In today’s
scenario everyone including governments are looking for raising funds for various
reasons. Funds can be raised by following
1. Make profit by selling a product
for more than it costs to produce. This is the most basic source of funds for
any company and hopefully the method that brings in the most money.
2. Borrow money. This can be done
privately through bank loans, or it can be done publicly through a debt issue.
The drawback of borrowing money is the interest that must be paid to the lender.
3. A company can generate money by
selling part of itself in the form of shares to investors, which is known as equity
funding. The benefit of this is that investors do not require
interest payments like bondholders do. The drawback is that further profits are
divided among all shareholders.
In this
article we will be focusing on Debt Issue/Bonds.
A bond, also known as a fixed-income security, is a debt instrument created for the purpose of
raising capital. They
are essentially loan agreements
between the bond issuer and an
investor, in which the bond issuer is obligated to pay a specified amount of money at specified future dates.
When an investor purchases a bond, they are
"loaning" that money the bond issuer,
which is usually raising money for some project. When the bond matures, the
issuer repays the principal to the investor. In most cases, the investor will
receive regular interest payments from the issuer until the bond matures.
Types of Bonds
1. Government
bonds
These
kinds of bonds are issued and backed by the Governments .In other words, the 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.
2. 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.
3. 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.
4. 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.
5. Tax-saving bonds
By
investing in this type of bond, you receive exemption from paying taxes on the
interest income as long as you hold the bond or until its period of maturity.
While
there are many other types of bonds available in the market, the ones mentioned
above are some of the most common ones in India.
Different types of bonds offer investors different options. For
example, there are bonds that can be redeemed prior to their specified maturity date,
and bonds that can be exchanged for shares
of a company. Other bonds have different levels of risk, which can be
determined by its credit rating.
