How to invest in bonds

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How to invest in bonds

What is bond

Bonds refer to debt instruments that enable an entity to raise funds and fulfil the capital requirement.
Bonds refer to debt instruments that enable an entity to raise funds and fulfil the capital requirement.
Companies sell bonds to finance on-going operations, new projects, or acquisitions. Governments sell bonds for funding purposes and supplement revenue from taxes. When you invest in a bond, you are a debt holder for the entity that is issuing the bond.

Bond represents

Eg:- 7.57 SBI 2037

COUPON RATE

Coupon Rate refers to the periodic interest payments that are made by the issuer to the investor and are expressed as a percentage of the face value. Example: – 7.57%

MATURITY DATE

Maturity Date refers to the date on which the bond matures, or the date on which the borrower has agreed to repay (redeem) the principal amount to the lender. Example:- 23 Sept 2037

PAR OR FACE VALUE

Pay For Face Value: The amount of money that is paid to the bondholders at maturity. Example:- Rs. 100 or Rs. 1000 or Rs. 10 Lakhs etc.

PRINCIPAL

Principle is the amount that has been invested. Example: – Rs. 50 Lakhs

MARKET PRICE

Market Price: The current price the bond is selling for in the market. Example:-Rs. 100.25 or 98.25

CALL OPTION AND CALL DATE

The call option provides the issuer the right to redeem a bond before its maturity date. If interest rates decline, the issuer will prefer to redeem and re-issue the bonds at a lower rate and hence in all likelihood likely to

PUT OPTION AND PUT DATE

investor the right to sell a low coupon-paying bond to the issuer, and invest in higher coupon paying bonds, if interest rates move up. For bonds which are puttable, i.e., bonds which can be redeemed by the investor of such bonds prior to maturity,

Government Securities Bonds

The Government securities bond is a debt instrument that is issued by the central or the state Government of India. Central Government Securities (G-Sec): – In India, Government bonds fall under the category of Government securities (G-Sec) that mainly offer long term investment between 5 to 40 years. State Government Loans (SDL): -Bonds that are issued by the state government are known as State Development Loans.

54EC bonds

54EC bonds or capital gains bonds are one of the best ways to save on long-term capital gain tax. 54EC bonds are the fixed income instruments that provide capital gains tax exemption under section 54EC to investors. A tax deduction is available under section 54EC of the Income Tax Act. Safe and secure: 54EC bonds are AAA rated. Interest: Interest on 54EC bonds is taxable. No TDS is deducted on interest. Tenure: 54EC bonds come with a lock-in period of 5 years (effective from April 2018) Investment amount: Minimum investment in 54EC bonds is 1 bond amounting to Rs 10000; the maximum investment is 500 bonds amounting to Rs 50 lakhs

Step-up bond

A step-up bond is a bond that pays a lower initial interest rate but includes a feature that allows for rate increases at periodic intervals. The number and extent of the rate increase, as well as the timing, depends on the terms of the bond.

INVIT Bonds

Infrastructure investment trust is investment instruments that work like mutual funds and are regulated by the Securities and Exchange Boards of India. Abbreviated as InvITs, their units are listed on a different trading platforms like stock exchanges and are a wholesome combination of both equity and debt instruments.

Perpetual bond

Perpetual Bond is a bond with no maturity date, therefore allowing it to be treated as equity, not as debt. Issuers pay coupons on perpetual bonds forever, and they do not have to redeem the principal. The issuer of a perpetual bond usually holds the option to call, or redeem, the bond at any point after a specified time, such as five years from the date of issue. Therefore, some issuers of perpetual bonds eventually redeem their bonds. Whereas the Put option on a bond, also known as a put provision, gives the holder the right to demand the issuer pay back the principal before the bond matures.

Tax-free

Tax-free bond is a bond in which interest is fully exempted from the Income Tax and shall not form part of the total Income. Tax-free bonds are considered a low-risk investment opportunity for investors. These bonds constitute a long-term maturity of 10 years or more during issuance. The money collected by the government from these bonds is usually invested in infrastructure and housing projects.

Convertible bond

A convertible bond can be described as corporate hybrid debt security that features both debt and equity components. A convertible bond allows the purchaser a right or an obligation to convert the bond of issuing company into shares The conversion option means you or the company can choose instead to turn your bond into shares of its stock, which can offer you great upside potential

Plain vanilla bond

A plain vanilla bond is the most basic type of bond, wherein when an investor buys a bond, there is a fixed coupon payment at pre- determined fixed intervals, and the maturity of the bond is also pre-determined. Furthermore, the face value of the bond is also predetermined, and the issuer redeems the bond at face value on the date of maturity.

State Guaranteed Bonds

State-guaranteed bonds are issued and guaranteed by the government, which gives regular interest and on maturity repay the principal amount and interest.