What is a Bond?

Bonds refer to high-security debt instruments that enable an entity to raise funds and fulfil capital requirements. It is a category of debt that borrowers avail from individual investors for a specified tenure.
Organisations, including companies, governments, municipalities and other entities, issue bonds for investors in primary markets. The corpus thus collected is used to fund business operations and infrastructural development by companies and governments alike.
Individual investors acquiring bonds have legal and financial claims to an organisation’s debt fund. Borrowers are therefore liable to pay the entire face value of bonds to these individuals after the term expires. As a result, bondholders receive debt recovery payments before stakeholders in case a company faces bankruptcy. With this understanding of what bonds are, take a look at the features of this debt category.

Features of Bonds

Bonds have several features that investors should take into account. The popularity of this debt instrument can be assigned to some intrinsic factors as mentioned below.

Face Value

Face value implies the price of a single unit of a bond issued by an enterprise. Principal, nominal, or par value is used alternatively to refer to the price of bonds. Issuers are under a legal obligation to return this value to the investor after a stipulated period. For instance, an investor chooses to purchase a corporate bond at face value of Rs. 6,500. The company issuing the bond is thus obliged to return Rs. 6,500 plus interest to the investor after maturity of the tenor. Note that the face value of a bond is different from its market value as market operations influence the latter.

Interest or Coupon Rate

Bonds accrue fixed or floating rates of interest across their tenure, payable periodically to creditors. Bond interest rates are also called coupon rates as per the tradition of claiming interests on paper bonds in the form of coupons. Interest earned on a bond depends on various aspects such as tenure, the issuer’s repute in the public debt market.

Tenure of bonds

Tenure or term refers to the period after which bonds mature. These are financial debt contracts between issuers and investors. Financial and legal obligations of an issuer to the investor or creditor are valid only until the tenure’s end.

Credit Quality

The credit quality of a bond refers to the creditors’ consensus on the performance of a company’s assets in the long-term. It is determined by the degree of confidence that investors have in an organisation’s bonds. Credit rating agencies classify bonds based on the risk of a company defaulting on debt repayment. These agencies assign risk grading to private players in the market and categorise bonds into investment grade and non-investment grade debt instruments. Investment grade securities are susceptible to lower yields due to a steady market risk factor, whereas non-investment grade securities offer high returns at considerable risks.

Tradable Bonds

Bonds are tradable in the secondary market. The ownership can thus shift among various investors within a given tenure. These creditors often sell their bonds to other entities when market prices exceed the nominal values as they have an option to secure bonds with high yield and appropriate credit ratings.

Advantages of Bonds

Investment in bonds is advantageous to customers in extensive ways. Due to the dependability of interest and principal returns, bonds have proved to be a stable investment option for customers averse to excessive risk in the market. The advantages thus include-

Stability

Bonds are long-term investment tools that accrue assured returns in comparison to other investment options. They provide a low-risk avenue to investors apprehensive of the volatility of returns from equity. Even though dividend incomes from equities are traditionally higher than coupon returns, bonds are comparatively inelastic as compared to cyclical market fluctuations.

Indentures

Bonds grant a legal guarantee that binds borrowers to return the principal amount to the creditors in due time. They serve as financial contracts which contain details such as the par value, coupon rates, tenure, and credit ratings. Companies that attract massive investments in their bonds are highly unlikely to default on interest payments due to their reputation in the securities market. Besides, bondholders precede shareholders in receiving debt repayment in the event of an entity’s bankruptcy.

Portfolio Diversification

Investors massively rely on investment in fixed-income debt instruments such as bonds to diversify their investment portfolio as they offer superior risk-adjusted returns on investment. Consequently, portfolio diversification reduces the possibility of short-term losses due to increased allocation of investment funds to fixed-income resources instead of solely depending on equities.

Let’s have a look at the curated list of Bonds offered by Wise Funds to diversify and enhance your portfolios .

Disclaimer : Wise Funds team has, to the best of its ability, taken into account various factors-both quantitative measures and qualitative assessments, in an unbiased manner, while advising the bond(s). However, they carry unknown risks and uncertainties linked to broad markets, as well as analysts' expectations about future events. They shouldn't, therefore, be the sole basis of investment decisions.
*The yield of the bonds are dependent on multiple factors such as Ratings , Current Market Price etc . The best care has been taken to depict all information correctly , kindly contact your Wise Funds appointed relationship manager prior to making any investment decision.