Bond

When the government or corporate requires funds, they may consider issuing bonds. They are financial instruments which raise funds from the general public for a specific period. However, the bond issuer compensates the investors during the tenure and promises to pay the principal back at the end of the tenure. Bonds can be categorized based on coupon rates, maturity, convertibility, and so on. This article guides on different types of bonds, features of bonds, and the things Investors should consider before investing in the bonds.

Types of Bonds

Fixed-rate bonds

Fixed-rate bonds pay consistent interest amounts until maturity. The bondholders earn predictable and guaranteed returns regardless of the prevailing market conditions.
For example, An investor purchased a ten-year fixed-rate government bond of Rs. 1000, issued on 20th April 2013 which offers a coupon rate of 7.5%. The investor will get a fixed interest of Rs. 75, annually every April, till 20th April 2023.

Floating-rate bonds

Floating-rate bonds do not pay fixed returns each period. Instead, the interest rates vary, depending on the set benchmark, during the tenure.
For example, an investor purchased an 8-year floating rate bond issued in 2015. The bond pays interest of 40 points higher than the prevailing National Savings Certificate interest rate. This means the NSC interest rate is the benchmark and any fluctuation in it directly affects the coupon payment of this bond.

Zero-coupon bonds

As the name implies, these bonds do not pay periodic coupons during their tenure. Though, these bonds are issued at a discount and repayable at the par value. The difference is the yield for investors.
For example, an investor buys a 20-year zero-coupon bond, with a face value of Rs. 1000, at Rs. 700. At the end of 20 years, the issuer will pay Rs. 1000 to the bondholder.

Perpetual bonds

Perpetual bonds are those debt securities which do not have a maturity. In this type of bond, the issuer does not repay the principal amount to the bondholders. Though, they keep paying steady coupon payments to the bondholders till perpetuity.

Inflation-linked bonds

These types of bonds aim at minimizing the impact of inflation on the face value and coupon payments. The principal is adjusted according to the inflation and coupon payments are made based on the adjusted principal.
For example, an investor purchases an Inflation-linked bond with a face value of Rs. 100. After a year, the inflation-adjusted principal amounts to Rs. 107. Therefore, the coupon will be paid considering Rs. 107 for that period.

Convertible Bonds

The investors holding convertible bonds get the right to convert the bond to a predefined number of equity shares in the issuing company at a particular time from the tenure. Though, the investor can also opt to receive the principal repayment at the maturity, if they don’t want to exchange it with shares.

Callable Bonds

Callable bonds are high coupon paying securities that give the issuer the right to call back the bonds at a pre-agreed price and date.

Puttable Bonds

Callable bonds are high coupon paying securities that give the issuer the right to call back the bonds at a pre-agreed price and date.
Puttable bonds give the bondholder the right to return the bond and ask for repayment of principal at a pre-agreed date before maturity. Since the benefit offered is for investors, these bonds pay lower returns.

What are non-Convertible debentures?

NCDs are issued by corporates to raise funds from the public and offer a fixed return . This is done through a public issue and subsequently traded either over the counter (OTC) or on exchanges.
Ratings of NCDs issued reflect the position of the issuer in servicing its financial obligations i.e. to pay interest when due and also about the payment of the maturity proceeds on time.
NCDs offer various other benefits to the owner such as high liquidity through stock market listing, tax exemptions at source and safety since they can be issued by companies which have a good credit rating as specified in the norms laid down by RBI for the issue of NCDs.