What are bonds?
Bonds are fixed-market instruments that signify a loan given to the borrower by an investor. The one who issues the bond promises the investor to pay a certain amount of interest and the bond's principal amount on the maturity date.
Bonds are securities that can be traded in the stock market. They are either issued by government or by corporate entities. Want to know more about these categories of bonds? Stick till the end of the article!
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What are the different types of bonds?
Bonds can be broadly classified into the following categories:
- Government bonds: Government bonds are issued directly by the government and have the backing of the Indian government. These bonds can be further subdivided into two types:
1)Fixed-rate bonds: By investing in these types of bonds, you will enjoy a fixed interest rate that remains constant throughout the bond's tenure.
2)Floating rate bonds: These bonds do not have a fixed interest rate, and the rates of these bonds vary with market fluctuations, meaning that you will gain more interest if the market moves up and less if the market falls.
- Corporate bonds: These bonds are issued by private companies classified based on ratings from rating agencies, such as CRISIL and ICRA. Furthermore, it is classified as secured and unsecured bonds.
1)Secured bonds: Bonds backed by collateral.
2)Unsecured bonds: Bonds with no collateral other than the company's promise to abide by the bond.
- Zero coupon bonds: These bonds do not pay periodic interest in coupons but sell the bonds at a lesser price or discount and then repay at the bond's par value. For example, a zero-coupon bond of Rs 1000 is sold at Rs 700, and the bondholder is paid Rs 1000 on maturity.
- Inflation-linked bonds: These bonds are designed to minimise the impact of inflation on coupons and the face value of the bond. Thus, the coupon and principal amount payment of such bonds are inflation-adjusted.
- Convertible bonds: These bonds give the holder the right to convert their bonds into equity shares (numbers to be predefined) in the company issuing them. However, one can receive the principal amount instead of shares upon maturity.
- Put bonds: These bonds give the bondholders the right to demand the principal amount on a pre-agreed date before the maturity date. For this benefit, the investors are paid low returns.
- Tax savings bonds: The government issues these bonds, which give tax benefits to the investors. One can claim tax exemptions up to Rs 20000 under Section 80CCF of the Income Tax Act.
Bottom line
All the bonds listed above have pros and cons, which you must understand before investing. So talk to a debt securities expert before investing in these categories.
Related Blogs - The Benefits of Investing in Bonds | Secured Vs Unsecured Bonds: Which Will Bond with Your Portfolio
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