BONDS

 

FAQ- BONDS

What are bonds and debentures?

Bonds and debentures are debt investment instruments with a Fixed Rate of Return and Fixed Maturity Period. While Bonds are securities that are mostly issued by the government, debentures are always issued by corporations.

Bonds and Debentures are issued by these entities to raise money from investors as loans used to fulfil business objectives like entering new markets, starting a new project, or scaling existing businesses. For every bond/debenture issue, fixed interest payments (Coupons) are made regularly on pre-specified dates. The principal loan amount (face value per unit of Bond/ Debenture) is paid back on the pre-specified maturity date.

Bonds are usually seen as a long-term investment and can have terms of up to 30 years, although 5 to 10 years is the normal investment period. They tend to have a high entry level, with a minimum investment of Rs.10 Lacs.

Bonds are available through brokers and banks.

 

What is the relationship between interest rates and bond prices?

They are inversely correlated. When interest rates fall, bond prices rise; and vice versa. If you buy a bond and hold onto it until it matures - as many investors do - rising interest rates will not affect the principal amount you receive upon maturity. But if the interest rates go up and you need to sell your bonds before they mature, their value may have gone down and you may have to sell them at a loss.

If the interest rates have gone down since you bought the bonds, the value of your bonds may have gone up and that will give you what is known as a "capital gain".

 

What are the differences between Coupon and Yield?

 

The Coupon or Coupon rate is the interest rate paid by fixed-interest security such as Bond/ Debenture. It is the annual payment towards the face value of a bond. The bond-issuing company pays it to the bondholder. The yield is the effective interest rate on bonds. The yield will vary inversely with the market price of the Bond.

Yield= (Coupon/ Market Price of Bond) X 100

 

Are returns earned from my bond investment taxable?

 

For interest earned from Taxable Bonds, the earnings are taxable. For interests earned from Tax-Free Bonds, the earnings are 100% tax-free. Also, capital gains earned from selling any Bond (taxable and tax-free) before maturity are subject to capital gains taxation rules. Here is a blog that explains Taxation on Gains from Bond Investments.

 

 How will I receive the interest payment?

 

The interest payment will hit the bondholder’s bank account associated with the Demat account as per the predefined schedule.

 

When will I receive bond units in my Demat?

Once your order is confirmed, bond units will be credited to your Demat account on T+1 day i.e. next trading day.