A bond is a fixed-income vehicle that represents a type of loan provided by investors to borrowers. Typically, corporations and governments issue bonds to raise funds. A bond is essentially an agreement between the investor and the borrower, containing details about the loan and the repayment method. Bonds are debt apparatus issued by corporates, governments, Municipal Corporation and other organism to raise funds. When investor invest in a bond that means he give some specific amount to the issuer on lease in exchange of interest on principal amount. At the maturity an investor can receive the principle and interest earned.
How
Bonds works:
1. Types of Bonds: There are several types of bonds issued by different bodies i.,e Central government issuing Government Securities (G-Secs) bonds, state governments issuing State Development Loans and various corporates issuing bond to raise funds.
2. Issuance:
Bonds normally issued by the Reserve
Bank of India by conducting auctions on behalf of all the bodies. It has clear mentioned the principal amount,
coupon rate and maturity date of the bond.
3. Bond
Purchase: Investors
can purchase bonds through authorized financial institution or banks or online
trading platforms, it is regulated by the Securities and Exchange Board of
India.
4. Payment Method: Usually bonds pay periodic interest on their investments, it is know as coupons. At the time of purchasing the coupon rates are fixed, it’s normally percentage of the face value. And payments are made half yearly or yearly basis.
5. Maturity: All the bonds are specified it’s maturity dates, it may be short-term bonds or long-term bonds. The issuer are tied with the rules and resolution to replay the principal amount along with the interest to the bond investors.
6. Yield: The yield is a interest rates or the bond’s coupon rate, demand for bonds in the market can cause fluctuate the bond prices and also affecting the yield.
7. Risks:
One can study all the details about the
issuer and risks associated with the specific bond before investing. Usually bonds face inflation risk, liquidity
risk, interest rate risk etc.,
8. Taxation:
Bond investments is a taxable, selling
bonds it is like a capital gains, so an investors has to pay capital gains tax.
Example:
The government has decided to build a new
dam and issues the bonds to raise funds for dam infrastructure project, it is
also known as sovereign bonds. It is a
safest investment option in india.
The bonds details are as follows:
Face Value: ₹3,000 per bond
Total Number of Bonds: 50,000
Coupon Rate: 7%
Maturity: 15 years
Investor:
Several investors like financial institutions, foreign investors, corporates includes
individual are interested in purchasing the bonds.
Coupon: Coupon
rate fixed i.e., 7%, that means every year bond investors will receive INR
2100.
Maturity:
The government replays the face value of INR 3000 to each bond investors at the
time of bond maturity date.
Sell: Investors can sell their bonds in the secondary market before maturity.
Bond Security: Since it is backed by Government of India, there is a very low-risk.
Tax: Specific government
bonds offer tax benefits to all the investors, Individual can get the tax benefit
up to a specific limit.
This is a simple example, how government bonds are work.
