Bonds Investing 101: Your Perfect Guide To Investing In Bonds

This article aims to explain the basic construct of bonds and provide knowledge of fundamental parameters you need to consider for bond investments.

What are Bonds?

A bond is a financial instrument where you lend money to an entity (like a corporation or government) and, in return, earn a fixed return for the amount you have lent. Bonds are a key component of the fixed-income asset class, offering a predictable income stream and typically lower risk compared to equities.

Key Terminologies in Bond Investments

When exploring bond investments, you will encounter several key terminologies. Understanding these terms is crucial for making informed investment decisions. Let’s dive into these terms using the example of a ten-year Government of India bond, as quoted on the RBI NDS OM Platform, the official platform of RBI for G-sec bond trade and settlement.

Face Value

The face value or par value is the amount of money the bondholder will be repaid upon the bond’s maturity. A newly issued bond typically sells at its face value, though there is no regulation that mandates the face value of any bond.

For example, the face value/par value of a Government Security (G-Sec) in India is Rs. 100. Publicly issued corporate bonds in India generally have a face value of Rs. 1000, while the government bonds have a face value of Rs. 100. In the private placement market, the face value of a corporate bond is usually either Rs 1 lakh or Rs 10 lakhs.

ISIN

ISIN stands for International Securities Identification Number, a 12-digit unique code used to identify specific securities. This ensures each bond issue by an entity is uniquely identifiable, even if the entity has issued multiple bonds.

Coupon Rate

The coupon rate is the interest amount the bondholder will receive until the bond’s maturity. This rate is different from the bond’s yield. For example, a G-Sec with a coupon rate of 5.85% means the bondholder will receive 5.85% of the bond’s face value annually until maturity.

Interest can be paid at various frequencies such as annually or semi-annually. Coupon rates can be fixed, as in the 5.85% G-Sec example, or floating/variable, depending on the terms of the bond.

Price

The bond price is the market price of the bond, which fluctuates based on several factors throughout its life. This price can be different from the face value of the bond. If a bond is trading below its face value, it is said to be trading at a discount. Conversely, if it is trading above its face value, it is trading at a premium.

For instance, if the last traded price of a bond is Rs. 99.1175, which is less than the bond’s par value of Rs. 100, the bond is trading at a discount.

Yield to Maturity (YTM)

Yield to Maturity (YTM) is the total return anticipated on a bond if it is held until it matures. YTM helps investors understand the bond’s profitability relative to its market price.

• If YTM > coupon rate, the bond trades at a discount.
• If YTM < coupon rate, the bond trades at a premium.
• If YTM = coupon rate, the bond trades at par.

Calculating YTM involves complex formulas, often requiring financial calculators or software like Excel. However, a simpler approximation formula can provide a rough estimate, though it might not be exact.

While the calculations can seem daunting, YTM essentially indicates the riskiness of the bond. Higher yields generally suggest higher perceived risk, while lower yields indicate lower risk. As the yield increases, bond prices typically decrease and vice versa.

Types of Bonds Available in the Market

The bond market offers a variety of bonds to suit different investment needs and risk profiles. Here are some common types of bonds:

1. Government Bonds: These are issued by the government and are considered one of the safest investments. Examples include U.S. Treasury bonds and Government of India bonds.
2. Corporate Bonds: Issued by companies to raise capital, these bonds typically offer higher yields than government bonds but come with higher risk. They can be further categorized into investment-grade and high-yield (junk) bonds based on their credit ratings.
3. Municipal Bonds: Issued by state and local governments, these bonds are often tax-exempt, making them attractive for investors in higher tax brackets.
4. Convertible Bonds: These bonds can be converted into a predetermined number of the issuing company’s shares, offering potential for capital appreciation in addition to interest income.
5. Zero-Coupon Bonds: These do not pay periodic interest. Instead, they are issued at a discount to their face value and the full face value is paid at maturity.

Read more about types of bonds here

The Importance of Bonds in Your Investment Portfolio

Bonds play a critical role in diversifying an investment portfolio. They offer stability and a steady income stream, which can be particularly appealing during periods of stock market volatility. Bonds also provide a way to preserve capital while earning a return.

Investors looking to grow their wealth should consider bonds for several reasons:

1. Lower Risk: Compared to stocks, bonds are generally less volatile and offer more predictable returns.
2. Fixed Income: Bonds provide regular interest payments, making them an attractive option for income-focused investors.
3. Diversification: Including bonds in your portfolio can reduce overall risk and improve returns through diversification.
4. Capital Preservation: Bonds help in preserving capital, especially those with high credit ratings.

If you are looking to grow your wealth securely and steadily, bonds might be an ideal choice. To learn more about how bonds can fit into your investment strategy and to explore our selection of senior secured bonds, contact us today at support@aspero.in.

Bonds investment evaluation cheat sheet

How to Invest In Bonds in India?

Investing in bonds in India can be done through several methods, including offline investments, the stock market, and Online Bond Platforms (OBPPs) like Aspero. Offline investments involve purchasing bonds directly from banks or post offices. For instance, one can buy government bonds, like the National Savings Certificate (NSC) or Kisan Vikas Patra (KVP), at designated banks or post office branches. These bonds typically offer a fixed return over a specified period. Investing via the stock market involves buying bonds through exchanges such as the National Stock Exchange (NSE) or Bombay Stock Exchange (BSE).

Investors can trade corporate bonds, government securities, and municipal bonds using a Demat account and a trading account with a registered broker. Lastly, OBPPs like Aspero provide a user-friendly online platform for bond investments. Aspero allows investors to explore various bond offerings, compare yields, maturities, and credit ratings, and make informed decisions. They facilitate the purchase of bonds from the comfort of one’s home, ensuring a seamless and secure transaction process.

How to sign up on Aspero?

1. Head over to invest.aspero.in or download the Aspero app from the Google Play Store or App Store
2. Enter your mobile number and verify your OTP to complete the sign up process
3. Start your KYC journey by verifying your email, PAN, address, Demat account and Bank Details. This process should take roughly 3-4 minutes and no document upload is required via our CKYC journey.
4. If all your details are filled correctly, your KYC verification will be complete within 24 hours and you are all set to invest!

Conclusion

Understanding bonds and their various parameters is essential for making informed investment decisions. By grasping key terms like face value, ISIN, coupon rate, price, and YTM, you can better navigate the bond market and optimize your investment strategy. Whether you are a conservative investor seeking steady income or looking to diversify your portfolio, bonds offer numerous benefits that can help you achieve your financial goals.

Visit our platform to start your bond investment journey today and secure your financial future with confidence.