What are bonds?
Bonds are issued by companies or governments when they want to raise money from investors. In other words, the bond is simply a loan taken out by a company instead of going to a bank.
The company gets the capital from investors who buy its bonds. In exchange for the bond money, the company pays an interest coupon.
Interest coupon is the annual interest rate paid on bonds based on the bond’s face value.
What are the different types of bonds in India?
1. Government bonds
2. Corporate bonds
3. Public Sector bonds
Government bonds are the securities issued by the central and state government of India to raise funds. A bond is issued by the Government when they are facing a liquidation crisis or require funds for infrastructure development.
Government bonds are the safest bonds to invest your hard-earned since they are regulated and managed by the Reserve Bank of India (RBI).
Government Bonds in India fall under the wide category of government securities (G-Sec) and are primarily used for long-term investment. (5 to 40 years)
Government Bonds can be issued by both the Central and State governments, those issued by State Governments are also called State Development Loans (SDLs).
Initially, G-Sec bonds were available for large investors only such as companies and commercial banks, but now it’s available for small and individual investors also.
What are the different types of Government Bonds (G-Sec) in India?
- Fixed-rate bonds
- Floating Rate Bonds (FRBs)
- Sovereign Gold Bonds (SGBs)
- Inflation-Indexed Bonds
- 7.75% GOI Savings Bond
- Bonds with Call or Put Option
- Zero-Coupon Bonds
Corporate bonds are the bonds issued by a company when they need capital for future growth or a new project.
Instead of taking a loan from banks or offering shares to the public, the company borrows money from investors.
In exchange for the capital, the company pays a predetermined interest rate on the face value of the bond.
These bonds are considered risky compared to Government Bonds.
Public Sector bonds:
Public Sector bonds are issued by companies where the Central Government is the majority shareholder and the money is required for the purpose of expansion and growth of the company.