A Study on awareness about types of bonds amongst Commerce

Undergraduate student

A project submitted to

University of Mumbai for partial completion of the degree of Bachelor in commerce

(Accounting and Finance) Under the faculty of commerce

By :- Rahul chandrakant shelar

Under the Guidance of

Professor jayesh sakpal

DTSS COLLEGE OF COMMERCE MALAD.E

January 2022
 CERTIFICATE

This is to certify that Mr. Rahul chandrakant shelar has worked and duly
completed his Project Work for the degree of Bachelor in Commerce (Management Studies)
under the Faculty of Commerce in the subject of Financial Markets and his
project is entitled, “A Study on awareness about types of bonds amongst Commerce
Undergraduates students” under my supervision.
I further certify that the entire work has been done by the learner under my guidance and
that no part of it has been submitted previously for any Degree or Diploma of any University.
It is her/ his own work and facts reported by her/his personal findings and investigations.

Prof. Jayesh sakpal _______________________

Principal

___________________________
External Examiner
Date :
 Declaration by learner

I the undersigned Mr Rahul chandrakant shelar hereby, declare that the work
embodied in this project work titled “A Study on awareness about Debt Market
Instruments amongst Commerce Undergraduates” forms my own contribution to the research
work carried out under the guidance of Mister Jayesh Sakpal is a result of my own research
work and has not been previously submitted to any other University for any other Degree/
Diploma to this or any other University.
Wherever reference has been made to previous works of others, it has been clearly indicated
as such and included in the bibliography. I, here by further declare that all information of
this document has been obtained and presented in accordance with academic rules and ethical
conduct.

Rahul

Certified by
Shraddha Chavan
 Acknowledgment

To list who all have helped me is difficult because they are so numerous and the depth is so
enormous.
I would like to acknowledge the following as being idealistic channels and fresh dimensions
in the completion of this project.
I take this opportunity to thank the University of Mumbai for giving me chance to do this
project. I would like to thank my Principal, ________for providing the necessary facilities
required for completion of this project.
I take this opportunity to thank our Coordinator Jayesh sakpal, for her moral support and
guidance.
I would also like to express my sincere gratitude towards my project guide _________whose
guidance and care made the project successful. I would like to thank my College Library, for
having provided various reference books and magazines related to my project.
Lastly, I would like to thank each and every person who directly or indirectly helped me in
the completion of the project especially my Parents and Peers who supported me throughout
my project.
Chapter Title of the Chapter Page no.
No.

1 Introduction
2 Research Methodology
3 Literature Review
4 Data Analysis and Interpretation
5 Conclusion and Suggestions
Bibliography
 Chapter 1:Introduction

What is a Bond?

A bond is a fixed obligation to pay that is issued by a corporation or government entity

to investors. Bonds are used to raise cash for operational or infrastructure projects.
Bonds usually include a periodic coupon payment, and are paid off as of a specific
maturity date. There are a number of additional features that a bond may have, such as
being convertible into the stock of the issuer, or callable prior to its maturity date.

Meaning

A bond is a financial instrument used to raise funds for the issuer by placing the issuer in the
bondholders’ debt. They are used by both corporations and government agencies to generate
funds by essentially borrowing money from bondholders, which is paid back when the bond
matures. In return, the bondholder enjoys interest payments on the bond’s principal.

Bonds are investment securities where an investor lends money to a company or a

government for a set period of time, in exchange for regular interest payments. Once the bond
reaches maturity, the bond issuer returns the investor’s money. Fixed income is a term often
used to describe bonds, since your investment earns fixed payments over the life of the bond.

Companies sell bonds to finance ongoing operations, new projects or acquisitions.

Governments sell bonds for funding purposes, and also to supplement revenue from taxes.
When you invest in a bond, you are a debtholder for the entity that is issuing the bond.

