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.
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
There will be no maximum limit for investment in these Bonds.
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.
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.
The Bond in the form of Bond Ledger Account shall NOT be transferable.
Interest income from the Bonds is taxable. TDS is deducted at the time of interest payment as per the prevailing IT Rules.
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 :
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).
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.