Bonds
What Are Bonds?
Bonds are fixed-income instruments that represent a loan made by an investor to a borrower—typically a corporation or government. When you buy a bond, you’re essentially lending money in exchange for regular interest payments (called coupons) and the return of the principal at maturity.
- Issuer: The entity borrowing money (e.g., government, corporation)
- Face Value: The amount repaid at maturity
- Coupon Rate: The interest paid annually or semi-annually
- Maturity Date: When the bond expires and the principal is repaid
Bonds are often used to diversify portfolios, generate steady income, and preserve capital.
Types of Bonds
| Type | Issuer | Features |
|---|---|---|
| Government Bonds | Central/State Governments | Low risk, tax benefits (e.g., RBI Bonds, Sovereign Gold Bonds) |
| Corporate Bonds | Private/Public Companies | Higher yield, credit risk varies by issuer rating |
| Municipal Bonds | Local Authorities | Used for infrastructure, may offer tax exemptions |
| Convertible Bonds | Corporations | Can be converted into equity shares |
| Zero-Coupon Bonds | Any | No periodic interest; sold at discount, redeemed at face value |
| Inflation-Linked Bonds | Government | Coupon and principal adjusted for inflation |
| Perpetual Bonds | Corporations/Governments | No maturity date; pays interest indefinitely |
Risks in Bond Investing
While bonds are generally safer than stocks, they’re not risk-free. Here’s a snapshot of key risks:
| Risk Type | Description |
|---|---|
| Interest Rate Risk | Bond prices fall when interest rates rise |
| Inflation Risk | Rising inflation erodes purchasing power of fixed interest payments |
| Credit Risk | Issuer may default on payments |
| Liquidity Risk | Difficulty selling the bond without affecting its price |
| Reinvestment Risk | Coupons may need to be reinvested at lower rates |
| Call Risk | Issuer may redeem the bond early, affecting returns |
| Market/Systematic Risk | Broad market movements can impact bond prices |
| Rating Risk | Downgrades in credit rating can reduce bond value |
Who should consider the Bonds?
Bonds can be a powerful tool in your financial strategy—especially when chosen with care. For someone like you who benchmarks investments and seeks clarity through data, bonds offer a predictable income stream and a hedge against volatility. But understanding the nuances of risk and structure is key to optimizing returns.
Want to dive deeper into bond yield calculations or compare bonds vs. mutual funds for yourself?