Many types of bonds, especially investment-grade bonds, are lower-risk investments than
equities, making them a key component to a well-rounded investment portfolio. Bonds can
help hedge the risk of more volatile investments like stocks, and they can provide a steady
stream of income during your retirement years while preserving capital.
Characteristics of bonds

Bonds, which are a form of debt instrument, all have certain common characteristics –
whether it be government bonds or corporate bonds. The most important common
characteristics of a bond, relate to the bond issuer, maturity date, coupon, face value, bond
price, and bond yield. Much like loans, a bond investor lends money to the issuer of the bond
and the issuer promises to repay the amount at a specific date in the future – termed as the
‘maturity date’. Between the bond issue date and the maturity date, bond investors typically
receive regular interest rate payments. However, bonds differ from loans, as they are easier to
trade in and out of so the ownership of a bond can be sold. For most bonds, there is usually a
relatively liquid secondary market.

This means that investors who lend money to the issuer of the bond, initially for a term of say
7 or 10 years in the primary market, can later decide to sell the bond to another investor in the
secondary market on any business day and get their money back – even if the maturity date
has not been reached.

A bond is a contractual agreement between the issuer of the bond and its bondholders. The
most important common characteristics vis-à-vis all bonds refer to the bond issuer, maturity
date, coupon, face value, bond price, and bond yield. These common characteristics of bonds
determine the scheduled cash flows of a bond. Consequently, they are the main determinants
of an investor’s expected return and actual return.

Bond issuer: This is the entity or company seeking to borrow money from investors and is
the entity or company that should repay the money borrowed. Therefore, the bond issuer
determines the credit risk that investors will be exposed to. Sovereign governments,
supranational organizations and corporate issuers amongst others can all issue bonds and are
given credit ratings according to factors determined by the credit rating agencies. One issuer
can have multiple credit ratings – these are attributed to each individual debt issue.

Maturity date: This is the date at which the bond will be redeemed i.e. when the outstanding
principal amount is repaid back to the investor. Maturities of bonds can range from overnight
to 30 years or more.

Coupon: This is the nominal rate of interest that an issuer agrees to pay to the bondholder
each year until the maturity date. It is usually expressed as a percentage (%) of the face value
of a bond and is almost always given as a per annum rate. For example, a bond with a coupon
rate of 4% and a face value of $1,000, will pay an annual interest of $40.

Face Value (FV): This is also known as the notional or principal amount, which is the
amount that will be repaid to the bondholder upon maturity. This is given as a currency
amount, for example, $5 million.

Bond Price: The current market price of a bond is expressed as a percentage of face value.
Bonds are tradable in the secondary market and the prices at which bonds can be bought and
sold at are recorded in percentage terms. For example, a bond could have a price of 102%.
Therefore, if a bond trades at a price of 102% and the investor buys a bond of $100 million
face value, the current market price of the bond is $102 million.

Bond Yield: This refers to the returns an investor will derive by investing in a bond. It is
calculated by dividing the annual coupon on a bond by its current market price.

THE ROLE OF BONDS IN A FINANCIAL MARKET

Investors include bonds in their investment portfolios for a range of reasons including income
generation, capital preservation, capital appreciation and as a hedge against economic
slowdown. In this section, we look at each in turn.

Income generation
Bonds provide investors with a source of income in the form of coupon payments, which are
typically paid quarterly, twice yearly or annually. The investor can use the income generated
by their investments for spending or reinvestment. Shares also provide income in the form
of dividens: however, such payments are less certain and tend to be less than bond coupons.

Capital preservation
Unlike stocks, the principal value of a bond is returned to the investor in full at maturity. This
can make bonds attractive to risk-averse investors who are concerned about losing their
capital.
Hedge against economic slowdown
While investors in stocks typically do not welcome a slowdown in economic growth, it can
be a good thing for bond investors. This is because a slower growth usually leads to
lower inflation, which makes bond income more attractive. An economic slowdown may also
be negative for company profits and stock market returns, adding to the attractiveness of
bond income during such a time.

DIVERSIFYING WITH BONDS

Bonds are considered a defensive asset class because they are typically less volatile than
some other asset classes such as stocks. Many investors include bonds in their portfolio as a
source of diversification to help reduce volatility and overall portfolio risk.

The chart below shows the historical volatility of different asset classes – including bonds
and stocks – over recent decades. The bars above the horizon (zero line) show gains, while
bars below the horizon reflect losses. You can see from the chart that bonds have a different
return profile than stocks, offering the potential for greater stability of returns.
What do bonds say about the economy?

