where investors get fixed returns adjusted by Inflation.
The following few things to consider before buying a bond for the Investment
Rate of Interest: It is the return provided by the Bound Issuer.
Maturity Date: This is the date when the Issuer returns the Final Payment of bound paid by an Investor.
Face Value: This is the amount paid by the issuer after the maturity of the bond.
Yield: This is the rate of interest per annum paid by the issuer.
Credit Rating: This is the rating of Bound issuer issued by the rating agency. It gives authenticity to Bound issuer Company.
Liquidity: Liquidity is redeemed or selling of Bound in between. Normally maximum bonds have less liquidity.
Bonds have the following advantages
Steady Income: A bond is the best investment product for steady income and fixed return.
Diversification: Through Investment in Bonds an Investor can diversify their portfolio with Equity, Mutual Funds, Insurance, Bonds, NCD, FD, etc.
Lower Risk: Bonds normally do not have any impact on Market volatility so it is called less riskier products.
Predictability: Bonds have normally fixed and periodic returns so their value can easily be predicted.
Issuer Flexibility: Bonds have flexibility for their Issuer as per their financial and Business exploration needs. They issue the bonds as per their needs of funds.
Despite many advantages, Bonds of following limitations:
Interest Rate Risk: There is always less return than market-based Products.
Inflation Risk: Some Bonds do even not beat Inflation.
Credit Risk: Low Credit Risk Bonds have Negative Impacts.
Liquidity Risk: There is definitely a risk of liquidity.
Limited potential for capital appreciation: This is fixed Income product. So one can not expect higher returns.
Following few things to consider before investing in Bonds
Credit ratings
Interest rates
Maturity
Yield
Liquidity
Tax Implications