Why Should You Buy Bonds?

What is Bond?

A bond is defined as a debt asset that reflects an investor’s loan to a borrower, usually an authority or a firm. When a company issues a bond, it is borrowing money from investors and promising to pay periodic interest payments (coupon payments) and repay the entire principal amount (face value or par value) at the end of the bond’s term. Bonds are important for several financial reasons,...

Who Issues Bonds?

Governments and organisations issue bonds to raise funds. By purchasing a bond, you are making a loan to the issuer, who agrees to repay the face value of the loan on a particular date and to pay you periodic interest payments along the way, usually twice a year. In India, the Central Government issues both Treasury bills and bonds or dated securities, whereas the State Governments exclusively issue bonds or dated securities, known as State Development Loans (SDLs). G-Secs have almost no default risk and are thus referred to as risk-free gilt-edged products....

How Do Bonds Work?

Bonds function as debt instruments, allowing institutions such as organisations or governments to raise funds by borrowing from investors. Understanding how bonds work involves understanding the major mechanisms at work about their issue, payment of interest, prices, and maturity. Here’s a detailed description of how bonds work,...

Categories/Varieties of Bonds

Bonds come in a variety of forms, each customised to certain investor demands or preferences. Here are some examples of bonds,...

How are Bonds Priced?

Investors should be aware of bond pricing conventions. Bonds are not traded in the same manner that stocks are. When compared to observing the value of a stock or mutual fund fluctuate, the pricing dynamics that drive bond market fluctuations do not appear as clear. This is because stocks and shares are traded based on their expected future worth (based on prospective earnings growth). Every debt instrument has a par value and can trade at, above, or below par depending on the market. The interest payment on a bond is fixed. If the bond’s price varies, so does the bond’s yield, which refers to the annual interest rate concerning the present market price....

Bond Prices and Interest Rates

Bond prices have a negative correlation with interest rate fluctuations; that is, if market rates rise following a bond issue, bond prices fall, and vice versa. Let me illustrate this with an example. Assume ABC Ltd issued bonds with a face value of ₹100 and an interest rate (also known as a coupon in bond terminology) of 10% per annum a year ago. The rates of interest have generally been falling over the last year, thus ABC Ltd is issuing new bonds at 9% today. The price of the previous bonds, which were issued with a 10% coupon, would now rise above their face value, to say ₹105. This is because the old bonds are being priced concerning the current interest rate. Even in today’s low-interest rate environment, investors receive the same ₹10 coupon from the old bond and are willing to pay a premium over its face value. The amount of impact on bond prices is determined by the coupon rate and the bond’s residual maturity. For the same interest rate movement, lower coupon rate bonds are more influenced than higher coupon rate bonds. Similarly, bonds with a longer residual maturity (years until maturity) are harmed more than those with a shorter duration....

Types of Bonds

Among the various various types of bonds are:...

Why Should You Buy Bonds?

Bonds are issued by governments and enterprises to raise funds. By purchasing a bond, you are making a loan to the issuer, who agrees to repay the face value of the loan on a particular date and to pay you interest at regular intervals, usually twice a year. Unlike stocks, corporate bonds provide you with no ownership rights. So you don’t necessarily gain from the firm’s development, but you also don’t see as big of an effect when the business isn’t doing so well as long as it still has the wherewithal to keep its loans current. Bonds, as part of your portfolio, can provide you with two potential benefits, they provide a steady stream of income while mitigating some of the risk associated with stock ownership....

Advantages of Investing in Bonds

Bond investing has various advantages, making it an appealing alternative for a wide range of investors. Here are some important benefits of bond investing,...

Factors Affecting Bond Prices

For initial investors who want to retain bonds until maturity, the market value is unimportant because they will get regular interest and subsequently the principal amount at maturity. The market value is critical for investors who want to acquire and sell securities on the secondary market. The following are some of the elements that impact bond prices,...

Taxation on Bonds

Bonds provide income to investors in two ways: interest and capital appreciation. In India, the following are the tax structures for various bonds,...

Conclusion

In conclusion, bonds are essential to finance, allowing investors, institutions, and governments a wide range of investment possibilities. Their face value, coupon rates, credit ratings, and maturity dates make them useful securities for investors. Bonds diversify investment portfolios and provide a constant income stream through coupon payments. Any investment requires knowledge and understanding to make smart choices. Bonds’ characteristics, variations, and risk profiles provide investors with a variety of ways to attain financial goals, maintain wealth, and participate in global financial markets. Bonds provide income and strengthen diversified investment portfolios in the ever-changing financial world....