What do bonds are essentially loans made to large organizations. These debt securities
include corporations, cities, and national governments. An individual bond is a piece of a
massive loan. That’s because the size of these entities requires them to borrow money from
more than one source. Bonds are a type of fixed-income investment, which is a broad asset
class. Other types of investments include cash, stocks, real estate, commodities, and
derivatives.

Where can I buy bonds?

Stocks are traded on a centralized market, meaning that all trades are routed to one exchange
and are bought and sold at one price. Unlike stocks, bonds aren’t publicly traded on an
exchange. Instead, bonds are traded over the counter, meaning that you must buy them from
brokers. However, you can buy U.S. Treasury bonds directly from the government.

Because bonds are not traded on a centralized market, it can be difficult for investors to know
whether they’re paying a fair price. While one broker may sell a bond at a premium (above
face value, to gain a profit), another broker’s premium might be even steeper.

The Financial Industry Regulatory Authority (FINRA) regulates the bond market. FINRA

posts transaction prices as the data becomes available. The data may lag the market, however,
making it difficult to know what constitutes a fair price at the time you wish to invest.

Who should invest in corporate bonds?

Corporate bonds are an excellent choice for investors looking for a fixed but higher income
from a safe option. Corporate bonds are a low-risk investment vehicle when compared to debt
funds as it ensures capital protection. However, these bonds are not entirely safe. If you opt
for corporate bond funds that invest in high-quality debt instruments, then it can serve your
financial goals better. Long-term debt funds often tend to become riskier when interest rates
fluctuate beyond expectations. As a result, corporate bond funds invest in scrips to combat
volatility. They usually go for an investment horizon of one year to four years. This can be an
added benefit if you remain invested for up to three years. It can also prove to be more tax-
efficient if you fall in the highest income tax slab.

Features and benefits of corporate bond funds

1.components of corporate bonds

Corporate bond funds invest predominantly in debt papers. Companies issue debt papers,
which include bonds, debentures, commercial papers, and structured obligations. All of these
components carry a unique risk profile, and the maturity date also varies.

2.Price of the bond

Every bond has a price, and it is dynamic. You can buy the same bond at different prices,
based on the time you choose to buy. Investors should check how it varies from the par value
– it will give information about the market movement.

3.Par value of the bond

This is the amount the company (bond issuer) pays you when the bond matures. It is the loan
principal. In India, a corporate bond’s par value is usually Rs 1,000.

4.Coupon interest

When you buy a bond, the company will payout interest regularly until you exit the corporate
bond or the bond matures. This interest is called the coupon, which is a certain percentage of
the par value.

5.Current yield

The annual returns you make from the bond is called the current yield. For example, if the
coupon rate of a bond with Rs 1,000 par value is 20%, then the issuer pays Rs 200 as the
interest per year.

6.Yeild to maturity

This is the in-house rate of returns of all the cash-flows in the bond, the current bond price,
the coupon payments until maturity and the principal. Greater the YTM, higher will be your
returns and vice versa.

7.Tax-efficiency

If you are holding your corporate bond fund for less than three years, then you must pay
short-term capital gains tax (STCG) based on your tax slab. On the other hand, Section 112 of
the Indian Income Tax mandates 20% tax on long-term capital gains. This applies to those
who hold the bond for more than three years.

8.Exposure and allocation

Corporate bond funds, sometimes, do take small exposures to government securities as well.
But they do so only when no suitable opportunities in the credit space are available. On
average, corporate bond funds will have approximately 5.22% allocation to sovereign fixed
income.
Different types of bonds that you can invest in India

Bonds are one of the many investment options in India in which investors can invest their
hard-earned money. A bond is a debt instrument where the issuer company borrows funds
from the bondholder and, in return, the issuer company is obliged to pay interest that is
known as the coupon. 

The bondholder enters into a formal contract with the issuer who decides to repay borrowed
money with interest at specific periods like on a semi-annual, annual or monthly basis.
The difference between bonds and stocks is that stockholders have an equity stake in the
company, whereas the bondholder has a creditor stake in the company.

In India, the Government as well as the business owners issue these for raising funds to
finance its long-term investments or their current expenditures needs.

