Bonds: Definition, Features, and How They Work

Bonds are a popular investment choice you can resort to if you wish to grow your money over time. They are usually considered safer than stocks, which makes them more valuable to many people. In this article, we will explain what are bonds, their key features, the different types, how they work, and the benefits of investing in bonds. The better you understand bonds, the better decisions you can make about your investments.

What is a Bond?

A bond is like a loan that you give to someone, usually a company or the government. When you buy a bond, you are lending your money to the issuer. In return, they promise to pay you interest regularly and return your money at a later date, called the maturity date. In simple terms, bonds allow organisations to get money while giving investors a way to earn interest.

Key Features of Bonds

The following are the important features of bonds that make them unique:

1. Maturity Date: This is the date when the issuer must pay back the money you lent them.
2. Interest Rate: Also known as the coupon rate, this is the amount of interest the bond issuer pays you. Bond interest rates can change based on market conditions and how reliable the issuer is.
3. Face Value: This is the amount of money you would get back when the bond matures.
4. Credit Rating: Bonds are rated by agencies based on how likely the issuer is to pay back the loan. Higher ratings mean lower risk, while lower ratings mean higher risk.
5. Yield: This is the return you can expect to earn from the bond.

Also Read : Best Investment Plans to Invest 1 Lakhs

Types of Bonds

There are many types of bonds and each have their own characteristics. Here are some common ones:

1. Government Bonds: Issued by national governments, these bonds are usually low-risk.
2. Municipal Bonds: These are issued by local governments. They often provide tax benefits, and this makes them considerable for investors in higher tax brackets.
3. Corporate Bonds: Issued by companies to raise money. They usually offer higher interest rates than government bonds but come with more risk.
4. Convertible Bonds: These can be turned into a certain number of the company’s shares. They offer the chance for profit if the company does well.

How Bonds Work

So, how do bonds work? When you buy a bond, you actually lend money to the issuer, who uses that money for various needs like funding projects. In return, the issuer would pay you interest regularly until the maturity date.

For example, if you buy a ₹10,000 bond with a 5% interest rate and it matures in 10 years, then the issuer would pay you ₹500 every year. At the end of 10 years, you would get back your ₹10,000.

Bond prices can go up or down in the market based on interest rates and the issuer’s credit rating.

Benefits of Investing in Bonds

Investing in bonds has many advantages and some of them are:

• Bonds provide regular interest payments, which can be a steady source of income for investors.
• Bonds are considered safer than stocks, especially government bonds.
• Adding bonds to your investments can lower overall risk by balancing more volatile assets like stocks.
• Certain bonds can help protect your investment from losing value due to inflation.

How to Invest in Bonds

Investing in bonds is quite easy and here’s what you need to do:

1. Learn about different types of bonds and their features. Look for information on interest rates, credit ratings, and risks.
2. To buy bonds, you may need to open an account with a broker who sells bonds.
3. Based on your research, pick bonds that match your investment goals.
4. Keep an eye on your bonds and their performance. Be aware of changes in interest rates and credit ratings.
5. If you do not want to buy individual bonds, look into bond mutual funds or exchange-traded funds (ETFs). These funds hold multiple bonds, offering more variety.

Conclusion

So, undoubtedly, bonds are a valuable investment option that can provide you with a stable income and lower risk compared to stocks. Now, if you wish to enjoy better returns on your investments, other than stock and bonds, you can also consider P2P lending. Download the 13Karat app and invest in our 6 month investment plan and 3-month investment plans to earn returns of up to 13% per annum.