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What is a Bond? Types of Bonds

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Bond

Bond is a financial instrument issued by companies or government bodies. These are purchased by all types of investors to secure higher returns on the basis of prices and yield factor. The various types of bonds are government bonds, corporate bonds, zero coupon bonds, junk and tax-saving bonds

If you have taken a decision of investing in bonds, then it is obviously a good decision. But as there are various bonds in the Indian investment market, selection of the most appropriate bond can be confusing for you. For that, you must know each and every type of bonds, its characteristics, advantages and risks involved.

Classification of bonds is done as per issuer, redemption, coupon rates, etc. Let us describe these various types of bonds in detail.

Government bonds

On the basis of issuer, bonds can be classified as government and corporate bonds Government bonds are issued by the government bodies in India. These bonds are available at a fixed rate. Intermediaries are also involved in this issue known as investment bankers. But the minimum investment to be made is considerably high. Hence, retail investors face difficulty in buying these bonds.

Corporate bonds

These bonds are issued by the companies. The safety element is less as compared to that of government bonds. This is due to the reasons like market volatility and industrial fluctuations.

Zero Coupon bonds

The word zero denotes to the interest rate or coupon rate. In simple terms, these bonds are not attached with any specific interest or coupon rate. The offer is made at the discounted rate of the face value of the bonds. When the bonds are matured, investors are provided with the face value. The profit results due to the difference between both the values.

Junk bonds

Some companies are not stable in terms of financial resources. They earn profit for two or three months, and in the next month, they suffer from a financial loss. But such companies are also subject to issuance of bonds. These are known as junk bonds. It is easy to grade that the grade offered to these bonds is not high. It contains high amount of risk factor. If you are investing in such bonds, you must be alert about the risks. You may get an opportunity to purchase these bonds without any difficulty. But later, you may get in a tight spot when you need your money back. The companies attract the investors by offering higher rates of investment return. Be careful about these bonds. It is recommended to do a detailed analysis about the future of these companies.

Tax-saving Bonds

Generally, you need to pay tax on the profit earned from investments in bond market. But you have a chance to waive off this interest by purchasing tax-saving bonds. Yes. You get an exemption from paying taxes on the profit earned from investing in these bonds. This exemption is applicable till the completion of maturity period or until you sell your bonds.

Thus, bonds are sound financial instruments for investment. You need to study these types and select a proper one according to your objectives.

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4 COMMENTS

  1. Thank you Ankita. A very easy to go article with crystal clear classification. The bonds are really a good tool and smart investors keeps aside a sufficient amount of money in their portfolio to invest in bonds. I was looking for examples in each category since it gives more clear idea and can be directly correlated with the world. What i wanted to ask was:
    1. Are the above bonds subject to fixed duration period? Can money be collected pre-maturely? Are there any penalties levied in such a case?
    3. Do we need to have Demat account for trading in all the type of bonds mentioned above?

  2. A number of young people today are eager to invest their money in the best possible sources. There are a number of options available for potential investors. Bonds are one such option. One can also choose from a variety of bonds, which are well explained above, as per ones requirements. These will help you enhance your investment portfolio. Good job Ankita!

  3. Bonds seem like a better idea than debentures for my personal life. There is a diversity for me to choose from, and each is a little different in terms of access and profits.
    Would it be best for me to consult an accountant to invest in bonds, or can I do this myself?

  4. I have got a clear Idea about bonds and their possible types. But the Zero coupon bonds could have been explained a little more. I doubt if individuals can buy any type of bonds as investment. Are there any restrictions for this? If so, is it applicable for every type of bonds? Which one is most beneficial for a government employee?

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