These are considered to be a safe instrument as there is low risk involved in it as compared to
other investment options available in India.

1.Government securities bonds

The Government securities bond is a debt instrument that is issued by the central or the state
Government of India.

In India, Government bonds fall under the category of Government securities (G-Sec) that
mainly offer long term investment between 5 to 40 years.

Bonds that are issued by the state government are also known as State Development Loans.

The Government of India has made these government securities so that the small investors
can invest in small amounts for earning interest with lower risks.
Interest can be fixed or floating that is disbursed on a semi-annual basis on these types of
bonds. However, most of the government bonds are issued at a fixed interest.

2.Corporate bond

Corporate bonds are issued by the companies to borrow money from investors for a fixed
period and give them a specific interest rate throughout the tenure.

Companies usually issue bonds to investors for expanding their business for future growth
through raising new capital or for starting a new project.

For the above purposes, the company asks investors to invest their money in exchange for a
specific rate of return for a tenure instead of taking a loan from the banks.

After the tenure ends, investors receive the face value along with the interest rate.

This type of bond is preferred by those investors who want to earn a fixed interest rate for the
tenure of their investment.

3.Convertible bond
These offer both the features of debt and equity but not at the same time.

This can be converted into a predetermined number of stocks and the bondholders can
become shareholders of the company and get all the benefits that are offered to shareholders.

Investors can take the benefit of both debt and equity instruments after investing in
convertible bonds.

4.Zero-coupon bond

As the name suggests, this financial instrument does not give any interest.

It is also referred to as the pure discount bond in which the money invested does not offer a
regular interest rate until the bond gets mature.

The annual returns on the principal amount include the face value, and this amount is paid to
the investor when the bond matures.

5.Inflation-linked bond

This type of bond protects against inflation and is made for cutting out the inflation risk of an
investment that is mainly issued by the government.

In Inflation-linked bonds, the principal and interest rates rise and fall with the rate of
inflation. 

6.RBI bonds

The floating rate saving bonds 2020 (FRSB) which is issued by the RBI is also referred to as
RBI Taxable bonds with a tenure of 7 years, and the interest rate keeps floating during the
tenure.

The interest rate is reset every six months, the first being on January 1, 2021, this means that
the interest rate is paid every six months rather than receiving it at maturity.

The floating interest rate can rise when the rates in the economy go up.

7.Sovereign gold bonds

This type of bond is issued by the central government for those investors who want to invest
in gold but do not want to keep gold in physical form with them.

The interest earned from this bond is exempted from tax. It is also considered a highly
secured bond as it is offered by the government.

Investors who wish to redeem their investment can redeem it after the first five years, which
will only affect the date of subsequent interest disbursal.
How to invest in India?

Investing in these financial instruments can be done in the primary or secondary market. In
the primary market, one can subscribe to the public issue of large companies. Alternatively,
one can purchase this financial instrument from the secondary markets being traded on
exchanges. Usually, bonds are considered to be illiquid are kept till maturity.

Nowadays even small investors can buy government bonds. In India, buying the purchasing
government bonds is easier than ever by using the website NSE (National Stock Exchange) or
The NSE app for buying government bonds is”NSE go BID”.
NSE makes available to the users both a mobile app as well as a web-based platform. Thus,
when you want to buy government bonds via these apps, you’re buying them in the primary
market.

Bottom line

Government Bonds are the most secure forms of investment in India which are attributed to
its Sovereign guarantee. Risk-averse investors can invest in this type of securities. It is also a
suitable long term investment option for those who do not have experience and knowledge of
investing in stock market tools.

Advantages of investing in government bonds

The following are the advantages of investing in government bonds.

1.Risk free
Government bonds promise assured returns and stability of funds to investors. They have
always been an example of risk-free security. Thus, investors looking for a risk-free
investment, government bonds are suitable for them. 
2.Returns
The returns from government bonds are generally as good as bank deposits. Also, there is a
guarantee of principal along with fixed interest. Unlike bank deposits, these bonds are
available for a longer duration. 
3.Liquidity
One can buy and sell government bonds like equity instruments. The liquidity in these bonds
is as adequate as banks and financial institutions. 
4.Portfolio diversification
Investment in government bonds makes a well-diversified portfolio for the investor. It
mitigates the risk of the overall portfolio since government bonds are risk-free investments.
5.Regular income
As per RBI guidelines, the interest accrued on government bonds shall be disbursed every six
months to bondholders. Therefore, it provides an opportunity for the bondholders to earn
regular income by investing their idle funds. 

