What is Bond Investing

Bonds are debt issued by corporations and governments throughout the world. When you purchase a bond, you are loaning money to the issuer, who in turn, pays you interest for the use of your capital. Bond markets most often rise when stocks are out of favor.

When a company issues bonds, it is borrowing money from investors in exchange for which it agrees to pay them interest at set intervals for a predetermined amount of time.

What is investment in Government Securities?

Government securities (G-secs) are sovereign securities which are issued by the Central Bank, in lieu of the Central Government's market borrowing program.

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The term Government Securities includes Central Government Securities. State Government Securities, Treasury bills

The Central Government borrows funds to finance its 'fiscal deficit’. The market borrowing of the Central Government is raised through the issue of dated securities and 364 days treasury bills either by auction or by floatation of loans.

In addition to the above, treasury bills of 91 days are issued for managing the temporary cash mismatches of the Government. These do not form part of the borrowing program of the Central Government.

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Types of Government Securities

Dated Securities are generally fixed maturity and fixed coupon securities usually carrying semi-annual coupon. These are called dated securities because these are identified by their date of maturity and the coupon, e.g., 11.03% GOI 2012 is a Central Government security maturing in 2012, which carries a coupon of 11.03% payable half yearly.

Zero Coupon bonds are bonds issued at discount to face value and redeemed at par.

Partly Paid Stock is stock where payment of principal amount is made in installments over a given time frame. It meets the needs of investors with regular flow of funds and the need of Government when it does not need funds immediately.

Floating Rate Bonds are bonds with variable interest rate with a fixed percentage over a benchmark rate. There may be a cap and a floor rate attached thereby fixing a maximum and minimum interest rate payable on it.

Bonds with Call/Put Option: First time in the history of Government Securities market RBI issued a bond with call and put option this year. This bond is due for redemption in 2012 and carries a coupon of 6.72%. .

Capital indexed Bonds are bonds where interest rate is a

fixed percentage over the wholesale price index. These provide investors with an effective hedge against inflation. These bonds were floated on December 29, 1997 on tap basis. They were of five year maturity with a coupon rate of 6 per cent over the wholesale price index.

Checklist for Bond Investing

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