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.
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.
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.
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.
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.
Recommended Read :
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- Coupon Bond Market
- What are Infrastructure Bonds?
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- What is Clean Price Clean Price Vs Dirty Price?