What are bonds?
Bonds are financial instruments or debt securities issued by governments, companies, and other entities to raise funds from investors. When an investor buys a bond, they are essentially loaning money to the issuer in exchange for regular interest payments over a specified period. The issuer is obligated to repay the loan at the end of that period. Bonds can be used by corporations and governments as part of their financing strategy and are generally seen as low-risk investments since they’re backed by the full faith and credit of the issuer.
How bonds are priced in India?
Bond pricing in India is determined by several factors such as risk-return profile, economic circumstances, and market demand. One key factor commonly used to determine the price of a bond is its credit rating; bonds with strong credit ratings usually have higher prices than other bonds. Other than that, the current inflation rate, exchange rate, and liquidity conditions also have significant impacts on the price determination of bonds. For example, when the interest rates are high, investors tend to look for better returns which increases demand. On the flip side, an increase in supply generally leads to reduced prices. All of these play an important role in determining the pricing of bonds in India.
Categories of Bonds
Bonds are a popular investment option for those who seek a more secure and steady form of income. In India, there are three main types of bonds to choose from: Corporate bonds are issued by companies to raise funds for business operations or capital expenditure, while municipal bonds are issued by state and local governments to finance public projects, such as bridges and roads. Government bonds include Treasury securities such as Treasury bills, notes, or bonds, which are backed by the full faith and credit of the Indian government and issued to raise money for their own needs.
What are the two main types of bonds?
Tax-free bonds in India are government-issued securities that allow investors to earn a fixed rate of interest over the life of the bond, without having to pay taxes on the interest earned. These bonds are typically issued by state and central governments and offer investors a source of income with minimal risk.
Capital Gain Bonds
Capital gain bonds are a type of financial instrument that provides investors with the opportunity to benefit from capital gains tax relief. They are issued by the Government of India and have a maturity period of 7 years. Capital gain bonds can be bought from any authorized bank, primary dealer, or scheduled commercial bank in India.