What Are Bonds? and Different Types of Bonds

Bonds also known as a fixed-income security, are debt instrument that a government or a company issues to raise money. Basically it is a contract between a government and a company—who is acting as the borrower—and investors like you—who are acting as the lender. It is considered to be one of the safest kinds of investment one can have. Whatever you’re financial goals, bonds can be an important part of a diversified investment portfolio. There are different types of bonds you can invest

Since 1929, bonds have generated a return of around 6% each year proving to be a real reason for investment. As part of a diversified portfolio, bonds can help you manage market fluctuations and generate income on a regular basis.

TYPES OF BONDS:

Fixed Rate Bonds

In Fixed Rate Bonds, the interest remains fixed throughout the time period of the bond. Owing to a constant interest rate, fixed rate bonds are least affected by the fluctuations in the market. The most common are pensions, bonds and loans.

Floating Rate Bonds

Floating rate bonds have a fluctuating interest rate (coupons) as per the current market interest rate or some other external measures.

Zero Interest Rate Bonds

Zero Interest Rate Bonds usually do not pay any regular interest to the investors. In such types of bonds, issuers only pay the principal amount to the bond holders. Here, the investor does not expect any interest. The buyer of the bond receives a return by the appreciation of the security, which is redeemed at face value on a specified maturity date.

Inflation Linked Bonds

Bonds that are mainly associated to inflation rate are called inflation linked bonds. These are the securities designed to protect investors from inflation risk. The interest rate of Inflation linked bonds is generally lower than fixed rate bonds and guarantees a real return.

Redeemable/callable bond – Can be bought back early by the issuer, at a price fixed by them. This usually happens when the issuer finds they can get a cheaper loan elsewhere.

Corporate Bonds– These are bonds issued by corporations, partnerships Liability Company, and other commercial enterprises. Usually corporate bonds offer higher yields than other types of bonds. A successful investor might end up paying 40% to 50% of his or her total interest income to Federal, state, and local governments in the form of taxes.

WHY ONE SHOULD INVEST IN BONDS?

  1. Risk taking capacity is one of the major aspects of investment. Bonds are less riskier than equities. Therefore, investing in bonds will ensure that your corpus is protected as long as your money is invested.
  2. The payment of interests on bonds is ideally assured while equities don’t make any such promise of paying regular dividends.
  3. There are also a variety of bonds to fit different needs of investors, including fixed rated bonds, floating rate bonds, zero coupon bonds, convertible bonds, and inflation linked bonds.

HOW ONE CAN INVEST IN BONDS IN INDIA?

If you want to invest in Bonds in India, you can invest in only two kind of bonds i.e., in corporate bonds or Government bonds. Let’s deal in both of them one by one.

One can purchase corporate bonds from the primary markets when the issuing company issues new bonds. In order to invest in them, you are required to file an application form and submit the same to any branch of the issuer along with prescribed documents and application fee. In case you are having Demat Account, your bonds will be credited to the same. However, if you don’t have your demat account active in that case you would receive them in their physical format. You can also buy corporate bonds from the secondary markets subject to their availability.

Government bonds are not traded on the stock exchange or secondary market. They are sold through their official distributors. These bonds are also made available by the designated branches of post offices and banks. For investing in these bonds, you can submit your application form, necessary documents, and required fees in any of the said places. Once your application is dealt and processed, you would receive bonds in your name.

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