A bond is like a fixed income in which the investor gives a loan to a company or government for a fixed period. The interest rate is fixed or can change based on a fixed formula. Just as you take a stake in any company by buying shares, in the same way by buying bonds you lend money to the seller of the bond, in return for which he gives you a fixed interest.
Through bonds, the Central Government, State Government, Municipal Corporations, and companies collect money for their projects. Bond in Hindi means security or debenture i.e. government paper related to a loan etc.
Types of bonds
At present the bond market has a very important place in the financial sector. To understand bonds well, it is very important to know the types of bonds. Although there are many types of Bonds in India, which have different tenures and interest rates. Some major types of bonds are shown below-
1. Government Bond
The first among the types of bonds is the “Government Bond”. Government bonds are also called treasury bonds. It is a bond issued by the central government which is usually based on repaying the value by interest called a coupon period. This is the bond with the lowest interest rate and the safest. It is backed by the full faith and credit of the government hence it is also called a risk-free bond in some major OECD countries.
2. Corporate Bonds
Corporate Bonds are issued by large financial corporations and financial institutions. In this, finance is extended for ongoing operations, M&A and business expansion. Corporate bonds offer high returns, but they also involve high risk. Its duration can be up to about 12 years and before investing any money, one should check the company whether the company is fake or not.
3. Municipal Bond
A municipal bond is issued by the local area government or any of its agencies, it is also known as a muni bond. According to SEBI, municipal bonds require a maturity period of 3 years before they can be issued to the public. These bonds are also considered a safe investment option because municipal bonds are backed by the state government.
4. High-Yield Bond
This is a bond that is kept below investment grade in finance and that is why it is known as High-yield Bond. These bonds are issued by companies that have newly entered the market and are yet to establish themselves in the market. These bonds offer high returns, but they also involve a lot of risk. This bond is a very good option for investors who like to take high risks.
What is the face value?
The face value of a bond is the value paid by the corporation or company issuing the bond to the bondholder upon maturity of the bond. The face value of their bonds also varies depending on the type of company or corporation they are. Normally a newly issued bond sells at its face value, but sometimes it may sell for more or less than its face value. If the rate of the bond is more than its face value then it is called premium sale and if it is worth it then it is called par trading.
Bond maturity period
The maturity period of the bond is not fixed, its maximum period is fixed but the company or body can withdraw the bond at any time after fully paying the bond. For this reason the maturity period of the bond changes from day to day.
Bond market in India
The bond market in India can be divided into two categories-
1. Main Market
2. Supporting market
3. Main Market
In the main market, those who need to borrow money invite the general public or investment banks to buy their bonds. In this, bonds are issued for a fixed tenure at a pre-determined interest rate.
Pro-market
In the secondary market, investors who previously purchased bonds in the main market sell their bonds to other investors. Many brokers are operating in the pro-market that facilitate these types of transactions.
