Bond Market Introduction

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.