A bond is a debt security, similar to an IOU. Borrowers issue bonds to raise money from investors willing to lend them money for a certain amount of time. When you buy a bond, you are lending to the issuer, which may be a government, municipality, or corporation. In return, the issuer promises to pay you a specified rate of interest during the life of the bond and to repay the principal, also known as face value or par value of the bond, when it "matures," or comes due after a set period of time. Bonds can provide a means of preserving capital and earning a predictable return. Bond investments provide steady streams of income from interest payments prior to maturity.
Benefits of investing in Bonds:
Higher source of income than traditional bank FDs
Predictable income stream. Typically, bonds pay interest twice a year.
Capital Preservation
Adds stability to your portfolio by offsetting exposure to more volatile stock holdings
Technically, Bonds as a term are used to denote the issuances that are issued by the Government. Whereas the term debentures are used for issuances made by corporates. However, colloquially, both Bonds and Debentures as a nomenclature are interchangeably used. Bonds in India can be categorized either by Issuer type or by means of Issue Structure. When it comes to the Issuer Type, Bonds are primarily issued either by:
• Corporates
• Government
- Central government
- State Government
• PSUs
• Bank or
• NBFCs.
Government Bonds are issued both by the Central Government as well as State Government. Bonds issued by Central Government are called as Government Bonds whereas Bonds issued by the state government are called as State Developmental Loans.
Similarly, when it comes to bond structure, following are the structures or features by which Bonds in India can be classified.
• Fixed Coupon Rate Bonds.
• Floating Coupon Rate Bonds
• Zero Coupon Bonds
• Callable and Puttable Bonds
• Subordinated Bonds
• Perpetual Bonds
• Tax Free Bonds
• Covered Bonds
• Principal Protected Market Linked Debentures
• Capital Gain Bonds