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What is a Bond?

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What is the Meaning of Bond?

Bond is a fixed-income instrument that represents a loan from an investor to a borrower. It is a contract between the investor and the borrower, where the borrower uses the money to fund its operation and the investors receive interest on the investment.

Bonds are high-security debt instruments that fall under the fixed income asset class. It enables an entity to raise funds to fulfil the capital requirement for funding various projects. It is a debt that borrower’s avail from individuals for a specified tenure.

These are issued by the government, corporates, municipalities, states, and other entities to fund their projects. These bonds have a maturity date and when that is attained, the issuer needs to pay back the amount along with a part of the profit to the investor.

With this understanding of Bonds meaning in finance, let’s take a look at the features and working of this debt category.

what is a bond

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Who are the issuers of a Bond?

The issuers of bonds are:

  • Government: The government raises funds to sponsor roads, dams, schools and other infrastructure projects. The government institutions at all levels need funds to sponsor roads, dams, schools, and other infrastructure projects and to complete projects and hence raise funds through bonds.
  • Corporations:Businesses or corporations often borrow money to grow their business. The browning can be for buying equipment, for research and development, undertaking profitable projects, etc. Large corporations usually need far more money than what a bank can typically lend.

How Bonds Work in Finance

Bonds are essential financial instruments in the capital market, representing a loan made by an investor to a borrower, typically a corporation or government. When an investor purchases a bond, they are effectively lending money for a specified period in exchange for periodic interest payments, known as coupon payments. The bond meaning is rooted in its promise to return the principal amount at maturity, making it a relatively safe investment compared to other assets. Different types of bonds in finance include treasury bonds, corporate bonds, and municipal bonds, each varying in risk and return characteristics. Understanding how bonds work is crucial for investors seeking stable income and portfolio diversification. Their characteristics, such as fixed interest rates and predetermined maturity dates, provide predictability, which is appealing in an often volatile market environment. By grasping the intricacies of bonds, investors can make informed decisions that align with their financial goals and risk tolerance.Features of a Bond

Bonds have three components that are used to calculate a bond yield:

  • The principal
  • The coupon rates
  • The maturity dates

  • When the borrower issue bonds, an agreement is made between the borrower and the lender where the issuer of the bond promises to pay back the principal amount on the maturity date. The issuer also pays the interest on the money borrowed (Coupon) throughout the tenure.

Features of a Bond in Capital Market

  • Issue Date: The issue date of bonds is the date from which the interest starts accruing.
  • Coupon Rate: The interest rate at which a bond is issued, which the company is liable to pay to the investors is referred as the coupon rate. Coupon payments are made semi-annually or annually.
  • Maturity Date: It is the date on which the issuer pays back the Bonds’ face value to the investor. Before investing, check the maturity period of the Bond and invest as per your financial goal.
  • Taxation: Certain Bonds provide tax benefits, while there are few corporate bonds that levy tax on their Bonds. Also, certain Bonds issued by the government, municipality Bonds, and a few more don’t impose a tax on the profit earned.

Advantages of a Bond in Capital Market

  • Portfolio Diversification: Diversification can provide you with better risk-adjusted returns. Also, diversification with bonds can help preserve capital for equity investors during times when the stock market is slumping.
  • Lower Risk: Bonds are long-term investment instruments with low-risk associated.
  • Fixed Return on investment: Bonds pay interest at regular intervals and also, when Bonds mature, the investor receives the principal amount. In Bonds, the investor knows the exact return he/she will be getting.

Characteristics of Bonds

  • Fixed Interest Payments: Bonds provide regular coupon payments, usually semi-annually or annually, which offer a predictable income stream to investors.

  • Maturity Date: Each bond has a specified maturity date, when the principal amount is repaid to the bondholder, marking the end of the investment period.

  • Face Value: The face value is the amount returned to the bondholder upon maturity, often standardized at $1,000 for corporate bonds.

  • Credit Rating: Bonds are assessed by credit rating agencies, which evaluate the issuer's creditworthiness, impacting interest rates and investor confidence.

  • Liquidity: Most bonds can be traded in the secondary market, allowing investors to sell before maturity, although liquidity varies by bond type.

  • Callable or Puttable Options: Some bonds include features that allow issuers to redeem them early (callable) or provide investors the option to sell them back at a predetermined price (puttable).

  • Types of Bonds: Characteristics can vary significantly across different types of bonds, including government, corporate, municipal, and high-yield bonds, each having unique features and risk profiles.

