A Bond is a debt instrument through which you lend money to an entity, typically a corporation, municipality, state, or sovereign government, for a defined period. In return, the entity offers a fixed or variable interest rate and promises to repay the money (principal) at maturity. These entities use Bonds as financing tools to raise capital for various projects and activities, such as infrastructure development or expanding business operations.
Bonds, including Corporate and Sovereign Gold Bonds, have several key features that make them a unique and valuable investment option. Understanding them lets you make informed decisions and optimises your investment strategy.
- Face value
Face value, also called par value, refers to the nominal value of a Bond as specified by the issuer. For example, Corporate Bonds may have a face value of Rs. 1,000. The face value can differ from the Bond’s market price, which fluctuates based on interest rate changes and market conditions.
- Principal
It refers to the initial amount of money you invest in a Bond. For example, if you invest Rs. 20,000 and receive 20 Bonds, each with a face value of Rs. 1,000, the principal amount would be the total Rs. 20,000 invested. This is the amount that the Bond issuer will repay you upon maturity.
- Coupon rate
The coupon rate also called the interest rate, is the percentage of the Bond’s face value that the issuer pays the Bondholder in interest. According to the Bond’s terms, this interest payment is made periodically, such as monthly, quarterly, semi-annually, or annually.
- Maturity date
The maturity date denotes the date when the Bond issuer is obligated to repay the principal amount to the Bondholder. The maturity period of Bonds can vary widely, ranging from short-term (less than five years), medium-term (five to ten years), and long-term (more than ten years). For example, after eight years, you can invest in the Sovereign Gold Bond scheme and receive your interest and redemption proceeds in your Bank Account.
- Yield to Maturity
Yield to Maturity represents the total annualised return expected if you hold the Bond until maturity. It accounts for the Bond’s current market price, coupon payments, and the time left for it to mature. YTM also factors in the difference between the Bond’s purchase price and its face value, offering a comprehensive measure of the Bond’s potential return.
- Credit quality
The Bond’s credit quality reflects the issuer’s ability to meet the financial obligations. Credit rating agencies provide ratings that enable investors to assess the risk of investing in a particular Bond.
Conclusion
You can invest in high-quality Bonds through various channels: directly from the issuer in the primary market during Bond issuance; through stock exchanges in the secondary market where Bonds are listed and traded; via brokers and financial institutions, with many banks and financial advisors offering Bond investment services; and through online platforms that facilitate the purchase and sale of Bonds.
