What are Bonds?

Bonds are fixed income instruments issued by a borrower such as the Government or a Corporate when they take money from an investor. In exchange for borrowing this money (similar to a loan), the bond issuer promises to pay regular coupons, which is nothing but a form of interest. The entire borrowed amount or principal is paid back at a pre-decided date called maturity.

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Principal is preserved
Earn regular interest income
Low Market Volatility
Portfolio Diversification
Can be traded before maturity
If you notice, bonds are very similar to a bank loan given to a company with a few differences:
Firstly, unlike usual loans, the bond principal is repaid in one shot at maturity and only interest is paid during the life of the bond.
Secondly, bonds can be traded - one investor can buy a bond from another. The new investor gets the remaining coupons and principal.
And finally, each bond has a face value of Rs 1000 to Rs 10 Lacs, and can be owned by many different investors unlike a bank loan.


Principal / Face ValueThis is the amount on which the interest payment is calculated. You will receive this amount on maturity
Coupon RateYou will receive this rate as interest every year. The actual payment is the coupon rate times face value.
Coupon FrequencyCoupons are paid at periodic intervals such as monthly, quarterly, yearly, etc. The annual coupon will be equally divided into these payments
Maturity DateYou will receive your principal back on this date along with the final coupon interest.
Yield and PriceYield is the effective interest rate that you make when you invest in a bond. Yield can be higher or lower than the coupon rate as yield is linked to the market rate of interest. If yield is higher than coupon rate, the bond price is lower than face value (because your actual interest payment will still be coupon rate) and vice versa.
Call OptionIn some bonds, there is an option for the issuer to pay the principal back before maturity. The dates for this option are fixed when the bond is issued first and cannot be changed later.
Secured / UnsecuredSecured bonds are backed by assets of the issuer. In case of default, these bonds have higher claim than others and hence are considered safer. Unsecured bonds are not backed by any assets
SenioritySenior bonds have higher claim on cashflows than other forms of debt and hence have better protection in case of default.

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