Bonds Basics.

1. What is a bond?

A bond is a contract to raise funds in the form of a loan (or debt). An entity that issues a bond, sells the bonds to raise funds and the investor who buys the bond is essentially lending the money to the issuer of the bond.

A bond is purchased for a fixed period of time – during this time, the investor is paid a monthly amount, called the coupon amount. The monthly coupon amount paid to the investor is the interest paid for the bond amount invested. At the end of the fixed time period, the bond holder will receive the original amount invested.

Bonds are issued by governments and other large corporations.

2. What is the difference between a stock and a bond?

A stock represents a small portion of a company. An investor who owns stock in a company is the owner of a very small portion of the company, the ownership is in proportion to the quantity of stock owned. If the total stocks in a company is 1,000,000, an investor who owns 100 stocks owns 0.01% of the company.

If a company goes bankrupt, the bond holders are given a higher preference than the stock holders in recovering their investments from the assets of the company.

3. Why should I invest in bonds?

Bond investments generate a steady flow of income in the form of coupon payments.

This is a preferred investment for investors looking to invest a large sum of money over a long term. These investments are relatively stable and carry less risk than equity investments.

Investments in government bonds are considered extremely low risk and is recommended for investors looking for a safe investment option.

4. What are the different types of bonds?

Government issues bonds to raise funds. These bonds are loans to the government that are funded by the investors. Government bonds are very low risk, stable investments.

Bonds are issued by certain corporations to raise funds. These bonds carry a relatively higher risk than the government bonds.

Certains bonds issued by the RBI (Reserve Bank of India) provide tax savings to investors. These bonds offer a partial or complete tax relief on interest payments to bond holders.