Bond Meaning
When you buy a bond, you lend money under a written set of terms. The issuer may be a government, municipal body, bank, or company. Its document tells you how much has been borrowed, what interest is payable, when each payment falls due, and when the principal must be return. You become a creditor once the purchase settles. Ownership of the business remains with shareholders. Bonds appear among financial assets in an investment portfolio. For a business issuer, the borrowing adds debt to its capital structure. The promise is only as dependable as the issuer's ability to pay, which is why the document and current finances need to be read together.
How Bonds Work
Follow the money, and the sequence becomes easier to understand. Every date and amount below comes from the offer document.
- Before the issue opens, the issuer publishes the face value, offer price, coupon terms, maturity date, security cover, and investor rights.
- Applications are sent in for a specified amount. The successful applicants pay up after the allotment is made.
- The allotted security is placed in the investors' dematerialised account. Coupon payments are received on the promised dates.
- On maturity, the principal is returned by the issuer through the redemption method that was disclosed before inviting applications.
Features of Bonds
Face Value is the Reference Figure
Face value is the basis for coupon calculations and final repayment. The issue price will state what the first buyer paid. An offer can be made at face value, above face value or below it.
The Coupon Is Written as a Percentage
A 9% coupon on ₹1,000 works out to ₹90 for the year. The issue terms decide whether that interest arrives in one payment or several installments. For the borrower, the coupon expense contributes to the cost of debt.
Maturity Shows When the Original Term Ends
The maturity date brings the agreed tenure to a close. Redemption terms name the eligible holder, confirm the sum payable and list any paperwork needed before the funds can be released.
Rating and Security Need Separate Checks
A credit rating reflects an agency's current view on the risk of timely payment. It does not ensure that repayment will occur. A downgrade may lower the trading price even if the coupon stays the same. Security cover states the assets available under the terms of the arrangement, and unsecured debt depends on the issuer's overall creditworthiness.
A Listed Bond May Still Be Hard to Sell
Market price starts moving after listing. Higher interest rates can push an older issue below face value because new securities may pay better coupons. Lower rates can support a higher quote. Remaining tenure, credit developments, and buyer demand also affect the price available. Some corporate issues attract little trading, which can complicate an early sale.
Types of Bond
- Fixed-rate bonds: The interest rate resets on designated dates according to a disclosed benchmark plus a spread.
- Floating-rate bonds: The interest rate resets at a frequency specified in the prospectus using a disclosed benchmark and an additional spread.
- Zero-coupon bonds: No interest is paid periodically. The return to the investor is the difference between the discounted purchase value and the redemption amount.
- Convertible bonds: The security can be converted to equity shares at a specified time, price or ratio.
- Callable bonds: Bonds which may be repaid early at times and at a price disclosed prior to their sale.
- Puttable bonds: Bonds where the investor may demand early repayment after stated conditions have been met.
- Perpetual bonds: Bonds with no fixed maturity. Their documents set the coupon obligations and any available redemption route.
Who Issues Bonds
The Union government issues dated securities, and states borrow through State Development Loans. The Reserve Bank of India conducts auctions and deals with the settlement of government securities. Municipal bodies and other local authorities eligible under the securities laws can issue debt for civic infrastructure financing. Companies and public-sector undertakings use it for financing plants and equipment, acquisitions, working capital or refinancing existing obligations. Banks and non-banking financial companies (NBFCs) also borrow from the markets subject to regulations for each category of the industry. These issues direct savings from the financial system to satisfy the public and commercial requirements. A company's corporate finance division usually compares debt with other available methods of capital financing and monitors its impact on the cost of capital before borrowing.
What is Yield to Maturity (YTM)
Yield to Maturity (YTM) answers a practical question: what annual return is built into today's price if every promised payment arrives and the security is held until maturity? Suppose an investor pays ₹940 for an issue with a ₹1,000 face value. The scheduled coupons provide one part of the return, and the extra ₹60 received at redemption provides another. The calculation combines both parts, accounts for the remaining tenure, and expresses the result as a yearly rate. Buying below face value can place this estimate above the coupon rate. A premium purchase can lower it. The calculation is based on all payments being made on time and interim coupons being reinvested at the same rate. Selling before maturity, a late payment or reinvestment at a different rate will affect the total actually received.
