Bonds

Various entities can issue bonds to raise capital. These include:

1️⃣ Governments:

• National governments (e.g., U.S. Treasury bonds, Indian government bonds) issue bonds to fund public projects, manage debt, or finance deficits.
• State and local governments (municipal bonds) issue bonds for local infrastructure projects like roads, schools, or utilities.

2️⃣ Corporations:

• Companies issue corporate bonds to raise funds for expansion, acquisitions, or capital expenditures. These bonds can offer higher yields due to higher risk compared to government bonds.

3️⃣ Government Agencies:

• Agencies or authorities (e.g., Fannie Mae in the U.S., National Housing Bank in India) issue bonds to fund specific government-backed programs, like housing or infrastructure development.

4️⃣ International Organizations:

• Entities like the World Bank or International Monetary Fund (IMF) issue bonds to fund global development initiatives or to support various countries.

5️⃣ Special Purpose Entities:

• Sometimes, companies create specific entities (such as asset-backed securities or mortgage-backed securities) to issue bonds and raise funds backed by specific assets or loans.

The key features of a bond in Indian currency are:

1️⃣ Face Value (Par Value): The amount the bond issuer agrees to repay the bondholder at maturity. It's typically ₹1,000 or its equivalent in local currency.

2️⃣ Coupon Rate: The interest rate the bond pays annually or semi-annually, expressed as a percentage of the bond's face value. For example, a 5% coupon rate on a ₹1,000 bond would result in annual interest payments of ₹50.

3️⃣ Coupon Payment: The periodic payments made by the issuer to the bondholder, usually paid annually or semi-annually. These are based on the bond’s coupon rate.

4️⃣ Maturity Date: The date when the bond matures, and the issuer must repay the face value to the bondholder. Bonds can have short-term (1-5 years), medium-term (5-10 years), or long-term (10+ years) maturities.

5️⃣ Issuer: The entity that issues the bond (e.g., a government, corporation, or agency) to raise funds. The issuer is responsible for making interest payments and repaying the principal at maturity.

6️⃣ Yield: The bond's effective return, which can differ from the coupon rate. It factors in the bond's market price, interest payments, and the time remaining until maturity.

7️⃣ Credit Rating: Bonds are rated by agencies (like CRISIL, ICRA) based on the issuer's creditworthiness. Higher ratings indicate lower risk, while lower ratings indicate higher risk and potential for higher yields.

Yield to Maturity (YTM) is the total return an investor can expect to earn if a bond is held until its maturity date. It takes into account the current market price, coupon payments, and the face value that will be repaid at maturity. YTM is expressed as an annualized percentage rate and assumes that all coupon payments are reinvested at the same rate as the YTM.

Bonds can be classified into various categories:

1️⃣ Government Bonds: Issued by national governments, low-risk (e.g., Indian government bonds).
2️⃣ Municipal Bonds: Issued by local governments, often tax-exempt (e.g., city bonds).
3️⃣ Corporate Bonds: Issued by companies, higher risk (e.g., Reliance bonds).
4️⃣ Convertible Bonds: Can be converted into company shares.
5️⃣ Zero-Coupon Bonds: No interest payments, issued at a discount.
6️⃣ High-Yield (Junk) Bonds: High risk, high return, issued by low-credit companies.
7️⃣ Inflation-Linked Bonds: Interest linked to inflation (e.g., India’s inflation-indexed bonds).
8️⃣ Floating Rate Bonds: Interest rates fluctuate with market rates.
9️⃣ Callable Bonds: Can be redeemed early by the issuer.
🔟 Perpetual Bonds: No maturity date, interest paid indefinitely.
1️⃣1️⃣ Foreign Bonds: Issued by foreign entities in a local market.
1️⃣2️⃣ Asset-Backed Securities (ABS): Backed by assets like loans or mortgages.

Fixed Rate Bonds:

• Interest Rate: The interest (coupon) rate is set at issuance and remains constant throughout the bond’s life.
• Predictability: Investors know exactly how much interest they will earn, making them more stable and predictable.
• Risk: Interest rate risk if market rates rise, as the bond's fixed rate becomes less attractive.

Floating Rate Bonds:

• Interest Rate: The interest rate is variable and typically linked to a benchmark rate (e.g., LIBOR, RBI repo rate).
• Adjustability: The interest rate adjusts periodically (e.g., every 6 months or annually), depending on market conditions.
• Risk: Lower interest rate risk since the bond's coupon adjusts with market rates, but the yield may vary.

Callable Bonds:

• Issuer’s Option: The issuer has the right to redeem (call) the bond before its maturity date, usually when interest rates fall.
• Risk to Investors: The bond may be called early, and the investor may not be able to reinvest the principal at the same attractive rate.
• Benefit to Issuer: Allows the issuer to refinance debt at a lower interest rate.

Puttable Bonds:

• Investor’s Option: The bondholder has the right to sell (put) the bond back to the issuer before maturity, typically at face value.
• Risk to Issuers: The issuer might have to redeem the bond early, especially if interest rates rise, potentially increasing their cost of borrowing.
• Benefit to Investors: Offers protection against rising interest rates and allows investors to exit if market conditions worsen.

