Essentials of Bond Market You Need To Know

In this blog, we would attempt to enable our readers to become well versed with the concept of Bonds.

Bonds are those financial instruments which are utilized by the organizations for raising the required amount of financial capital. The concerned organization uses it as a financial contract wherein it assures the lenders to make the payment of the principal on maturity date and the periodic interest amounts. However, not all the bonds accrue the interest to the investor.

Bonds can be classified into various types. They can basically be differentiated on the basis of multiple parameters including the anticipated interest rates and the maturity period.

Let’s understand about the different types of bonds available in the market:

1. Public Sector Undetaking Bonds - PSU are medium and long term obligations issued by public sector companies in which the government has a share holding, generally greater than 51%. Some PSU Bonds carry tax exemptions. The minimum maturity is 5 years for taxable bonds and 7 years for tax-free bonds. PSU bonds are generally not guaranteed by the government and are in the form of promissory notes transferable by endorsement and delivery.

2. Corporate Bonds - These are types of debt instruments that a firm issues and then sells to an investor. Through this exchange, the company gets the cash it needs for capital or a venture and the investor or the buyer is paid a predetermined number of interest payments at a fixed or variable rate of interest. Upon maturity of this coporate bond, the payments stop and the principal sum is returned to the investor. The guarantee for the bond is generally the ability of the firm to repay depending on revenues and profitability.

3. Financial Institutions and Banks - Financial institution bonds are a type of fidelity bonds i.e they work as insurance for your business. They serve the purpose of protecting the investor’s finance related company against different illegal acts the employees may engage in. They are sometimes referred to as bankers blanket bonds, and Banks and other financial institutions generally obtain these bonds in order to protect themselves in cases of employee theft, forgery, and other types of dishonesty.

4. Emerging Markets Bonds - Emerging market bonds are the bonds issued by the governments or corporations of the world’s developing nations. These bonds are seen as being higher-risk since smaller countries have been perceived as more likely to experience sharp economic changes, political unrest, and other disruptions that are not usually found in countries with more established financial markets. Since investors need to be compensated for these added risks, developing countries have to offer higher returns than the more developed nations.

5. Tax Savings Bonds - These types of bonds are issued by the government to help individuals save tax, under the Income Tax Act. Individuals can earn a certain interest on them with a special provision in the Income Tax Act providing tax benefits on these investments. Tax Saving Bonds have a minimum lock-in period of 5 years, making them mid to long term investment tools.

After becoming familiar with the defining characteristics and diverse categories of bonds, the knowledge of our readers would definitely remain incomplete without understanding certain mechanisms through which Bond Performance can be adjudged.

In order to make the task easier for our readers, we are sharing a brief list of the key factors that have an implication on the Bond Performance:

● Price of the Bond

● Expected Rate of Interest

● Maturity Period of the Bond- If a bond has a longer maturity, it leads to greater interest rate risk.

● Norms during Redemption of the Bond- A special provision that allows the issuer to redeem the bond at a specific price before the maturity date is called Call Provision. It provides higher rate of interest to the bond holder.

We hope our blog would serve as a useful source of information for our curious readers.