Bonds are financial products that fall under the debt asset category and are issued by public or private institutions to generate money from the general public. Governments and commercial groups generate money to guarantee they have enough cash to carry out a variety of tasks.
In the stock market, there are different types of bonds which have their own functions. Some of the bonds are as follows:
Zero Coupon Bonds
Zero-coupon bonds are sold at a discount and redeemed for their full face value rather than paying interest.
Sovereign Gold Bonds
As a replacement for real gold, sovereign gold bonds are issued in multiples of grams.
The Municipal Corp. offers bonds to finance public projects including schools, hospitals, parks, roads, and bridges.
Bonds known as convertible bonds are those that may be converted into a set number of shares of common stock or equity.
Bonds Linked to Inflation
Bonds with inflation-linked principle values (ILBs) reduce the risk of inflation by varying the principal value with inflation.
Governments and corporate organisations can generate money through the disinvestment of public issues like initial public offerings (IPOs), but these avenues cannot guarantee a constant flow of resources. As a result, both public and private organisations issue bonds to make sure they raise enough money.
Similar to other debt products, bonds function by requiring periodical interest payments from the issuer to the holder and repayment of the principal at maturity. When the investment in bonds is complete, the issuer pays interest to the bondholders in accordance with the coupon outlined at the time of the bond issuance.
Investors have two options when bonds are created. Investing in bonds either retain return until maturity with its interest payments, or you can sell them to other investors to benefit from the spread between the current bond price and the face value. When interest is due, the issuer must pay the new buyer of the bonds if the bonds are sold to a new buyer.
Principal is protected yet grows in line with money market trends
Investments in bonds grow steadily, giving relatively better returns than traditional asset classes like FDs
Helps in hedging your equity investments and capturing growth during adverse trends
Host of choices across highly-rated bonds that allow choosing level of risk and returns.
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Bond tenure is measured by the duration of the bonds. It decides how long before the bonds mature and how long interest will be paid.
On the day of maturity for bonds and debentures, funds are automatically sent to your bank account.
Bond investments are crucial because they provide a steady flow of income. They usually send you interest payments twice a year. Bondholders receive their whole principal amount if the bonds are kept to maturity. Therefore, when you invest, bonds provide a way to preserve your wealth.
If you want to make direct investments in the Indian bond market, you can register a Demat and trading account with a stockbroker, look for bonds and invest in them.
Governments and corporations issue bonds when they want to raise money. When you buy a bond, you give the issuer a loan, and they agree to pay you back its face value on a specific date. They also pay periodic interest payments, usually twice a year.
Bonds are safer for a reason — you can expect a lower return on your investment. Stocks, on the other hand, typically combine unpredictability in the short term with the potential for a better return on your investment.
If the interest rates increase, previously issued bonds lose value because an investor can buy new bonds with the same maturity date and receive a higher yield (and income stream). Long-term bonds will experience more significant losses compared to short-term bonds when interest rates increase.
Prices of bonds have an inverse relationship to interest rates. When the cost of borrowing money rises (when interest rates rise), bond prices usually fall, and vice-versa.