Bonds & Debentures

What are Bonds & Debentures?

Bonds and debentures are debt instruments issued by companies or governments to raise capital. They are essentially loans made by investors to the issuer in exchange for regular interest payments and the return of the principal amount at maturity. While bonds are typically issued by governments or corporations, debentures are unsecured debt instruments issued by companies.

How it Works?

When you invest in bonds or debentures, you are lending money to the issuer for a fixed period, during which you receive periodic interest payments (coupons). At the end of the term, the principal amount is repaid. The interest rate is fixed at the time of issuance and can vary based on the credit rating of the issuer and prevailing market conditions.

History of Bonds & Debentures:

Bonds and debentures have been used as a means of raising capital for centuries, dating back to ancient civilizations. In India, the bond market has developed over time, with both government and corporate bonds being issued to cater to investors seeking regular income and long-term capital appreciation.

Advantages of Bonds & Debentures:

• Steady Income: Bonds and debentures offer regular interest payments, providing a steady income stream for investors.
• Capital Preservation: Bonds are generally considered a safer investment compared to equities, as they provide principal repayment at maturity.
• Tax Benefits: Certain types of bonds, such as tax-free bonds, offer tax-exempt interest income.
• Liquidity: Bonds can be traded on the secondary market, providing liquidity before maturity.
• Variety: Bonds and debentures come in various forms, offering options with different risk and return profiles.

Types of Bonds & Debentures:

• Government Bonds: Issued by the central or state governments to raise funds for infrastructure or other public purposes.
• Corporate Bonds: Issued by companies to raise capital for business expansion or other financial needs.
• Tax-Free Bonds: Issued by the government or public sector companies with tax-exempt interest income.
• Convertible Debentures: Debentures that can be converted into equity shares of the issuing company after a specified period.