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When companies or other entities need to raise money to finance new projects, maintain ongoing operations, or refinance existing debts, they may issue bonds directly to investors instead of obtaining loans from a bank. The indebted entity (issuer) issues a bond that contractually states the interest rate that will be paid and the time at which the loaned funds (bond principal) must be returned (maturity date). The interest rate, called the coupon rate or payment, is the return that bondholders earn for loaning their funds to the issuer.
The issuance price of a bond is typically set at par, usually Rs100 or Rs1,000 face value per individual bond. The actual market price of a bond depends on a number of factors including the credit quality of the issuer, the length of time until expiration, and the coupon rate compared to the general interest rate environment at the time.
Corporate bonds:
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.
Convertible bonds:
They can be converted into a pre-defined number of stocks as and when required by the investor.Â
Non-Convertible bonds:
Non-convertible bonds are just plain bonds.
Government bonds:Â
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.Â