What is a bond?
A bond is a debt security in which the authorized issuer owes the holders a debt and depending on the terms of the bond is obliged to pay interest (the coupon) and/or to repay the principal at a later date, termed maturity. (It is a formal contract to repay borrowed money with an interest at a fixed intervals).When you purchase a bond; you are lending money to the issuer which may be a government,corporation, federal agency, or other entity.In return for the loan, the issuer promises to pay you a specified rate of interest during the life of the bond and to pay back the face value of the bond or the principal when it "matures," or comes due.
Types of Bonds
- Zero coupon bonds - Zero coupon bonds do not pay any interest. They are issued at a substantial discount to par value. The bond holder receives the full principal amount on the redemption date.
- G-Sec Bonds - Government Securities is a bond where government is an issuer or borrower. It is the safest form of bond as it is unlikely that the government defaults. Government issues bonds to raise money for funding infrastructure development, support subsidies or several other initiatives.
- Corporate Bond - Corporate Bond are issued by the corporates i.e. Public or Private companies to investors. The company borrows money from investors and promise to pay interest at regular intervals. The interest rates on such bonds are high compared to government bonds as the probability of government defaulting on interest payments is low compared to a corporate.
- Inflation Linked Bond - In Inflation linked bonds; principal and the interest payments are indexed to inflation. The interest rate is usually lower than that of fixed rate bonds with a comparable maturity.
- Convertible Bond - The holder of a convertible bond has the choice to convert the bond into equity (in the same value as of the bond) of the issuing firm (borrowing firm) on pre-specified terms. This results in an automatic redemption of the bond prior to maturity date.
Why Invest in Bonds?
- For Capital Preservation
- For a steady stream of income
- Tax Advantage
- Low-Risk Investment