Bonds are debt instruments that allow governments and corporations to borrow money from investors. Instead of taking loans from banks, they issue bonds where investors receive fixed interest payments until maturity, when the full amount is repaid. There are different types of bonds including government bonds, which are backed by the government and have lower risk, and corporate bonds, which are riskier but can offer higher returns. When choosing bonds, investors must consider factors like security, credit rating, risks involving interest rates and inflation.

1. What are Bonds & It’s Different Types
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2. • For Government & Corporate entities only taking a loan may not
suffice. This is where financial bonds comes into play
• Instead of taking a loan from a Bank, the Government or the
companies take loans from investors
• In turn, legal certificates are issued which entitles an investor to fixed
interest payments till maturity after which the loan amount is paid
off. This is essentially what a Bond is all about.
• In other words, it is a debt instrument which allows the Government
or companies to undertake development or fund businesses and the
investors, to get interest on their investment. These interests are
generally paid to investors on an annual and semi-annual basis.
What Are
Bonds
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3. Basic Terms
Used w.r.t
Bonds
Indenture
Accrued
Interest
Coupon
Credit
Rating
A legal contract that
states the obligations,
terms and conditions
of a Bond
Interest rate on a
Bond
The interest
accumulated since the
last interest payment
This is the final return that
you will receive from your
investment in a Bond
To determine credit
worthiness of companies,
agencies like CRISIL assign
a credit rating to each
company which can help
investors make a more
informed decision before
investing in a company’s
Bond.
Yield At
Maturity
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4. Types of Bonds
Typesof Bonds
GovernmentBonds CorporateBonds TaxSavingBonds
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5. Government
Bonds
• Government Bonds – These Bonds are issued and backed by
the Government and are considered relatively low risk for a
medium to long term investment.
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6. Corporate
Bonds
• Corporate Bonds – Issued by corporate entities to fund new
ventures, expansion plans or other initiatives and capable of
providing better interest. Here, the risk involved is also higher as
these bonds generally have a lower bond-rating as compared
to government Bonds by the rating agencies.
• As a thumb rule, higher bond rating is considered to be a safer
investment.
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7. Tax Saving
Bonds
• Tax Saving Bonds – These Bonds are issued by RBI since 2003
and are available at many public and private banks. The
interest rate offered is currently 8% with a minimum deposit of
Rs. 1000/- with a 6-year maturity period. The bonds are non-
transferrable and the interest earned on these bonds is taxable.
However, these bonds are exempted from Wealth Tax
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8. Factors to
Consider
While
Buying
Bonds
• While looking to invest in a bond, it is better to select Secured Bonds over
Unsecured Bonds. Secured Bonds come with collateral (backed by a specific
asset) to ensure that your investment can be repaid by the issuer
• On the other hand, unsecured bonds are backed only by the credit worthiness of
the issuer and there is no collateral asset involved.
• Secured Bonds are a safer option as the bond issuers can ask for selling the
collateral assets in case of a payment default and even during liquidation
(bankruptcy), bond holders need to get paid first
• In unsecured Bonds, there is no such security and investment might have to be
recovered using legal course in case a company goes bankrupt.So when going
for unsecured Bonds, it is important to be well aware of the issuer’s credibility and
repayment capacity.
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9. Factors to
Consider
While
Buying
Bonds
• Secondly, you should also evaluate your risk taking capacity before deciding on
what bond to buy. Investment grade bonds get a credit rating between AAA
and BBB and come with a low risk of default
• On the other hand, Bonds with credit rating lower than that have higher risks but
also carry the possibility of higher returns. These are known as Junk bonds
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10. Factors to
Consider
While
Buying
Bonds
• Here’s a Bond Rating table to understand the investment grade in different
Bonds as rated by different credit rating agencies –
Credit Rating
CRISIL (Standard
and Poor’s)
Moody’s Finch
Highest quality CRISIL AAA Aaa AAA
High quality CRISIL AA Aa AA
Upper Middle
grade
CRISIL A A A
Middle Grade CRISIL BBB Baa BBB
Low Speculative CRISIL BB Ba BB
Speculative CRISIL B B B
Very Speculative CRISIL C Caa CCC
Highly Speculative CRISIL D Ca CC
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11. Risks
associated
with Bond
Investments
Reinvestment Risk
Revaluation of Credit Ratings
Liquidity Risk
Risk Due To Natural Causes
Interest Rate Risk
Inflation Risk
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12. Factors to
Consider
While Buying
Bonds
Interest Rate Risk – The Price of a Bond and interest rate work in an inverse manner
i.e. if the interest rate reduces, then the price of the Bonds rise and if there is a rise
in the interest rate, then the Bond prices go down.
To help you understand how it works, consider this: The coupon rate on your Bonds
is 6%. Now, the interest rate rises to 7.5% and as investor, you would prefer to have
a higher coupon rate at which you will be willing to trade your current Bonds. And
like you, there are many other investors who would do the same and this trading
on a mass level will result in the price level of the Bonds (that were initially
purchased at a 6% coupon rate) to go down.
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13. Factors to
Consider
While Buying
Bonds
Reinvestment Risk – When bond interest rates fall, the bond issuer can call your
Bonds and repay the amount which affects the maturity amount you were
supposed to get for the initial lock-in period. Now since the bonds are being
redeemed at a lower rate, the amount that you get might be slightly higher than
the original amount. But the investment that would be made with the funds form
this redemption will be at a lower coupon rate, leading to lower returns.
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14. Factors to
Consider
While Buying
Bonds
Inflation Risk – A risk that is subject to the change in the cost of living. There is
always a possibility that your bond investments might not be able to provide
returns which are in sync with the rising rate of inflation i.e. the Bonds might give
you returns lesser than the inflation rate.
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15. Factors to
Consider
While Buying
Bonds
Revaluation of Credit Ratings – Depending on the company’s growth, increase in
operations and cash flow, agencies can upgrade or downgrade the credit ratings
of your Bonds. While an upgrade in rating can be looked at in good light, a
downgrade only makes your Bonds more reactive to market changes.
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16. Factors to
Consider
While Buying
Bonds
Liquidity Risk – This risk is more likely to be there for corporate bonds than
Government bonds. If the interest rates drop, you might have to sell your bonds at
a lower interest rate as the number of interested buyers might be low or if
liquidation is an absolute must at the time.
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17. Factors to
Consider
While Buying
Bonds
Risks due to Natural Causes – In case of natural calamities like earthquakes or
floods, industries might be affected which result in market fluctuations that in turn
affect your Bond prices.
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18. Benefits of
Bond
Investments
• Diversification of your investment.
• Better interest rate as compared to Bank deposits.
• High-yielding bonds can reap higher returns.
• Much safer than equity investments.
• If the markets are doing well, Bond investments can be very rewarding
When it comes to Bond investments, a little risk is often present. But considering the
fact that the possibilities of potential returns are very appealing, investing a small
portion of your investment budget on Bonds makes for a pretty wise option
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19. THANK YOU
Visit www.itsallaboutmoney.com to Know More.
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