List of Different Types of Bonds Categories

  • Government Bonds: These are the bonds issued by the Central and the State Government of India. RBI (Reserve Bank of India) manages and regulates these bonds. Government bonds generally have a low-interest rate.
  • Municipal Bonds: These are issued by municipalities or government bodies. When compared with Government bonds, these carry comparatively more risks.
  • Corporate Bonds: These are bonds that are issued by private companies. The companies issue both Secured Bonds and Unsecured Bonds. The companies issue them to raise capital at a low-interest rate. Certain Corporate Bonds pay higher yields than Government Bonds.
  • Asset-Backed Securities:Asset-Backed Securities are Bonds that are issued by banks or other financial institutions.

What are the Different Types of Bonds in Finance

There are varieties of Bonds available for investors. These can be divided by the rate, type of interest, or coupon payment. Below is the list of the most common variations:

  • Callable Bonds: When a Bond issuer calls out his right to redeem the Bond even before it reaches its maturity, it is referred to as a Callable Bond. This option is exercised by the Bond issuer. An issuer can convert a high debt bond into a low debt bond.
  • Fixed-rate Bonds: Bonds whose coupon rate remains the same through the course or tenure of the investment, it is referred to as Fixed-rate Bonds.
  • Floating-rate Bonds: Bonds whose coupon rate vary during the tenure of the investment, then it is referred to as Floating-rate Bonds.
  • Zero Coupon Bonds: Zero coupon bonds When the coupon rate is Zero and the Bonds issuer pays only the principal amount to the investor on maturity. It is called Zero-coupon Bonds.
  • Puttable Bonds: These are those Bonds where an investor sells their bond and gets their money back before the maturity date, then it is called Puttable Bonds.

Things to Consider Before Investing in Bonds

An investor must consider the following factors before investing in Bonds:

  • Do the Bonds fit into your financial plans
  • Do the Bonds carry the risk of default
  • What will be the price risk of these Bonds
  • What is the exit option

What is Yield to Maturity (YTM)

YMT (Yield To Maturity) is one of the ways through which one can price Bonds. It is the total of expected return for an investor if the bond is held till maturity. It is a long-term yield but represented as an annual rate.

Who Should Invest in Bonds?

Bonds are an excellent investment option for various types of investors, particularly those seeking stability and regular income. They are ideal for risk-averse individuals, such as retirees, who prioritize preserving capital and receiving predictable returns over higher-risk investments like stocks. Additionally, conservative investors looking to diversify their portfolios may find bonds appealing, as they can help reduce overall risk by balancing more volatile assets.

Investors who are concerned about market fluctuations but still want a source of passive income will benefit from the fixed interest payments that bonds provide. Furthermore, bonds can be an attractive option for those interested in tax-efficient investing, as certain bonds, like municipal bonds, often offer tax-free interest income.

Finally, those with long-term financial goals who wish to ensure stability in their investment strategy should consider adding bonds. Understanding your financial objectives and risk tolerance is essential in determining whether bonds are a suitable addition to your investment portfolio.

Investors who are risk averse and looking for fixed returns on investment should consider bonds.

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Frequently Asked Questions

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How do bonds work?

Answer Field

Bonds are debt instruments issued by entities such as governments, municipalities, or corporations to raise capital. When you buy a bond, you are essentially lending money to the issuer in exchange for periodic interest payments and the return of the bond's face value upon maturity. The interest payments, known as coupon payments, are typically made semi-annually or annually. Bonds have a fixed maturity date, at which point the principal amount is repaid to the investor.

Are bonds a good investment?

Answer Field

Bonds can be a good investment for those seeking stable and predictable returns. They are generally less volatile than stocks and can provide a steady income stream through regular interest payments. Bonds can also diversify an investment portfolio, reducing overall risk. However, the suitability of bonds depends on individual financial goals, risk tolerance, and market conditions.

Are bonds guaranteed?

Answer Field

Not all bonds are guaranteed. Government bonds, such as those issued by the central or state governments, are typically considered low-risk and are often backed by the government's credit. Corporate bonds, on the other hand, are subject to the issuing company's financial stability and may carry higher risk. Some bonds may have specific guarantees or insurance, but it is essential to check the bond's credit rating and issuer's credibility before investing.

What is the riskiest type of bond?

Answer Field

The riskiest type of bond is typically a high-yield bond, also known as a junk bond. These bonds are issued by companies with lower credit ratings and, therefore, offer higher interest rates to attract investors. The increased risk comes from the higher likelihood of default, meaning the issuer may be unable to make interest payments or repay the principal.

