Bonds are fixed income securities issued to the public. It is a debt for the issuer. When you buy it or invest in bonds you are lending money to the issuer of bonds and you receive interest on it semi-annually or annually called as Coupons. It can also be explained in 3 categories based on time period of the bonds to maturity.

Bills:

Also known as T-Bills or Treasury Bills. It is short term i.e. less than one year

Notes:

Debts issued for more than one year up to 10 years

Bonds:

Debts issued for more than 10 years

Types of Bonds

There are several types of bonds differing from issuers, credit rating, maturity period, etc.

To provide with the basic types, there are

· Municipal Bonds

· Government Bonds

· Corporate Bonds

Municipal Bonds are issued by the City Municipal and Government bonds by a country. These bonds have the least risk of defaulting i.e. you are mostly sure you will not lose your money. As the risk is lowest, the returns on it would be low.

Corporate Bonds are issued by companies. Its risk is higher than the government bonds and therefore they provide higher returns on the bonds. Some bonds can be based on

· Asset Based Bonds

· Mortgage based Bonds

These bonds are backed by assets or mortgage or group of mortgages. These bonds connect the home and business loan consumers with investors. People take loans from bank, banks pool the loan in to various Bonds as they are have the security of assets or mortgage. Banks sell these bonds to investors.

Usually you receive Coupon payments (interest) on bonds semi-annually or annually. But there are also a Bond called

· Zero Coupon Bonds

In this you as an investor do not receive any coupon payment throughout the holding period. But you can buy it at a discount and get receive the par value at the end of the maturity. What does this mean in simple terms? I’ll tell you with an example.

Coupon and Yield

Assume there is a Bond with par value of Rs.1000. It is a Zero coupon bond. So you are getting it at a discount. You can buy it at Rs.600 and at the end of the maturity i.e. 10 years or whatever the maturity time is, you will receive Rs.1000

Confusion about bond is that you are said there is a 3% Coupon and the return or yield of the Bond is 12%. So, what is the difference between both?

If a Rs.1000 Bond has 3% coupon, then you receive Rs.30 annually as Coupon payment

The market value of Bond can increase or decrease as it is tradable like shares. The market value of bonds might have gone around Rs.1090. The overall coupon payments and the increase in your Bond price since the time you bought shows you the overall yield. This would be explained in detail in another article.

D.V.P