Bonds allow investors to lend money to a company or government for a specific time and get interest payments regularly. The issuer will pay the investor when the bond’s due date comes. Bonds are sometimes called “fixed income” because they give investors regular payments for as long as they keep their money.
Businesses sell bonds to raise money for their operations, new ventures, and purchases. Governments often sell bonds to help balance their budgets and make up for lost tax revenue. A person who buys bonds is a debt holder of the company that made the bonds.
Bonds are an important part of a well-balanced portfolio because many types of bonds, especially investment-grade bonds, are safer than stocks. Bonds are a great way to keep your money safe for retirement and get a steady income without worrying about the market’s ups and downs.
What are Bonds?
Investors can borrow money by buying bonds that work the same as promissory notes. Bonds are debt security given to investors by people who need short-term loans. You give the issuer money when you buy a bond from a government, city, or company.
Before looking at different types of bonds, investors should understand some of the most important things about bonds.
Maturity: It is the date by which a bond issuer must pay back the principal and interest to the investors. Bonds can be paid off after a few years, a few decades, or never.
Face Value: Face value is the amount of money you will get back when your bond matures. A bond’s face value determines how much interest it will pay. The par value of most bonds is Rs.1,000.
Coupon – The fixed amount of interest that the bond issuer pays to those who own bonds. If a Rs.1,000 bond has a 3% payment, the issuer will pay back investors Rs.30 per year until the bond matures (3% of Rs.1,000 par value = Rs.30 per year).
Bond Yield: The rate of return on a bond over a year is called its yield. The work of a bond is not the same as its coupon, which is not tied to the bond’s price on the secondary market.
Price: Most bonds, if not all, are traded on secondary markets after they are first sold. On the market, there are prices to buy and sell bonds. The asking price is the least amount a seller will take, while the bid price is the most a buyer is willing to pay for a bond.
Risk Duration: This is the amount a bond could lose in value if interest rates change. Bonds tend to lose one percentage point of their value when interest rates go up by one percentage point. If a bond has a longer term, its price is more affected by changes in interest rates.
Types of Bonds
There are many types of Bonds in India: Government Bonds, Sovereign Gold, Corporate, Convertible, RBI, etc.
- Government Bonds
Government securities are bonds issued by the federal or state governments of India. Government securities (G-Sec) or Indian Government bonds have terms ranging from five to forty years. The Government of India has put out these Government bonds so that people in India can save money in the hopes of making money with less risk.
- Sovereign Gold Bonds
If you want to invest in gold but don’t want to hold actual gold, you can buy the Sovereign Gold bond, a gold bond issued by the central government. The interest income from this Sovereign Gold bond is not taxed. It is a very safe bond because the government issued it.
- Corporate Bonds
Bonds are a way for companies to get money from investors for a set amount of time in exchange for a fixed interest rate for the bond’s term. Corporate Bonds are bonds that businesses usually give to investors to get money to start a new business or expand into new markets. Instead of getting a loan from the bank, the company is turning to investors willing to put up their own money in exchange for a fixed return over a set period. At the end of the term, investors will get their money back plus the annual interest rate on corporate bonds. Fixed-rate bonds are a good choice if you want a steady return on your money.
- Convertible Bonds
Convertible Bonds are a type of bond that is like both debt and equity, but they don’t have both of those things at the same time. Bondholders can become shareholders of the company and get all the benefits of owning stock by having their bonds turned into a set number of shares of stock. Convertible bonds give investors access to both the debt and stock markets.
- RBI Bonds
The interest rates on RBI Bonds, also called variable rate saving bonds 2020 (FRSB), change over the seven-year term of the bond. In other words, you won’t get the interest rate at the end of the term. Instead, you’ll get it every six months starting January 1, 2021.
- Capital Gain Bond
Long-term capital gain is the profit you make when you sell something you’ve owned for more than two years (Land or Building). You can get a tax break if you put the money from the sale into certain bonds within six months. 54EC bonds also called “capital gains bonds,” are one of the best ways to save on long-term capital gain tax.
People should invest in becoming self-sufficient and financially stable. Bonds are a great way for investors to put their money to work in India because there are so many various types of Bonds available. Before you buy a Bond, you should do a lot of research. Indian government bonds are the safest way to invest because the Sovereign guarantees them. People who want to keep their risk to a minimum should buy these kinds of securities. Also, it’s a great long-term investment for people who don’t know enough about the stock market or have enough experience to invest in stock market instruments.
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