What is the safest type of bond?

Answer Field

Government bonds, particularly those issued by stable governments like the Government of India (such as G-Secs), are considered the safest type of bonds. These bonds are backed by the full faith and credit of the issuing government, making them low-risk investments. Treasury bills and notes are examples of safe government bonds.

What makes a bond attractive?

Answer Field

A bond becomes attractive based on factors such as its interest rate (coupon rate), credit rating, and maturity period. Higher interest rates offer better returns, while higher credit ratings indicate lower risk. Additionally, bonds with features like call or put options and tax advantages can also enhance their appeal. Investors look for bonds that align with their risk tolerance and investment goals.

Are bonds risk-free?

Answer Field

No, bonds are not entirely risk-free. While they are generally considered safer than stocks, they still carry risks such as credit risk (issuer default), interest rate risk (fluctuations in interest rates affecting bond prices), and inflation risk (erosion of purchasing power). Government bonds are relatively low-risk, but even they are subject to interest rate and inflation risks.

How are bonds priced?

Answer Field

Bonds are priced based on their face value, interest rate (coupon rate), and market interest rates. The price of a bond fluctuates with changes in market interest rates. When market interest rates rise, bond prices typically fall, and vice versa. Other factors influencing bond prices include the issuer’s credit rating, time to maturity, and prevailing economic conditions.

How to invest in bonds in India?

Answer Field

To invest in bonds in India, you can buy them through various channels such as stock exchanges, banks, and stock brokers like Bajaj Broking. Bonds can be purchased during the initial offering or in the secondary market. You can also invest through bond mutual funds or exchange-traded funds (ETFs) that hold a diversified portfolio of bonds. Consulting with a financial advisor can help you choose the right bonds based on your investment objectives and risk profile.

How do bonds work?

Answer Field

Bonds function as loans from investors to borrowers, usually governments or corporations. When you purchase a bond, you agree to lend your money for a specified period, receiving periodic interest payments. At maturity, the issuer repays the bond’s face value.

How to invest in bonds in India?

Answer Field

To invest in bonds in India, you can open a demat account with a broker or financial institution. Options include buying government securities, corporate bonds, or bond mutual funds. It’s essential to understand the risks and types of bonds available before investing.

What is the riskiest type of bond?

Answer Field

High-yield or junk bonds represent the riskiest category of bonds. Issued by companies with low credit ratings, these bonds offer higher interest rates to attract investors but come with a significant risk of default, making them suitable only for risk-tolerant investors.

What is the safest type of bond?

Answer Field

Treasury bonds, issued by the government, are widely considered the safest type of bond. They are backed by the government’s full faith and credit, making them low-risk investments. Investors often turn to treasury bonds for stability during economic uncertainty.

Are bonds a good investment?

Answer Field

Bonds can be a good investment for those seeking steady income and lower risk compared to stocks. They diversify an investment portfolio, providing predictable cash flow. However, the suitability depends on individual financial goals, market conditions, and risk tolerance.

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Bajaj Financial Securities Limited ("Bajaj Broking" or "Research Entity") is regulated by the Securities and Exchange Board of India ("SEBI") and is licensed to carry on the business of broking, depository services and related activities.  

This Report has been prepared by Bajaj Financial Securities Limited in the capacity of a Research Analyst having SEBI Registration No. INH000010043 and distributed as per SEBI (Research Analysts) Regulations 2014. This report does not constitute an offer or solicitation for the purchase or sale of any financial instrument or as an official confirmation of any transaction. The information contained herein is from publicly available data or other sources believed to be reliable. This report is provided for assistance only and is not intended to be and must not alone be taken as the basis for an investment decision. The user assumes the entire risk of any use made of this information. Each recipient of this report should make such investigation as it deems necessary to arrive at an independent evaluation of an investment in the securities of companies referred to in this document (including the merits and risks involved), and should consult his own advisors to determine the merits and risks of such investment. The investment discussed or views expressed may not be suitable for all investors.  

