Bond-related terms you should know!

[Abhilash Rathore]

A Bond is like a security which represents a Loan from the buyer to the issuer, like a company or a government. They issue Bonds when they want to raise money. In the government’s case, they use the money to run daily operations, finance all sorts of projects for the nation’s development, repay the money borrowed from other countries and investors, and more.

Companies raise Corporate Bonds to finance their operations, build new factories, generate working capital, etc. By investing in them, you give the issuer a Loan, and they agree to repay the money and some interest in a fixed schedule. You get a regular income stream as a periodic interest payment.

Bond-related terms you should know

Bonds give you a steady income stream and an offset to some of the volatility you might see from owning stocks. Here are Bond-related terms every investor should know:

Maturity date

Every Bond has a particular end date, which tells you about the period for which you can hold your investment. The decision is made by the government or company issuing the bond. At the end of this period, investors receive all the money they owe: the initial investment amount and the interest accumulated along the way.

Credit ratings

Credit ratings are a grade agencies give to help investors decide if the company they want to invest in is performing well. These agencies analyse the company’s financials and growth and rate them accordingly. If the company is doing well, they get AAA, the highest rating. Grade D is for defaulters, so stay away.

For a retail investor who does not have the resources to analyse each company inside out, the agency rating is a simpler indicator to follow while investing in Corporate Bonds.

Secured and Unsecured Bonds

When you invest in Bonds, you need to choose between Secured and Unsecured Bonds. Secured Bonds are collateralised by an issuer’s asset or future cash flow. If the issuer defaults, bondholders can claim the asset or the cash-flow-generating source. Unsecured Bonds do not come with collateral. If the issuer defaults, Unsecured Bondholders cannot claim any of the issuers’ assets. Here, investment decisions are made purely based on the issuer’s trust and credit history.

The face value and market price

Face value is the price at which the issuer issues a Bond unit. The price at which Bonds are traded is known as the market price.

Coupon rate and yield-to-maturity

The coupon rate is the interest rate paid by fixed-interest securities, such as Bonds. It is the payment towards their face value. The issuer pays it to the Bondholder. The yield-to-maturity is an effective interest rate on the Bond, which the investor receives at the time of purchase.

Since investments in the securities market are subject to risks, read the offer document carefully before proceeding.