Understanding Bonds – Part4

Today we will discuss about different types of bonds. In India, there are several types of bonds available to investors, including ones that are only sold privately and a tax-savings bond that releases the investor of a tax burden.


Public Sector Undertaking Bonds (PSU Bonds):


If you're looking for a medium- to long-term investment in the Indian bond market, a Public Sector Undertaking bond can be a good choice. PSUs are issued and backed by the government of India, but they are usually sold on a private basis. The Indian government targets investors themselves and offers the bonds to these isnvestors at fixed rates.


Corporate Bonds:


A company can issue bonds just as it can issue stock. Large corporations have a lot of flexibility as to how much debt they can issue: the limit is whatever the market will bear.These are more traditional bond instruments, which are offered by private corporations in India for terms that can last up to 15 years. Corporate bonds are characterized by higher yields because there is a higher risk of a company defaulting than a government. The upside is that they can also be the most rewarding fixed-income investments because of the risk the investor must take on. The company's credit quality is very important: the higher the quality, the lower the interest rate the investor receives. There are two other of corporate bond. One is convertible bond which the holder can convert into stock, and the other is callable bond which allow the company to redeem an issue prior to maturity.

Financial Institutions and Banks :


Bonds issued by financial institutions and banks in India are a vibrant financial instrument and make up more than 80 percent of the bond market. Bonds issued by financial institutions and banks are regulated well and come with good bond ratings. Large-scale investors are some of the most important investors in this category.


Emerging Markets Bonds:


These bonds, issued by the Indian government, are issued abroad as hard currency to raise capital for economic development. What's different about these bonds is that they are usually issued in U.S. dollars or the Euro, which can make them more attractive to investors in those countries. Also making these EM bonds attractive is the interest rate, which while high is typically paid by the issuer. The risk comes in that countries like India have a lower credit rating and the success of the bonds is tied to the success of the country's economic development.

Tax-Savings Bonds:


The Indian government issues special bonds that allow its citizens to be either partially or fully released from paying taxes. Most of them are issued by India's Reserve Bank. The upside for the investor is that by purchasing this bond, they are released from paying taxes on the related interest income, as long as they hold the bond until it matures.


Zero-coupon Bond:


This is a type of bond that makes no coupon payments during the holding period but instead is issued at a considerable discount to par value. For example, let's say a zero-coupon bond with a Rs 1,000 par value and 10 years to maturity is trading at Rs 600; you'd be paying Rs 600 today for a bond that will be worth Rs 1,000 in 10 years.

Regards,

Arvind Trivedi

Certified Financial Planner