'Bond' - A Debt Investment Avenue For Risk Averse Investors

A businessman to his fat wife "you are the only investment that has doubled."

Perhaps that businessman is yet to explore the right investment avenues, otherwise, he would have a long list of rewarding investments to count upon, for instance, he can pick up 'Bonds.' Why Bonds? Because it is that investment avenue, where an investor earns by lending money to governmental or/and corporate entities. So, it is a debt investment and normally seen as a safe investment with no lock-in period. The income from certain bonds is tax-free as well

What are 'Bonds'?

A bond is a debt investment in which an investor loans money to an entity (typically governmental or corporate) which borrows the funds for a defined period of time at a variable or fixed interest rate.

Bonds are issued by companies and governments.

Owners of bonds are debt-holders or creditors of the issuer.

How Do Bonds Work?

When companies or other entities need to raise money to finance new projects, maintain ongoing operations, or refinance existing other debts, they may issue bonds directly to investors instead of obtaining loans from a bank. The indebted entity (issuer) issues a bond that contractually states the interest rate (coupon) that will be paid and the time at which the loaned funds (bond principal) must be returned (maturity date).

The issuance price of a bond is typically set at par, usually Rs.100 or Rs.1,000 face value per individual bond. The actual market price of a bond depends on a number of factors including the credit quality of the issuer, the length of time until expiration, and the coupon rate compared to the general interest rate environment at the time.

Most bonds share some common basic characteristics including:

Face value is the money amount the bond will be worth at its maturity and is also the reference amount the bond issuer uses when calculating interest payments.

Issue price is the price at which the bond issuer originally sells the bonds.

The coupon rate is the rate of interest the bond issuer will pay on the face value of the bond, expressed as a percentage.

Coupon dates are the dates on which the bond issuer will make interest payments. Typical intervals are annual or semi-annual coupon payments.

The maturity date is the date on which the bond will mature and the bond issuer will pay the bond holder the face value of the bond.