Disadvantages of investing in government bonds

The following are the disadvantages of investing in government bonds.

1.Low returns
The yield or interest earned on government bonds is relatively lower in comparison to other
investment options like equity, real estate, corporate bonds, etc.
2.Interest rate risk
Government bonds are long term investment bonds where the maturity is ranging from 5
years – 40 years. Hence, the bond might lose its value over this period. If inflation rises, the
interest rate is less attractive. Also, higher the bond period, the market risk also increases
along with interest rate risk. Furthermore, the investor remains with an investment which is
paying below the market value. 

History of bond market

Bonds have been traded far longer than stocks have. In fact, loans that were assignable or
transferrable to others appeared as early as ancient Mesopotamia where debts denominated
in units of grain weight could be exchanged amongst debtors. In fact, recorded debt
instruments history back to 2400 B.C; for instance, via a clay tablet discovered at Nippur,
now present-day Iraq. This artifact records a guarantee for payment of grain and listed
consequences if the debt was not repaid.

Later, in the middle ages, governments began issuing sovereign debts in order to fund wars.
In fact, the Bank of England, the world's oldest central bank still in existence, was
established to raise money to re-build the British navy in the 17th century through the
issuance of bonds. The first U.S. Treasury bonds, too, were issued to help fund the military,
first in the war of independence from the British crown, and again in the form of "Liberty
Bonds" to help raise funds to fight World War I.

The corporate bond market is also quite old. Early chartered corporations such as the Dutch
East India Company (VOC) and the Mississippi Company issued debt instruments before
they issued stocks. These bonds, such as the one in the image below, were issued as
"guarantees" or "sureties" and were hand-written to the bondholder.

The role of bonds in a portfolio

Since governments began to issue bonds more frequently in the early twentieth century and
gave rise to the modern bond market, investors have purchased bonds for several reasons:
capital preservation, income, diversification and as a potential hedge against economic
weakness or deflation. When the bond market became larger and more diverse in the 1970s
and 1980s, bonds began to undergo greater and more frequent price changes and many
investors began to trade bonds, taking advantage of another potential benefit: price, or capital,
appreciation. Today, investors may choose to buy bonds for any or all of these reasons.

1.Capital preservation

Unlike equities, bonds should repay principal at a specified date, or maturity. This makes
bonds appealing to investors who do not want to risk losing capital and to those who must
meet a liability at a particular time in the future. Bonds have the added benefit of offering
interest at a set rate that is often higher than short-term savings rates.

2.Income

Most bonds provide the investor with “fixed” income. On a set schedule, whether quarterly,
twice a year or annually, the bond issuer sends the bondholder an interest payment, which can
be spent or reinvested in other bonds. Stocks can also provide income through dividend
payments, but dividends tend to be smaller than bond coupon payments, and companies make
dividend payments at their discretion, while bond issuers are obligated to make coupon
payments.

3.Capital appreciation

Bond prices can rise for several reasons, including a drop in interest rates and an
improvement in the credit standing of the issuer. If a bond is held to maturity, any price gains
over the life of the bond are not realized; instead, the bond’s price typically reverts to par
(100) as it nears maturity and repayment of the principal. However, by selling bonds after
they have risen in price – and before maturity – investors can realize price appreciation, also
known as capital appreciation, on bonds. Capturing the capital appreciation on bonds
increases their total return, which is the combination of income and capital appreciation.
Investing for total return has become one of the most widely used bond strategies over the
past 40 years. (For more, see “Bond investment strategies.”)

4.Diversification

Including bonds in an investment portfolio can help diversify the portfolio. Many investors
diversify among a wide variety of assets, from equities and bonds to commodities and
alternative investments, in an effort to reduce the risk of low, or even negative, returns on
their portfolios.