Investing in bonds offers several benefits:

1️⃣ Stable Income: Bonds provide regular interest payments (coupons), offering a predictable income stream.

2️⃣ Capital Preservation: Bonds, especially government and high-quality corporate bonds, are considered safer investments, protecting the principal amount if held to maturity.

3️⃣ Diversification: Adding bonds to an investment portfolio helps reduce overall risk by balancing more volatile assets like stocks.

4️⃣ Lower Risk: Bonds are generally less volatile than stocks, making them suitable for conservative investors or those nearing retirement.

5️⃣ Inflation Protection: Certain bonds, like inflation-linked bonds, help protect against inflation by adjusting payments with inflation rates.

6️⃣ Tax Benefits: Municipal bonds may offer tax exemptions on interest income, depending on your location.

7️⃣ Predictable Returns: With fixed-rate bonds, you know the interest income and principal repayment in advance, providing certainty.

You can invest in bonds through the following methods:

1️⃣ Direct Purchase:

• Government Bonds: You can buy government bonds directly through platforms like RBI’s Retail Direct Scheme in India or via the government's bond auctions.
• Corporate Bonds: Purchase directly from companies during bond issuances, often through brokers or investment banks.

2️⃣ Bond Funds or ETFs:

• Bond Mutual Funds: These funds pool money from multiple investors to invest in a variety of bonds, providing diversification.
• Bond ETFs (Exchange-Traded Funds): Like bond mutual funds but traded on stock exchanges, offering liquidity and lower costs.

3️⃣ Brokerage Accounts:

• Stockbrokers or online platforms allow you to buy and sell individual bonds (government, corporate, municipal, etc.) in the secondary market.

4️⃣ Fixed Deposit (FD) for Bonds:

• Some banks offer bond-linked fixed deposits where the returns are linked to bond yields, providing a safer, fixed-income option.

6️⃣ Bond Exchange Platforms:

• Online platforms like BSE Debt Platform or NSE Debt Market in India allow you to buy and sell bonds in the secondary market.

Yes, you can sell bonds before maturity. When you sell a bond before its maturity date, you're selling it in the secondary market, and the price you receive will depend on factors such as:

1️⃣ Interest Rates: If interest rates have risen since you bought the bond, the price of the bond will likely have fallen. Conversely, if interest rates have decreased, the bond price may have increased.

2️⃣ Credit Rating: If the issuer’s credit rating has worsened, the bond's price might decrease, while an upgrade in the issuer's rating could raise the price.

3️⃣ Market Demand: Bonds with higher demand or better liquidity tend to sell for a higher price, while those with lower demand may be harder to sell or sold at a discount.

4️⃣ Type of Bond: Some bonds, like callable bonds, may be redeemed early by the issuer, while others, like putable bonds, allow the bondholder to sell back to the issuer before maturity.

You can sell bonds through a brokerage account, bond exchange platforms like BSE Debt Platform or NSE Debt Market, or a financial advisor. Keep in mind that selling before maturity could result in a capital gain or loss, depending on market conditions.

Investing in bonds carries several risks, including:

1️⃣ Interest Rate Risk:

• When interest rates rise, the price of existing bonds typically falls, and vice versa. This is especially a concern for long-term bonds.

2️⃣ Credit Risk (Default Risk):

• If the bond issuer faces financial trouble, it may default on its payments, leading to a loss of principal and interest. This is higher with corporate bonds and lower-rated issuers (junk bonds).

3️⃣ Inflation Risk:

• Inflation erodes the purchasing power of future bond payments. Fixed-rate bonds are especially vulnerable, as their interest payments remain the same despite rising prices.

4️⃣ Liquidity Risk:

• Some bonds, particularly those issued by smaller companies or in niche markets, may not have a ready market for resale, making it difficult to sell them quickly without a significant price discount.

5️⃣ Reinvestment Risk:

• If interest rates decline, the income you earn from your bond may be reinvested at a lower rate, reducing overall returns.

6️⃣ Call Risk:

• Callable bonds may be redeemed by the issuer before maturity, usually when interest rates decline, forcing you to reinvest the principal at lower rates.

7️⃣ Currency Risk (for Foreign Bonds):

• If you invest in bonds issued by foreign entities, fluctuations in exchange rates can affect the value of your investment and returns.

In the context of bonds, "seniority" refers to the priority or rank of a bond in the event of the issuer's liquidation or bankruptcy. Seniority determines the order in which bondholders are paid if the issuer defaults or is liquidated.

Here are the key levels of seniority:

1️⃣ Senior Bonds:

• These are the highest-ranking bonds and have priority over other debt holders when it comes to repayment.
• In the event of liquidation, senior bondholders are paid first from the issuer's remaining assets.

2️⃣ Subordinated Bonds (Junior Bonds):

• These bonds are lower in the priority hierarchy and are repaid after senior bondholders in case of liquidation.
• They offer higher interest rates to compensate for the increased risk of lower repayment priority.

Yes, you can take a loan against your bond holdings by pledging them as collateral. The loan amount is typically a percentage of the bond's market value, and the interest rates tend to be lower since the loan is secured. Government and high-quality corporate bonds are more likely to be accepted, while lower-rated bonds may attract lower loan amounts. If you default, the lender can sell your bonds to recover the loan.