This information is strictly confidential and is being furnished to you solely for your information. This information should not be reproduced or redistributed or passed on directly or indirectly in any form to any other person or published, copied, in whole or in part, for any purpose. This report is not directed or intended for distribution to, or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction, where such distribution, publication, availability or use would be contrary to law, regulation or which would subject Bajaj Financial Securities Limited and associates / group companies to any registration or licensing requirements within such jurisdiction. The distribution of this report in certain jurisdictions may be restricted by law, and persons in whose possession this report comes, should observe, any such restrictions. The information given in this report is as of the date of this report and there can be no assurance that future results or events will be consistent with this information. This information is subject to change without any prior notice. Bajaj Financial Securities Limited reserves the right to make modifications and alterations to this statement as may be required from time to time. Bajaj Financial Securities Limited or any of its associates / group companies shall not be in any way responsible for any loss or damage that may arise to any person from any inadvertent error in the information contained in this report. Bajaj Financial Securities Limited is committed to providing independent and transparent recommendation to its clients. Neither Bajaj Financial Securities Limited nor any of its associates, group companies, directors, employees, agents or representatives shall be liable for any damages whether direct, indirect, special or consequential including loss of revenue or lost profits that may arise from or in connection with the use of the information. Our proprietary trading and investment businesses may make investment decisions that are inconsistent with the recommendations expressed herein. Past performance is not necessarily a guide to future performance .The disclosures of interest statements incorporated in this report are provided solely to enhance the transparency and should not be treated as endorsement of the views expressed in the report. The information provided in these reports remains, unless otherwise stated, the copyright of Bajaj Financial Securities Limited. All layout, design, original artwork, concepts and other Intellectual Properties, remains the property and copyright of Bajaj Financial Securities Limited and may not be used in any form or for any purpose whatsoever by any party without the express written permission of the copyright holders.  

We offer our research services to clients as well as our prospects. Though this report is disseminated to all the customers simultaneously, not all customers may receive this report at the same time. We will not treat recipients as customers by virtue of their receiving this report.  

Bajaj Financial Securities Limited and its associates, officer, directors, and employees, research analyst (including relatives) worldwide may: (a) from time to time, have long or short positions in, and buy or sell the securities thereof, of company(ies), mentioned herein or (b) be engaged in any other transaction involving such securities and earn brokerage or other compensation or act as a market maker in the financial instruments of the subject company/company(ies) discussed herein or act as advisor or lender/borrower to such company(ies) or have other potential/material conflict of interest with respect to any recommendation and related information and opinions at the time of publication of research report or at the time of public appearance. Bajaj Financial Securities Limited may have proprietary long/short position in the above-mentioned scrip(s) and therefore should be considered as interested. The views provided herein are general in nature and do not consider risk appetite or investment objective of any particular investor; readers are requested to take independent professional advice before investing. This should not be construed as invitation or solicitation to do business with Bajaj Financial Securities Limited.  

Bajaj Financial Securities Limited or its associates may have received compensation from the subject company in the past 12 months. Bajaj Financial Securities Limited or its associates may have managed or co-managed public offering of securities for the subject company in the past 12 months. Bajaj Financial Securities Limited or its associates may have received compensation for investment banking or merchant banking or brokerage services from the subject company in the past 12 months. Bajaj Financial Securities Limited or its associates may have received any compensation for products or services other than investment banking or merchant banking or brokerage services from the subject company in the past 12 months. Bajaj Financial Securities Limited or its associates have not received any compensation or other benefits from the Subject Company or third party in connection with the research report. Research analyst or his/her relative or Bajaj Financial Securities Limited’s associates may have financial interest in the subject company. Bajaj Financial Securities Limited, its associates, research analyst and his/her relative may have other potential/material conflict of interest with respect to any recommendation and related information and opinions at the time of publication of research report or at the time of public appearance.  

Research analyst has served as an officer, director or employee of subject Company: No  

Bajaj Financial Securities Limited has financial interest in the subject companies: No  

Bajaj Financial Securities Limited’s Associates may have actual/beneficial ownership of 1% or more securities of the subject company at the end of the month immediately preceding the date of publication of research report.  

Research analyst or his/her relative has actual/beneficial ownership of 1% or more securities of the subject company at the end of the month immediately preceding the date of publication of research report: No  

Bajaj Financial Securities Limited has actual/beneficial ownership of 1% or more securities of the subject company at the end of the month immediately preceding the date of publication of research report: No  

Subject company may have been client during twelve months preceding the date of distribution of the research report.  

There were no instances of non-compliance by Bajaj Financial Securities Limited on any matter related to the capital markets, resulting in significant and material disciplinary action during the last three years. A graph of daily closing prices of the securities is also available at https://www.nseindia.com/

ANALYST CERTIFICATION

The analyst for this report certifies that all of the views expressed in this report accurately reflect his or her personal views about the subject company or companies and its or their securities, and no part of his or her compensation was, is or will be, directly or indirectly related to specific recommendations or views expressed in this report.  

