Bond is a fixed income instrument which is issued by corporations, the Government and other organisations. It is a Debt of Security which is a form of loan. The holder of the bond is called a creditor or lender and the issuer of the bond is a borrower who issues the bond depending on the terms and is obliged to pay interest (coupon rate) and to repay the principal amount on maturity date. Interest is usually payable annually, semiannually, quarterly or sometimes on a monthly basis.it is negotiable instrument that can be transferred in the secondary market.
Features of bonds:
Issuer > the entity who borrows money by issuing bonds are called issuers.
Face Value > it is a value of the bond on its maturity.
Coupon > The rate of interest paid on the bond is called a coupon.
Rating > Every bond is usually rated by credit rating agencies; higher the credit rating lower will be the coupon required to pay by the issuer and vice versa.
Coupon Rating Frequency > The coupon payments on the bond usually have a payment frequency. The coupons are usually paid annually or semi-annually; however, they may be paid quarterly or monthly as well.
Yield > the effective return is called the yield that the investor makes on the bonds.
Types of Bonds:
There are different types of bonds:
Government Bonds > it issued by the Government (Central or State) i.e NHAI, NTPC UPPCL etc. They issued taxable or tax free Bonds.
Corporate Bonds > These bonds issued by private and public corporations. It’s a long term debt instrument, with maturity of at-least 1 year. It may be secured or unsecured
Secured:- if a bond is classified corporate secured bond then the issuer is backing it with collateral.
Unsecured:- if a bond is classified as corporate.
Perpetual Bonds > Perpetual bonds have no maturity. It has a call option.These types of Bonds pay interest till the life of the company.i.e Bank of Baroda Perpetual Bonds, PNB Bank Perpetual bond.
Zero Coupon Bonds > These types of bonds where there are no coupon payments made. It is not that there is no yield; the zero coupon bonds are issued at a price lower than the face value and the face value pay at the time of maturity. The difference will be the yield of the investor. It is also called a deep discount bond.
Floating Rate Bonds > They have a coupon which is not fixed but rather linked to a benchmark. For example RBI Bonds which are linked to the interest rate of national saving certificates(NSC). 0.35% over the NSC current rate.