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Many investors can therefore, lend a part of their capital to the government. In short bond is a type of a loan where you act as the lender. The company or the association that put up bond for sale is referred as the issuer. The investors get paid from the bond- issuers which is a little more for the benefit of using their money. It may be in the shape of payments of the interest, which are fixed at a stipulated schedule and rate. Government Bonds are also referred as securities for fixed-income as the investor knows the total cash amount that he or she will get the return from it if retain the security till the date of maturity.
Characteristics of a bond
Face Value/Par Value: The face value which is also known as the par value or principal, is the amount of money a holder will get back once the bond matures.
Coupon (The Interest Rate): The coupon is the amount the bondholder would obtain in the name of interest payments. It is named so, as occasionally there are physical coupons on the bond that the investor tear off and redeem for interest.
Maturity: The word maturity is given to the date in the future on which the investor's principal amount will be paid back. It can range from as little as one day to as long as 30 years. It is also said that a bond that matures in one year is much more predictable and thus less risky than a bond which matures in a long term.
Issuing a bond
The government, public sector units dominate as far as issuing of bond is considered. The central government raises funds through the issue of dated securities and treasury bills and generally they are issued for a minimum amount of Rs10, 000 (face value). Afterwards they are issued in multiples of Rs 10,000. The systems of releasing of bonds are done generally through an auction carried out by the Reserve Bank of India.
Different Types of Bonds
- Bills - Bill is the Debt security which gets matured in less than 1 year.
- Notes - Note is the Debt security which gets matured in 1 to 10 years.
- Bonds - Bond are the Debt securities which get matured in more than 10 years.
Municipal Bonds
Municipal bonds, shortly referred as "munis", are the later succession in terms of risk. The major benefits to Municipal Bonds are that the returns are federal tax-free. Other than this, local governments at times make their debt free from tax for inhabitants of the particular city, thus some municipal bonds are becoming entirely tax free.
How to Read and understand a Bond Table: Sample
Column 1
Issuer - The Column one shows us the issuer that is the state (or province), company, or country that is preparing the bond issued to us.
Column 2
Coupon - Second column two is of coupon which refers to the fixed interest rate in a fixed form that the lender gets from the issuer.
Column 3
Maturity Date - Third column shows the date during which the bond issuer will repay their entire principal to the investors.
For example, the last two number digits of any year like 26 in 2026, 07 meaning 2007, etc. are quoted.
Column 4
Bid Price - Fourth column shows the price somebody is ready to pay for his or her bond.
It is showed with the relation of hundred, irrespective of the par value. We can take percentage for the bid price
For example: a bond having a bid of 97 is doing its trade at 93percent of its par value.
Column 5
Yield - And finally in the fifth column the yield specifies annual return till the date of bond maturity. Generally, if the bond is referred as callable it will get a "c--" shown where the potion "--" is the year the bond can be called.
For example, c07 meaning the bond is as early as 2007
How Do I Buy Bonds?
- In the end we would discuss about the transaction of Bonds. Most bond dealings can be done through a full service or concession brokerage. The investor has the option of opening an account with a bond broker but remember that most bond brokers entail a minimum initial deposit of $5,000.
- Other than this certain financial institutions will provide their customers with the service of transacting government securities. In case if your bank doesn't provide this service the investor can acquire government bonds through a government agency which is done in most of the countries.
- Remember that if you do choose to obtain a bond through your broker, he or she may tell you that the trade is charge free but don't be fooled. What usually happens to the investor is that the broker will mark up the price to some extent; this mark-up is in truth the same as a commission. To make ensure that you are not being cheated, simply look up the latest quote for the bond and conclude whether the mark-up is acceptable.
- Lastly, one should research bonds just as you would do for stocks a bit of that homework that you need to do before investing and it would do wonders in your returns.
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