Bonds

WHO CAN ISSUE THE BONDS?

Bonds are issued by the following entities:

1. Corporate:

Corporate issues the bonds to raise the funds to conduct their business activities. They may need funds for long term basis for their Capital expenditures or short term basis for working capital requirements. Bonds issued by corporate also called Debentures.

Corporate issues the following type of bonds:

1. Convertible Debentures-These type of bonds are converted into shares as per the pre-decided terms and conditions of the debentures. It could be fully convertible or partly convertible debentures. In the case of fully convertible bonds, no amount is payable on maturity. In the case of Partially convertible bonds, the amount about the nonconvertible part is repaid on maturity. Corporate bonds carry a certain amount of risk as the repayment of bonds depends upon the profit earned by the company. Therefore companies offer more interest on their bonds.
2. Non-convertible Debentures– Nonconvertible debentures remain as a debt instrument and carries the fixed rate of interest. Redemption amount is repaid on maturity.

2. Government:

The government also issues the bonds to fund their various developmental activities mostly for infrastructure projects. Government bonds are also known as G-Sec or Government Securities. These bonds are considered a safe investment as repayment is guaranteed by the government. These bonds carry little less interest compared to Corporate bonds. The duration of the bonds is also longer for up to 30 years. The interest rate offered on Government bonds is also called Coupan rate.

Type of Bonds:

The following type of bonds are in vogue:

Government Bonds: These bonds are issued by Central and State Governments to fund their development activities.

Local Authorities Bonds: These bonds are issued by the local authorities like Municipal Corporations.

Public Sector Bonds: These bonds are issued by Public Sector Enterprises of Central and State Governments.

Tax-Free Bonds: These bonds are issued by the Central Governments. Interest paid on these bonds is tax-free.

Sovereign Gold Bonds(SGB):

These types of bonds are issued by the Central Government. The underlying security in these bonds is Gold. The price of the bond is fixed based on the prevailing price of the gold. The value of a bond is mentioned in no. of grams of gold. On maturity, investors can opt to get either the physical gold in grams or equivalent amount of value in rupees. The interest payable in these bonds is @2.50% pa. Interest can be taken half-yearly or can be taken at the time of maturity. The interest paid on these bonds is tax-free.

Classification of Bonds based on its features:

1. Fixed Interest Bonds: These bonds carry fixed interest during the tenure of bonds.
2. Floating Interest Bonds: Rate of Interest on these bonds is not fixed. It is reset at periodical intervals mostly every six months or yearly. Interest is fixed based on prevailing market conditions.
3. Zero-Coupon Rate Bonds: These bonds do not carry any rate of interest. These bonds are issued at discount to the redemption price of the bonds. On maturity, the redemption price of the bonds is paid. Rate of interest is determined based on discounts offered to the redemption price of the bonds.
4. Inflation-Indexed Bonds: The rate of interest in these bonds is fixed based on the Consumer Price Index(CPI) or Wholesale Price Index(WPI). The return on these bonds is insulated against inflation.
5. Bonds with Put and Call option: These type of bonds carry Call option i.e. the right to an issuer to buy back the bonds and Put option i.e the right to the bondholder to sell the bond to the issuer on the terms and conditions set out in the offer documents.
6. Perpetual Bonds: These bonds do not carry any maturity date. The interest is paid perpetually to the holder.
7. Bearer Bonds: These bonds do not carry the name of the holder. Whosoever is possessing it can claim the amount.
8. Subordinated Bonds: These bonds carry less priority over other bonds of the company. These bonds are considered to be less secure.

BONDS Vs STOCKS:

Bonds and Stocks are financial market instruments to raise the funds from the public. Both carry different characteristics and have got their own advantages.

BENEFITS OF INVESTMENT IN BONDS:

1. Government Bonds carry a sovereign guarantee. Therefore, these bonds are considered as secured and payment is assured on the maturity date.
2. Corporate Bonds issued by blue-chip companies are also considered as a good investment and considered a secured investment.
3. These bonds offer regular income at regular intervals i.e Quarterly, Half yearly.
4. Inflation Indexed Bonds offer return linked with inflation. Returns are insulated against inflation.
5. Bonds are also listed on stock exchanges. Hence it offers liquidity to the bonds.
6. In Tax Savings Bonds, interest paid is tax-free from income tax.

SHORTCOMINGS OF BONDS:

1. The gestation period of bonds is very long. It goes even up to 30 years.
2. Liquidity of bonds is limited. In case of need If a pre-mature withdrawal is sought, we have to forgo a part of the principal amount.
3. Rate of return on bonds is comparatively less.

Bonds have emerged as the most preferred investment option among Senior Citizens who require a regular and steady return for their sustenance.