BONDS

Overview

A bond is a fixed-income instrument that represents a loan made by an investor to a borrower (typically corporate or governmental). A bond could be thought of as an I.O.U. between the lender and borrower that includes the details of the loan and its payments. Bonds are used by companies, municipalities, states, and sovereign governments to finance projects and operations. Owners of bonds are debtholders, or creditors, of the issuer.

Bond details include the end date when the principal of the loan is due to be paid to the bond owner and usually include the terms for variable or fixed interest payments made by the borrower.

Bonds are units of corporate debt issued by companies and securitized as tradeable assets..

Type of Bonds

Government Bonds

Government bonds, issued by both Central and State Governments in India, serve as debt instruments to address liquidity needs for infrastructure development. These bonds guarantee interest earnings and principal repayment, attracting diverse investors. They offer fixed or floating coupon rates, disbursed semi-annually, catering to various investment objectives, thus enhancing accessibility to smaller investors over time.

Key Takeaways

  •  A government bond represents debt that is issued by a government and sold to investors to support government spending.
  •  Some government bonds may pay periodic interest payments. Other government bonds do not pay coupons and are sold at a discount instead.
  •  Government bonds are considered low-risk investments since the government backs them.
  •  The various types of bonds that are offered by the U.S. Treasury are considered to be among the safest in the world.
  •  Because of their relatively low risk, government bonds typically pay low interest rates.
    • High-Yield Bonds

    High-yield bonds (also called junk bonds) are bonds that pay higher interest rates because they have lower credit ratings than investment-grade bonds. High-yield bonds are more likely to default, so they pay a higher yield than investment-grade bonds to compensate investors.

    Issuers of high-yield debt tend to be startup companies or capital-intensive firms with high debt ratios. However, some high-yield bonds are fallen angels, which are bonds that lost their good credit ratings.

    Key Takeaways

  •  High-yield bonds, or junk bonds, are corporate debt securities that pay higher interest rates than investment-grade bonds.
  •  High-yield bonds tend to have lower credit ratings of below BBB- from Standard & Poor’s and Fitch, or below Baa3 from Moody’s.
  •  Junk bonds are more likely to default and have higher price volatility.
    • PSU Bonds

    Public Sector Undertaking Bonds (PSU Bonds) are the bonds in which the government shareholding is generally more than 51%. It is a medium and long-term debt instruments issued by public sector companies. Indian Oil Corporation Limited is the biggest PSU in India.

    Checking the credit rating and nature of bonds is always recommended. Make sure the credit rating, Investment nature, underlying security, and maturity aligns with your investment needs. PSU Bonds are considered a secure option for investment.

    PSU Bonds in India Key Features

  •  Higher interest rate than FDs.
  •  Generally, these bonds are taxable as per individual income tax slab.
  •  Low default risk as they backed by the Government.
    • RBI Bonds

    The Floating Rate Savings Bonds 2020 (Taxable) are debt instruments issued by the government of India. The bond provides periodic interest at floating rate every 6 months and is redeemable after 7 years. Minimum amount of Investment is just Rs 1000 with no upper limit.

    Key Features

  •  TAX TREATMENT
  •  INTEREST RATE
  •  Present Rate of Interest 8.05%*
  •  REPAYMENT/ TENURE
    • SGBs

    Sovereign Gold Bonds (SGBs) provide an avenue for investing in gold without the constraints of physical ownership. With interest exempt from tax, these bonds are tied to gold prices and offer fixed interest rates. Redemption after five years aligns with interest disbursal dates, ensuring liquidity for investors while maintaining long-term value.

    Individuals and entities face possession limits on Sovereign Gold Bonds (SGBs), set by RBI regulations. While individuals and HUFs are limited to 4 kg per fiscal year, trusts and other entities can hold up to 20 kg. Interest disbursed at 2.50% is tax-exempt, with redemption possible after five years, coinciding with interest payment dates.

    Key Features

  •  Govt. backed gold bonds
  •  2.5% annual interest, paid every 6 months
  •  Zero capital gains tax on maturity
  •  100% secure & free gold storage

    • FAQs

    How do you buy government bonds?

    A completed application form must be submitted to the Reserve Bank of India or the central government with the relevant paperwork. Processing your request would take a minimal amount of time. You will obtain a bond certificate in your name upon the conclusion of the procedure and the verification of your supporting documentation.