What is Bond?

What is Bond?

Bonds are considered very safe for investment :-

The return from a bond is called the yield. A bond’s yield and its value are inversely related.
Bonds are a means of raising money for the company and the government. Money raised from bonds comes under the category of debt.

The company raises money from bonds from time to time to expand its business. The government also takes loans to meet the gap between income and expenditure. She takes this loan through bonds. The bonds issued by the government are called government bonds.

Bonds

Bonds are considered very safe if seen from an investor’s point of view. Especially government bonds are very safe. The reason is that they are guaranteed by the government. The bonds of the company are secured according to its financial position.

This means that if the company’s financial position is sound, then its bonds will also be safe. If the financial position of the company is not good, its bonds are not considered good from the point of view of security. Company bonds are called corporate bonds.

The interest on the bond is paid at a pre-determined rate. This is called a coupon. Since the interest rate of a bond is pre-determined, it is also called a fixed rate instrument. This interest rate is fixed during the tenure of the bond. It doesn’t change.

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The government issues bonds to meet its fiscal deficit. Government bonds are called Government Securities (G-Secs). Through these, money is raised from investors. Earlier only big investors could invest in them. But now even small investors are allowed to invest in them. The maturity period of the bond can range from one to 30 years.

The return from a bond is called the yield. A bond’s yield and its value are inversely related. This means that when the price of a bond falls, its yield increases. As the price of a bond increases, its yield decreases.

How does a bond work?

How does a bond work?

Bond is a type of loan. Government or companies issue bonds to raise debt.
Generally the government, companies, municipal corporations and other institutions raise debt through bonds to meet their needs. The government raises a huge amount every year through bonds. This is called a government bond.

What is a bond, how many types of bonds are there? How safe is investing in it? ET has already given you the answers to these questions. Today we are going to tell you how bond works.

Bond is a type of debt :-

Bond is a type of debt :-

First of all, it is important for you to understand that a bond is a type of loan. Government or companies issue bonds to raise debt. Suppose if a company named ABC needs a loan for its business. For some reason she does not want to take a loan from the bank. Then she decides to take a loan through bonds.

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Most important to Bond ;-

Now ABC will have to decide many things before issuing the bond. The first is how much money it wants to raise from bonds. Second, for how many years does she want to raise the loan. Third, how much interest will she pay on this loan. Generally the interest is compounded annually. In the case of bonds, the interest is called the coupon.

Bond Example

With the help of example you can understand like this

Suppose you invest in ABC bonds. The cost of a bond is Rs 100. Coupon rate is 8 percent. The maturity of the bond is 10 years. The company wants to raise a total of Rs 1 lakh through bonds. You have bought 100 bonds of ABC. In this way, you have invested a total of Rs 10,000 in the bonds of ABC.

You will get an interest of Rs 800 (at 8 per cent coupon rate) every year on a total investment of Rs 10,000 in ABC bonds. In this way, over a period of 10 years, you will get a total amount of Rs 8,000 as interest. On completion of 10 years, ABC will return the amount of Rs 10,000 to you. In this way ABC used your Rs 10,000 for its business. For this he paid you interest every year. Then on maturity he will return your money.

Generally the government, companies, municipal corporations and other institutions raise debt through bonds to meet their needs. The government raises a huge amount every year through bonds. This is called a government bond. It is considered very safe.

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