Definition and Types of Bonds


Definition and Types of Bonds

Bonds are typically issued by financial institutions, government undertakings and large companies. The interest rate is assured and is paid at a fixed interval. On maturity, the principal is repaid. Bond is a form of loan. The holder of the bond is the lender and the issuer of the bond is the borrower. Bonds are issued to fund long-term capital expenditure needs. As per Section 2(30) of the Companies Act 2013 “debenture” includes bonds. Therefore all the provisions applicable for debentures given in the Companies Act 2013 and other relevant statutes are applicable for bonds also.

Types of bonds

Some of the types of bonds issued in the Indian markets are given below:

1.  Deep discount bonds, also known as zero-coupon bonds, are bonds wherein there is no interest or coupon payment and the interest amount is factored in the maturity value.

2. Corporate bonds are issued by companies and offer interest rates higher than bonds issued by public sector units and other financial institutions. The interest rate on these bonds is governed by their credit rating and higher the rating, lower is the interest rate offered by them.

3.  Sovereign bonds are issued by the Reserve Bank of India. These can be referred to as low-risk or even risk-free bonds.

4.  Convertible bonds are another category wherein the bondholder has an option to convert the bonds into equity after a fixed tenor. These may be fully or partially convertible where only a part is converted and the other part matures.

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