RISK DISCLOSURE ON DERIVATIVES

  • 9 out of 10 individual traders in equity Futures and Options Segment, incurred net losses.
  • On an average, loss makers registered net trading loss close to ₹ 50,000.
  • Over and above the net trading losses incurred, loss makers expended an additional 28% of net trading losses as transaction costs.
  • Those making net trading profits, incurred between 15% to 50% of such profits as transaction cost.

SEBI study dated January 25, 2023 on “Analysis of Profit and Loss of Individual Traders dealing in equity Futures and Options (F&O) Segment”, wherein Aggregate Level findings are based on annual Profit/Loss incurred by individual traders in equity F&O during FY 2021-22.

BROKERAGE DISCLAIMER

All leveraged intraday positions will be squared off on the same day. There is no restriction on the withdrawal of the unutilised margin amount. Brokerage will not exceed the SEBI prescribed limit. Visit : https://www.bajajbroking.in/pricing

MTF 

As subject to the provisions of SEBI Circular CIR/MRD/DP/54/2017 dated June 13, 2017, and the terms and conditions mentioned in the lights and obligations statement issued by the TM (if applicable).  

US INVESTING

International investment is not supervised by any regulatory body in India. Thus, any claim or dispute relating to such investment or enforcement of any agreement/contract /claim will not be under laws and regulations of the recognized stock exchanges and investor protection under Indian Securities Law. The account opening process will be carried out on Vested platform and Bajaj Financial Securities Limited will not have any role in it.  

MARKETSMITH / GOLDENPI / SOVEREIGN GOLD BONDS

Bajaj Financial Securities Limited is only distributor of this product. These are not exchange traded products and all disputes with respect to the distribution activity, would not have access to exchange investor redressal forum or Arbitration mechanism. Bajaj Financial Securities Limited is not a registered Investment Advisory. User discretion is required before investing. Client is requested to independently evaluate and/or consult their professional advisors before arriving at any conclusion to make any investment. The decision to invest shall be the sole responsibility of the Client and shall not hold Bajaj Financial Securities Limited, its employees and associates responsible for any losses, damages of any type whatsoever. 

IPO 

This should not be construed as soliciting investment. Investors’ discretion is required. Kindly consult your financial expert before investing. No need to issue cheques by investors while subscribing to IPO. Investments in securities markets are subject to market risks, read all the related documents carefully before investing.  

IPO FINANCING

IPO Financing is done through Bajaj Finance Limited. Bajaj Finance Limited (BFL or Lender) reserves the sole right to decide participation in any IPO and financing to the client shall be subject to credit assessment done by the lender. Also, BFL shall have full rights to decide the commercial terms for IPO and final application and financing shall be subject to all requirements being met by the client in a timely manner including documentation, account setup and payment of required Interest and Margin. Bajaj Finance Limited also reserves the exclusive rights to change any of the above-mentioned terms and conditions without prior notice to clients. The scheme margin is subject to change. UPI is mandatory to bid in all IPOs through our platform. As per exchange guidelines, all the UPI mandates will only be accepted till 5:00 PM on IPO closure day. 

SCREENERS 

Screeners is not Exchange-approved products and any disputes related to the same will not be dealt on the Exchange platform. 

SECURITIES 

Securities quoted are exemplary and not recommendatory. 

IPV 

Account would be open after all procedure relating to IPV and client due diligence is completed. 

IMAGES 

The images used are only for representation purpose. Proper due diligence has been done for the images and the image is not of any artist. The same is captured from royalty free sites. 

DISCLOSURE TO CLIENTS REGARDING PAYOUT OF FUNDS

As per SEBI circular no. SEBI/HO/MIRSD/MIRSD-PoD-1/P/CIR/2023/84 dated June 08, 2023, Stockbrokers are required to upstream the entire client funds lying with them to the Clearing Corporation. Based on client’s request the funds’ release request must be placed with the Clearing Corporation. Based on the internal process and cut-off timelines of the Clearing Corporation the funds will be released to the Stock Broker. In view of this new process, as specified by the regulatory and the cut-off time of Clearing Corporation/Banks processing the funds, Bajaj Financial Securities Limited cannot commit the exact time for releasing funds payout to its client. Clients are requested to note that, Bajaj Financial Securities Limited will not be responsible for any inconvenience caused to clients due to delay in release of funds payout, including fines, delayed charges, defaults, etc.