Bonds

A bond is a fixed income investment in which an investor loans money to an entity (typically corporate or governmental) which borrows the funds for a defined period of time at a variable or fixed interest rate. Bonds are used by companies, municipalities, states and sovereign governments to raise money and finance a variety of projects and activities. Owners of bonds are debt holders, or creditors, of the issuer.

Different kinds of Bonds

• Corporate Bond                                                                                                                        Corporate bonds are issued by corporations to raise capital. They are safer than equities. The bondholders get a specified return every period. These bonds can be of two types-
  
  
  1. Convertible bonds
  They can be converted into a pre-defined number of stocks as and when required by the investor.
  2. Non-Convertible bonds
  Non-convertible bonds are just plain bonds.

• Government Bond
  Government bonds are issued by Government to finance their activities. In India, the Government bond market size is much larger than the corporate bond market size. They are also known as G-Sec. The bonds’ return depends on the prevailing interest rate. Usually, Government bonds pay a return of 7% to 10%. The maturity can be anywhere between 3 months to 30 years. To buy a government debt is a low-risk activity as long as you deal with the government itself or some other reputable institution.

• PSU Bond
  PSU bonds are medium and long term obligations issued by public sector undertakings. PSU bonds issue is a phenomenon of the late 1980s when the Central Government stopped / reduced funding to PSUs through the general budget. PSUs float bonds in the primary market to raise funds. PSUs borrow funds from the market for their regular working capital or capital expenditure requirement by issuing bonds. The market for PSU bonds has grown substantially over the past decade. All PSU bonds have a built in redemption and some of them are embedded with put or call options. Many of these are issued by infrastructure related companies such as railways and power companies, and their sizes vary widely from Rs.10-1000 crore. PSU bonds have maturities ranging between five and ten years. They are issued in denominations of Rs.1,000 each.The majority of PSU bonds are privately placed with banks or large investors.

• Municipal Bond
  A municipal bond is a debt security issued by a state, municipality to finance its capital expenditures, including the construction of highways, bridges or schools. Municipal bonds are exempt from federal taxes and most state and local taxes, making them especially attractive to people in high income tax brackets. 

Bonds Credit Ratings

Investment grade issuer credit ratings are those that are above BBB- or Baa. The exact ratings depend on the credit rating agency.

For Standard & Poor’s, investment grade credit ratings include. AAA, AA+, AA, and AA-. Companies that have credit ratings in this category have a very high capacity to repay their loans, with AAA rated companies having the highest capacity to repay.

The next category down includes companies with A+, A, and A- ratings. These are companies that have a strong capacity to repay their financial commitments. These companies are currently stable and easily able to repay their debts, but could face challenges if economic conditions deteriorate. The bottom tier of investment grade credit ratings includes BBB+, BBB, and BBB-. These companies are considered "speculative grade" and are vulnerable to changing economic conditions and could face big challenges if economic conditions decline. When rated, however, these companies have demonstrated both the capacity and capability to meet their debt payment obligations.

Debentures

A debenture is a type of debt instrument that is not secured by physical assets or collateral. Debentures are backed only by the general creditworthiness and reputation of the issuer. Both corporations and governments frequently issue this type of bond to secure capital. Like other types of bonds, debentures are documented in an indenture.

Types of Debentures