- Types of Bonds
- How Are Bonds Priced?
Bonds are debt instruments that an investor purchases from a borrower, typically a business, government, or other institution. Buying a bond means lending money to the issuer in exchange for consistent interest payments. It also comes with the guarantee that the principal will be reimbursed once the bond matures.
Bonds are classified as fixed-income instruments because they usually offer a coupon rate—a fixed interest rate that is specified and never changes.
Types of Bonds
Investors in India can choose from a variety of bonds issued by a range of organisations, including financial institutions, enterprises, and the government. Here are a few types of bonds in India:
Government of India Savings Bonds: These low-risk, non-tradable bonds have fixed interest rates and are issued by the government of India. They are primarily aimed at individual investors.
State Government Bonds (State Development Loans or SDLs): State governments in India also issue bonds to fund their various projects and initiatives. These are typically tax-free for residents of the respective states.
RBI Savings Bonds: These are taxable, non-negotiable savings bonds with fixed interest rates that are issued by the Reserve Bank of India (RBI).
Sovereign Gold Bonds: These are government securities that let investors profit from the price movement of gold without actually holding any gold. They are valued in kilos of gold.
Capital Gains Bonds: Also known as 54EC bonds, these are issued by specific government entities and offer tax benefits for capital gains reinvestment.
Corporate Bonds: Issued by corporations to raise capital. They can be categorised into two types:
- Public Issue Bonds: Offered to the general public through stock exchanges.
- Private Placement Bonds: Offered to a specific group of investors, typically institutional investors.
Tax-Free Bonds: Issued by various government-backed organisations, these bonds offer tax-free interest income. High-tax bracket individuals find them attractive.
Zero-Coupon Bonds: These bonds do not pay periodic interest but are issued at a discount and provide a lump-sum payout at maturity.
Bank Fixed Deposits (FDs): While not traditional bonds, fixed deposits offered by banks are a common investment option in India. They offer fixed interest rates for a specified tenure.
Non-Convertible Debentures (NCDs): These are issued by corporations and do not have a conversion option to equity shares. They can be secured or unsecured, and some are listed on stock exchanges.
Commercial Paper (CP): Corporations issue commercial paper (CP), an unsecured short-term debt instrument, to cover their short-term funding needs.
Certificates of Deposit (CDs): CDs are time deposits with set maturities that are issued by banks. They usually provide greater interest rates than standard savings accounts.
How Are Bonds Priced?
The face value, coupon rate, and current market interest rates are used to determine the price of bonds. A bond's face value, or the amount it will be returned at maturity, and coupon rate, or the annual interest payment expressed as a percentage of face value, are usually set when the bond is issued. The secondary market price of the bond varies in reaction to shifts in market interest rates.
Investors find bonds more appealing when their price tends to decline and market rates surpass the bond's coupon rate. On the other hand, the bond's price increases when market rates fall below the coupon rate. This dynamic between coupon rate and market rates determines the bond's price.
Here are a few examples of bonds available in India:
- 10-Year Government of India Savings Bond
- 7.75% Government Savings Bond
- RBI Floating Rate Savings Bond
- Sovereign Gold Bonds (SGBs)
- NABARD Rural Bonds
When it comes to bonds and fixed-income products, Indian investors have many possibilities. The type of bond selected is determined by investment preferences, risk tolerance, and personal financial objectives. To make wise investing decisions, it's critical to carry out an in-depth study and speak with a financial counsellor when applicable.