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Bonds & Debentures Basics
Madhura OakProject Manager
Intellect Design Arena Ltd.
Debt Instrument
A Debt instrument also called as a debt security is a contract between borrower and lender in which the lender lends money to borrower on predefined rate of interest called as coupon rate, maturity and principal amount also called as par value or face value of the bond.
Debt instruments are traded in market. They are issued in primary market and can also be purchased from secondary market. They can be held upto maturity. Callable bonds can be redeemed prior to maturity.
Types of Debt Instruments
Debt Instruments
Bonds & Debentures Money Market Instruments
Long Term Medium to Short Term
Treasury Bills
Certificate of Deposits
Commercial Paper
Repurchase Agreements
Notes
Bonds & Debentures
Debt instruments issued by central/state governments and public sector companies are called bonds and those issued by private sector companies are called debentures.
Bonds issued by the central government are also called as gilts. In India, they are also called as GOI securities or G-secs.
Price of Bonds/Debentures
Government bonds have a face value of Rs. 100.
The market price of the bond/debenture may vary. They are purchased at market price from secondary market.
Coupon Rate
Coupon rate may be fixed rate or floating rate.
In case of fixed coupon rate, the rate of interest remains same throughout the investment period.
In case of floating coupon rate, the rate of interest varies periodically through the tenor of investment.
Returns of Bonds/Debentures
Coupon = Face value * coupon rateThe coupon is paid annually, semi-annually, quarterly or
monthly. Coupon on GOI securities is paid semi-annually i.e. after every 6 months.
On maturity, the investor gets the fixed amount mentioned on the bond irrespective of its market price.
The coupon is issued to the investor irrespective of whether the company makes profits unlike shares where the dividend is paid only during profit.
Ownership
Holders of debt instruments are not owners unlike share holders.
Difference between Bonds & Debentures
Bonds Debentures
Secured Unsecured
Coupon rate is lower Coupon rate is higher as the default risk is higher
Issued by State/Central Government or PSU companies
Issued by private sector companies
Convertible bonds & debentures
Bonds & debentures issued by companies may be completely or partially convertible into shares.
Credit Rating of Companies issuing Bonds/Debentures
Source: Investopedia, CRISIL
Moody’s S&P/Fitch CRISIL Grade Quality
AAA AAA AAA Investment Highest
AA AA AA Investment High
A A A Investment Strong
BAA BBB BBB, BB Investment Medium
BA, B BB, B B Junk Speculative
CAA, CA, C
CCC, CC, C
C Junk Highly Speculative
C D D Junk In Default
Why should individuals invest in Bonds/Debentures
• Steady source of income
• Safe Investment in case of bonds & debentures of companies with good credit rating
• Capital appreciation in case of investment in riskier companies.
Thank you!