What are Bonds ?
Bonds refer to high-security debt instruments that enable an entity to raise funds and fulfil capital requirements. It is a category of debt that borrowers avail from individual investors for a specified tenure.
Organisations, including companies, governments, municipalities and other entities, issue bonds for investors in primary markets. The corpus thus collected is used to fund business operations and infrastructural development by companies and governments alike.
Types of Bonds
Fixed Interest bonds
These bonds incur coupon rates which are subject to market fluctuations and elastic within their tenures.
Floating-interest bonds
Fixed-interest bonds are debt instruments which accrue consistent coupon rates throughout their tenure. These predetermined interest rates benefit investors with predictable returns on investment irrespective of alterations in market conditions.
Inflation-linked bonds
Inflation-linked bonds are special debt instruments designed to curb the impact of economic inflation on the face value and interest return. The coupon rates offered on inflation-linked bonds are usually lower than fixed-interest bonds
Perpetual bonds
Perpetual bonds are fixed-security investment options whereby issuers do not have to return the principal amount to the purchaser. This investment type does not have any maturity period, and customers benefit from steady interest payments for perpetuity.
Coupon bonds
A coupon bond is a type of bond that includes attached coupons and pays periodic (typically annual or semi-annual) interest payments during its lifetime and its par value at maturity. Bonds that have higher coupon rates offer investors higher yields on their investment.
Non Convertible Debentures
Non-convertible debentures (NCD) are fixed-income instruments, usually issued by high-rated companies in the form of a public issue to accumulate long-term capital appreciation.
Features of Bonds
Bonds have several features that investors should take into account. The popularity of this debt instrument can be assigned to some intrinsic factors as mentioned below.
Face value – Face value implies the price of a single unit of a bond issued by an enterprise. Principal, nominal, or par value is used alternatively to refer to the price of bonds. Issuers are under a legal obligation to return this value to the investor after a stipulated period.
Interest or coupon rate – Bonds accrue fixed or floating rates of interest across their tenure, payable periodically to creditors. Bond interest rates are also called coupon rates as per the tradition of claiming interests on paper bonds in the form of coupons.
Tenure of bonds – Tenure or term refers to the period after which bonds mature. These are financial debt contracts between issuers and investors. Financial and legal obligations of an issuer to the investor or creditor are valid only until the tenure’s end.
Tradable bonds - Bonds are tradable in the secondary market. The ownership can thus shift among various investors within a given tenure. These creditors often sell their bonds to other entities when market prices exceed the nominal values as they have an option to secure bonds with high yield and appropriate credit ratings.
Who Should Invest in bonds?
Individuals are met with several options while investing in bonds as per their financial inclination. Investors inclined towards safe debt instruments should accumulate bonds from high-rated companies.
Additionally, investors who are willing to take market risks can find it financially beneficial to accumulate bonds from low-safety rated companies for a higher rate of return on these fixed-income securities.