Why bond price moves up and down

Investors who plan on holding their bond until maturity typically don’t need to worry about
the movement of bond prices on the secondary market as they will be repaid their principal in
full at maturity, barring a default. But for those looking to sell their securities sooner, an
understanding of what drives secondary market performance is essential.
The price of a bond relative to yield is key to understanding how a bond is valued.
Essentially, the price of a bond goes up and down depending on the value of the income
provided by its coupon payments relative to broader interest rates.
If prevailing interest rates increase above the bond’s coupon rate, the bond becomes less
attractive. In this situation, the bond price drops to compensate for the less attractive yield.
Conversely, if the prevailing interest rate drops below the bond’s coupon rate, the price of the
bond goes up as it becomes more attractive.
For example, if a bond has a 4% coupon and the prevailing interest rate rises to 5%, the bond
becomes less attractive and so its price will fall. On the other hand, if a bond has a 4%
coupon and the prevailing interest rate falls to 3%, that bond becomes more attractive which
pushes up its price on the secondary market.

Factors that influence the performance of bonds

Apart from interest rate movements, there are three other key factors that can affect the
performance of a bond: market conditions, the age of a bond and its rating. Let’s look at each
in turn.

1.Market conditions

Broader market conditions can have an impact on bonds. For example, if the stock market is
rising, investors typically move out of bonds and into equities. By contrast, when the stock
market is going through a correction, investors may seek the perceived safety of bonds.

2.Ratings

Bonds are assigned credit ratings by ratings agencies, such as Moody’s and Standard &
Poor’s. The ratings signal to investors the agency’s view of the issuer’s ability to pay the
interest and principal when due. If a bond’s credit rating is downgraded, the bond becomes
less attractive to investors and its price will likely fall.

3.The age of a bond

The age of a bond relative to its maturity date can affect pricing. This is because the
bondholder is paid the full face value of the bond when the bond reaches maturity. As the
maturity date gets closer, the bond's price will move towards par. The diagram below shows
the effect of time on the price of a bond when the prevailing interest rate is 5%.

What this chart tells us

 Blue line (at par) - The blue line that runs across the middle of the chart represents a
bond that has a coupon of 5% - the same as the current prevailing interest rate. As
such, this price of this bond is also at par ($100)

 Green line (premium to par) - The green line represents a bond offering a coupon of
10%. Because it is paying more than the prevailing interest rate of 5%, it costs more
to buy ($180 instead of $100).

 Navy line (discount to par) - The navy line represents a bond offering a coupon of
3%, which is below the prevailing interest rate of 5%. As such, this bond costs less to
buy ($70)

All three bonds converge on the same price at maturity because they will all repay the
same face value amount of $100.
 Bond market index

A bond index or bond market index is a method of measuring the investment

performance and characteristics of the bond market. There are numerous indices of
differing construction that are designed to measure the aggregate bond market and its
various sectors (government, municipal, corporate, etc.) A bond index is computed
from the change in market prices and, in the case of a total return index, the interest
payments, associated with selected bonds over a specified period of time. Bond
indices are used by investors and portfolio managers as a benchmark against which to
measure the performance of actively managed bond portfolios, which attempt to
outperform the index, and passively managed bond portfolios, that are designed to
match the performance of the index. Bond indices are also used in determining the
compensation of those who manage bond portfolios on a performance-fee basis.

An index is a mathematical construct, so it may not be invested in directly. But

many mutual funds and exchange-traded funds attempt to "track" an index (see index
fund), and those funds that do not may be judged against those that do.

Characteristics

Characteristics that are relevant in judging bond indices include.

 The sample of securities: the number of securities in the index, and the criteria used to
determine the specific bonds included in the index.

 Market sector measured: indices can be composed of government bonds, municipal

bonds, investment grade corporate bonds, below-investment-grade (high-yield
bonds), mortgage-backed securities, syndicated or leveraged loans. Indices may also
consist of bonds within a certain range of maturities, e.g. long term, intermediate
term, etc.

 Weighting of returns: the impact of each individual issue's return on the overall index
may be weighted by market capitalization (the market value of the security), or equal-
weighted for each security. Most bond indices are weighted by market capitalization.
This results in the "bums" problem, in which less creditworthy issuers with a lot of
outstanding debt constitute a larger part of the index than more creditworthy ones
with less debt.

