Bonds

A bond is a debt instrument in which enables people to participate in lending to a company or the Government. A Government or a company may issue a  to the public to help fund projects when they don’t have enough cash on hand ,they issue bonds and  promise to repay the principal they act as external sources of funds to finance long-term investments .In the case of government issued bonds  they are issued to finance current expenditure.Bond can be thought of as being  similar to getting a personal loan from a bank but t in this case you are the lender (known as the investor or creditor) and the borrower is generally a government or corporation (known as the issuer).

The issuer of the bonds promises to make regular interest payments to the investor at a specified rate called the coupon rate or at a floating rate on the amount it has borrowed  until a specified date called the maturity date. After the bond matures the issuers pays back the face value amount and the payment of interest stops.As the interest payments are made generally at set periods of time and usually at a fixed rate,they are fairly predictable and therefore bonds are often called as fixed-income securities.

The bonds can usually trade able in the secondary market.The market price of a trade able bond will be influenced by the quality of the bond and the yield they will produce in their term,their maturity , price and the coupon rate.They are usually traded over the counter as their is a very wide variety of bonds.Over the counter means that they are sold from broker to broker rather than price being floated in a exchange.

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Bonds are considerably different from the stocks.The holder of a bond is a creditor while holder of stocks is  an investor and is a part owner of the corporation,so their is no profit sharing and voting rights to the bondholders. While stocks are usually issued by companies the bonds are issued by both companies and the government.The rate of income are usually fixed and guaranteed in bonds but the returns in stock depends upon the performance of the company.

The returns of bonds can be quite low in comparison to stock market under bullish conditions but then havoc hits the markets these can be quite effective and most people regret not holding them.Government bonds are the safest and you can be sure of getting you capital back in almost at any condition.

REASONS TO INVEST IN BOND

•  If you wish to maintain a specific and steady  rate of income in your portfolio high quality bonds are must  as they provide a series of predictable cash flows with minimal risk to your invested capital.
• Bonds can serve as a key element to diversify the portfolio.Bond acts as a safety net and adding a fixed rate bond brings diversification to a portfolio with only equity, Diversification is important as since even if one class declines in value there still will be an opportunity for an increase in one or more of the other classes.
• Bonds provide you with a wide range of option regarding the coupon rates and maturity dates are available for you to choose from so this allows you to find the bonds with cash flows that match your requirement.
• Sometimes bonds are just the only decent option when compared to interest provided on deposits by banks.So anyone who has a saving  and doesn’t  need the money in the short term can invest into bonds which will give you a relatively better return without posing too much risk.
• Bonds are often liquid and is often fairly easy for an institution to sell a large quantity of bonds without affecting the market price much.It is quite difficult with equities as if a lot is being sold at once the share prices can plunge a lot. Bonds are attractive because of the  certainty of a fixed interest payment twice a year and a fixed lump sum at maturity.

So the next time you are thinking about doing a fixed deposit please do consider bonds or debenture as a option.In India the terms bonds and debenture are interchangeable and mean the same.