A Better Alternative to FDs- BONDS! All you need to know about Bonds.

Our parents have always encouraged us to invest our hard-earned money in Fixed Deposits. Why only Fixed Deposits? Because there is a huge amount involved, so such an amount should be invested where there is low or no risk at all. And due to this, the first thing that they think of are FDs.

But a drawback of FDs is the low rate of return they provide. Roughly, it is around 6% and that too is taxable. To curb the problem of low rate of return, a fine alternative is available to us, known as BONDS.

What are Bonds?

A company who is in need of money borrows it from us for a period of time and provides a rate of return (interest) to us.

The company also has the option to issue shares to raise money but in this case the shareholding of the company decreases, that is why they go with the option to issue Bonds.

Why does the Company borrow money from Us and not the Bank?

The Benefit is both to the Company and to Us.

For the Company, if they go to a Bank then it will charge high interest rate at 11% p.a. Whereas, if they borrow money from the public then they will have to pay 9% interest p.a. which is low when compared to the interest rate of Bank.

For Us, the benefit is, if we invest our money in FD, then we would get an interest of 6% p.a. Whereas, if we lend our money to the Company then they will give us 9% interest p.a. which is high when compared to the interest rate of FD.

Concepts related to Bonds:

• Face Value of the Bond – Also called as the Par value, is equal to Bond’s price when it is first issued. After that, the price of the Bond fluctuates in the market in accordance with changes in interest rates while the face value remains fixed.
• Coupon Rate- It is the rate of return or the interest that the holder receives on the Bond. It is calculated on the face value of the Bond.
• Yield to Maturity- It is the percentage rate of return for a Bond assuming that the investor holds the asset until its maturity date. A Bond's yield to maturity rises or falls depending on its market value and how many payments remain to be made.
• Tenure of the Bond- It refers to the length of time before the Bond expires.
• Maturity/ Redemption Date- It is the time when the Bond issuer must repay the amount invested by the Bond holder.

Types of Bonds:

• Government Bonds- It is a debt security issued by a government to support government spending and obligations. Risk- not at all.
• Public Sector Undertakings- These bonds are essentially medium- or long-term debt instruments issued by Public Sector Undertakings that are owned and managed by the central or the state government. Risk- very low.
• Corporate Bonds- It is a Bond issued by a corporation in order to raise financing for a variety of reasons such as for ongoing operations or to expand business. Risk- moderate to high.

Risks Involved in Subscribing to Bonds:

• Credit/ Default Risk- When the Bond issuer fails to pay the interest or the principal amount to the Bond holder, it is known as Credit or Default Risk.

This risk can be minimized by checking the Credit Rating of the Bond. The Credit Rating starts from AAA and goes down to D. Bonds which have AAA rating are considered to be the safest.

• Liquidity Risk- If you don’t want to hold a Bond till it’s maturity date, then in the secondary market it is quite difficult to sell bonds. Therefore, it is advisable to hold the bond until it’s redemption.

Trouble-free Way to Buy Bonds:

There are two websites which are helpful to buy bonds, check the credit rating, coupon rate, maturity date, face value, tenure and yield to maturity. The first website is thefixedincome.com and the second one is goldenpi.com. Click on the image to open the website.