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What are Bonds?

Bondholders get their entire investment back if they hold the bonds until maturity, so they’re a good method to save money while investing.

What are Bonds?
Image via Lifefinance.com.sg

Bonds are comparable to IOUs in that they are debt securities. Borrowers create bonds in order to raise funds from investors who are prepared to lend them money for a set period of time.

When you buy a bond, you are lending money to the issuer, which could be the government, a municipality, or a company. In exchange, the issuer commits to pay you a predetermined rate of interest for the duration of the bond’s existence, as well as to refund the bond’s principal, also known as the face value or par value, when it “expires,” or matures after a given period of time.

The holder enters into a legal contract with the issuer, in which the issuer agrees to repay borrowed funds, plus interest, at predetermined periods, such as semi-annually, annually, or monthly.

Stockholders have an ownership stake in the corporation, whereas bondholders have a creditor share.

stocks vs. bonds
Photo credit: The Balance

Stockholders are the company’s owners, whereas bondholders are the company’s lenders. Bonds also have a predetermined interest rate and a predetermined duration or maturity after which they mature. 

Bonds are routinely used to raise funds by governments (at all levels) and enterprises. Similarly, businesses frequently borrow to expand their operations, purchase real estate and equipment, embark on profitable ventures, conduct research and development, or hire new personnel. Large companies face the dilemma of requiring significantly more funds than the normal bank can offer.

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Why Bonds?
  • Bonds follow a pattern. You understand how much interest you’ll get, how often you’ll get it, and when your principal (the bond’s face value) will be repaid (maturity date).
  • Bonds will provide a predictable amount of recurring income for people on a fixed income and/or in retirement.
  • Bonds, especially short-term bonds, pay interest rates that are often higher than those offered by banks on savings accounts.
  • Bondholders get their entire investment back if they hold the bonds until maturity, so they’re a good method to save money while investing.
  • Bonds can help to mitigate the risk of stock investments that are more volatile.
Types of Bonds you can invest in

Capital Gains Bonds

54EC bonds also referred to as capital gains bonds are financial instruments that provide an investor with tax benefits under Section 54EC. After collecting capital gains from the sale of a property, an individual can invest in these bonds and receive the required tax exemption. The National Highway Authority of India (NHAI) and the Rural Electrification Corporation (REC) have issued bonds (REC.)

Government Securities

The central government is the one that issues these bonds. Sovereign Bonds is another name for them. These bonds carry a low risk for the investor because they are issued by the Union. These investments, however, have low rates of return. For example, in January 2018, the Government of India introduced a 7.75 percent GOI Savings Bond to replace the old 8 percent, Savings Bond. Government bonds are a good choice for those with a low-risk appetite.

Corporate Bonds

In the stock market, this type of bond is also popular, but it does not cover as much ground as government bonds. Because these bonds are issued by private enterprises or businesses, they come with a high level of risk. They do, however, provide larger yields than government bonds, and they can be used by someone with a high-risk appetite.

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RBI Bond

Floating Rate Savings Bonds, or RBI Bonds, are a type of bond issued by the RBI. The Indian government has declared that the floating rate savings bond plan will be re-launched. The 7.75 percent taxable savings bonds were phased out in May 2020, prompting the creation of this bond.

The government has introduced new offers, including a 7-year bond that will be available for subscription on July 1, 2020, albeit it keeps many of the qualities of its predecessor while changing the terms and conditions of interest payment to investors. The coupon rate on RBI Bonds 2022 for the period January 1, 2022, to June 30, 2022, and payable on July 1, 2022, is 7.15 percent (6.80 percent +0.35 percent = 7.15 percent), which is unchanged from the previous half-year.

Sovereign Gold Bond

The Central Government provides sovereign Gold Bonds, which allow businesses to invest in gold for a long time without having to buy physical gold. Such bonds’ interest is tax-free.

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Gold prices are tied to the pricing of these bonds. SGBs’ nominal value is determined by taking the three-day simple average of closing gold prices of 99.99 percent purity. SGBs are also measured in gold grams.

Hrushikesh Pachbudhe is a News Analyst and Author at Empire Weekly. He is an MBA aspirant and a finance enthusiast. He is a firm believer of “Quality over quantity”, strives towards improving himself every day, and is always eager to learn. He is an incredibly analytical person, yet his desire to explore his creative side led him to work in content writing and development. Amongst his peers, he is known for his punctuality, discipline, and reliability. He aspires to become a successful investor and tackle bigger responsibilities and challenges. Some of his hobbies involve playing football, listening to music, and weight training.

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