A bond is a debt investment in which an investor loans money to an entity (typically corporate or governmental) which borrows the funds for a defined period of time at a variable or fixed interest rate. Bonds are used by companies, municipalities, states and sovereign governments to raise money and finance a variety of projects and activities. Owners of bonds are debtholders, or creditors, of the issuer. Investing in bonds can yield high returns, but the sheer variety available in the market can be confusing. Knowing the types of bonds will help you decide which one to pick. While there are many other types of bonds available in the market, the ones mentioned below are some of the most common ones in India.
Government bonds : These kinds of bonds are issued and backed by the Government of India. In other words, the Indian government offers investors bonds at a fixed rate. The government also employs an investment banker, whose main responsibility is to serve as a middleman. However, it is difficult for retail individuals to invest directly in these bonds as the minimum investment amount is very high.
Corporate bonds : These bonds are offered by corporate houses and are open to everyone. However, these bonds are not as safe as government bonds as the issuing companies are subject to market volatility, industry ups and downs, etc.
Zero coupon bonds : Usually, most types of bonds are offered at a fixed interest rate. However, zero coupon bonds do not come with any specific coupon rate or interest rate. They are offered at a discount on the face value, and on maturity, investors get the face value back. The difference between the two is the profit.
Junk bonds : These bonds are issued by companies that are financially not very stable. These bonds are considered below the investment grade. Since it is a risky trade for an investor to put money in such bonds, the issuing company usually offers a high rate of return.
Tax-saving bonds : By investing in this type of bond, you receive the exemption from paying taxes on the interest income as long as you hold the bond or until its period of maturity.

8% GOI Taxable Bonds

Taxable 8% Savings Bonds, 2003 are issued by Government of India with effect from 21st April 2003
Eligibility for Investments - The Bonds may be held by

• An individual, not being a Non-Resident Indian
• In his or her individual capacity
• In individual capacity on joint basis
• In individual capacity on anyone or survivor basis
• On behalf of a minor as father/mother/legal guardian
• A Hindu Undivided Family (HUF)
• 'Charitable Institution' to mean a Company registered under Section 25 of the Indian Companies Act 1956
• An institution which has obtained a Certificate of Registration as a charitable institution in accordance with a law in force.
• An institution which has obtained a certificate from Income Tax Authority for the purposes of Section 80G of the Income Tax Act, 1961.
• "University" means a university established or incorporated by a Central, State or Provincial Act, and includes an institution declared under section 3 of the University Grants Commission Act, 1956 (3 of 1956), to be a university for the purposes of that Act.

Limit of Investment

There will be no maximum limit for investment in these Bonds.

Nomination

A sole holder or a sole surviving holder of a Bond, being an individual, may nominate one or more persons who shall be entitled to the Bond and the payment thereon in the event of his/her death.

Advances/Tradability against Bonds

The Bonds shall NOT be tradable in the secondary market and cannot be offered as collateral for loans from banks, financial Institutions and Non Banking Financial Companies, (NBFC) etc.

Transferability

The Bond in the form of Bond Ledger Account shall NOT be transferable.

Tax Treatment

Interest income from the Bonds is taxable. TDS is deducted at the time of interest payment as per the prevailing IT Rules.

Interest

• The bond will be issued the cumulative and non-cumulative form, at the option of the investor.
• The Bond will bear interest at the rate of 8% per annum. Interest to the holders opting for non-cumulative Bonds will be paid the date of issue up to 31st July/31st January, as the case may be and thereafter at half-yearly the period ending 31st July/31st January on 1st August and 1st February.
• Interest on cumulative bonds will be compounded with half-yearly rests and will be payable on maturity along with the principal. The maturity value of the Bonds shall be Rs.1601/- (being principal and interest) for every Rs.1,000/-(Nominal). Interest on Bond in the form of “Bond Ledger Account” will be paid, by cheque / warrant or through ECS credit to bank account of the holder as per the option exercised by the investor/holder.

Repayment

• The Bonds shall be repayable on the expiry of 6 (Six) years from the date of issue.
• No interest would accrue after the maturity of the bond.

Capital Gain Bonds

Capital Gain Bonds are instruments offering you tax exemption for transferring gains of long term capital assets. As per provisions of Income Tax Act, 1961, any long term capital gains arising from transfer of any capital asset would be exempt from tax under Section 54 EC of the Act if :

• The entire capital gain realized is invested within 6 Months of the date of transfer in eligible bonds
• Such investment is held for 3 Years
• To avail of capital gain exemption, the bonds so acquired cannot be transferred or converted into money or any loan or advance can be on security of such bond with 3 years from date of acquisition else, the benefit would be withdrawn.
• If the amount invested in bonds is less than the capital gains realized, only proportionate capital gains would be exempt from tax.

Breaking Down Bond

Bonds are commonly referred to as fixed-income securities and are one of the three main generic asset classes, along with stocks (equities) and cash equivalents. Many corporate and government bonds are publicly traded on exchanges, while others are traded only over-the-counter (OTC).

Characteristics of Bonds

• Most bonds share some common basic characteristics including
• Face value is the money amount the bond will be worth at its maturity, and is also the reference amount the bond issuer uses when calculating interest payments.
• Coupon rate is the rate of interest the bond issuer will pay on the face value of the bond, expressed as a percentage.
• The coupon dates are the dates on which the bond issuer will make interest payments. Typical intervals are annual or semi-annual coupon payments.
• The maturity date is the date on which the bond will mature and the bond issuer will pay the bond holder the face value of the bond.
• Issue price is the price at which the bond issuer originally sells the bonds.

Two features of a bond – credit quality and duration – are the principal determinants of a bond's interest rate. If the issuer has a poor credit rating, the risk of default is greater and these bonds will tend to trade a discount. Credit ratings are calculated and issued by credit rating agencies. Bond maturities can range from a day or less to more than 30 years. The longer the bond maturity, or duration, the greater the chances of adverse effects. Longer-dated bonds also tend to have lower liquidity. Because of these attributes, bonds with a longer time to maturity typically command a higher interest rate.