Bonds
Bonds are investment securities where an investor lends money to a company or a
government for a set period of time, in exchange for regular interest payments.
Once the bond reaches maturity, the bond issuer returns the investor’s money.
When you buy bonds, you’re providing a loan to the bond issuer, who has agreed to
pay you interest and return your money on a specific date in the future.
Types of bonds
GSEC BONDS
A government security (G-Sec) is a tradeable instrument issued by the central government
or state governments. It acknowledges the government’s debt obligations.
SOVEREIGN GOLD BONDS
SGBs are government securities denominated in grams of gold. They are substitutes
for holding physical gold.
ZERO COUPON BONDS
A Zero coupon bond is a debt security that trades at a deep discount, rendering
a profit at maturity, when the bond is redeemed for its full face value.
CORPORATE BONDS
A corporate bond is a type of debt security that is issued by a firm and sold to
investors. The corporate in return pays interest on the same.
Bonds are as important to an investment portfolio today as ever.
Key Benefits of Investing in Bonds
- While many investments provide some form of income, bonds tend to generally offer
reliable cash streams. Even at times when prevailing rates are low (as is the scenario
today) there are still plenty of options (such as high-yield bonds) that investors
can use to construct a portfolio that will meet their income needs.
- Most importantly, a diversified bond portfolio can provide decent yields with a
lower level of volatility than equities. Bonds are, therefore, a popular option
for those who need to live off of their investment income.
- Bonds as a part of investment portfolio also provide steady diversification. Over
time, greater diversification can provide investors with better risk-adjusted returns
(in other words, the amount of return relative to the amount of risk) than portfolios
with a narrower focus.
Limitations of Bonds
Bonds come with limitations that investors should be aware of. Some of the
Limited liquidity
Some Bonds are traded on the recognised
stock exchanges. Despite the same, there is limited volumes and liquidity
in these bonds.
Default risk
In certain cases, companies pose a threat of defaulting on their debt liabilities.
Such defaults by the company in honouring their debt could result in the bond becoming
junk.