 Quality of price data: the market price used for each bond in the index may be based
on actual transactions, a brokerage firm's estimate or a computer model.
  Reinvestment assumptions: what does the rate of return calculation assume regarding
reinvestment of periodic interest payments from the bonds in the index?

There are certain challenges inherent in constructing and maintaining a bond market index.

 The bond market contains more individual securities than the stock market. A
corporation which qualifies for inclusion in a particular bond index may have multiple
bonds outstanding.

 Most bonds are traded in a fragmented over-the-counter market that has no

consolidated price quotation system. Therefore, unlike the stock market, there is no
single source to consult to determine the definitive closing price of each bond in the
index on any given day.

 An individual bond's duration changes with the passage of time remaining until

maturity. This changes the index's price sensitivity to a given change in yield, even if
the bonds comprising the index remain constant. A bond's convexity and the value of
any embedded options (e.g. call provisions) also change over time.
Advantages of bonds

Bonds have a clear advantage over other securities. The volatility of bonds (especially short
and medium dated bonds) is lower than that of equities (stocks). Thus bonds are generally
viewed as safer investments than stocks. In addition, bonds do suffer from less day-to-day
volatility than stocks, and the interest payments of bonds are sometimes higher than the
general level of dividend payments.

Bonds are often liquid. It is often fairly easy for an institution to sell a large quantity of bonds
without affecting the price much, which may be more difficult for equities. In effect, bonds
are attractive because of the comparative certainty of a fixed interest payment twice a year
and a fixed lump sum at maturity.

Bondholders also enjoy a measure of legal protection: under the law of most countries, if a
company goes bankrupt, its bondholders will often receive some money back (the recovery
amount), whereas the company’s equity stock often ends up valueless. Furthermore, bonds
come with indentures (an indenture is a formal debt agreement that establishes the terms of a
bond issue) and covenants (the clauses of such an agreement). Covenants specify the rights of
bondholders and the duties of issuers, such as actions that the issuer is obligated to perform or
is prohibited from performing.
There are also a variety of bonds to fit different needs of investors, including fixed rated
bonds, floating rate bonds, zero coupon bonds, convertible bonds, and inflation linked bonds.
Bonds have some advantages over stocks, including relatively low volatility, high liquidity,
legal protection, and a variety of term structures.

1.Bonds offer diversification

Almost everyone has heard the phrase “Don’t put all your eggs in one basket.” This is very
true for investors. It may be a cliché, but it's wisdom that has stood the test of time. As time
goes on, greater diversification can provide you with better risk-adjusted returns than narrow
portfolios can. In other words, it reduces the amount of return relative to the risk.

More importantly, bonds can help preserve capital for equity investors during times when the
stock market is falling.

2.Bonds preserve principal

Fixed income investments are very useful for people nearing the point where they will need
to use the cash they have invested. For instance, this could apply to someone who is within
five years of retirement or a parent whose child is starting college. Stocks can face huge
levels of volatility in a brief period, such as the crash of 2001 and 2002 or the financial crisis
of 2008 and 2009, but a diversified bond portfolio is much less likely to suffer large losses
short-term.

As a result, it may be a good idea to increase your allocation to fixed income and decrease
your allocation to equities as you move closer to your goals.
3.Bonds offer tax advantages

Certain types of bonds can also be useful for those who need to reduce their tax burdens. The
income on bank instruments, most money market funds, and equities is taxable unless the
assets are held in a tax-deferred account, but the interest on municipal bonds is tax-free on the
federal level. If you own a municipal bond issued by the state where you live, it's tax-free at
the state level as well. The income from U.S. Treasury securities is tax-free on the state and
local levels.Tax reasons shouldn't be the main reason you choose an investment, especially if
you're in a lower tax bracket. but the fixed income universe offers a number of ways you can
minimize your tax burden.

Disadvantages of Bonds

Bonds are also subject to various other risks such as call and prepayment risk, credit risk,
reinvestment risk, liquidity risk, event risk, exchange rate risk, volatility risk, inflation risk,
sovereign risk, and yield curve risk.

Price changes in a bond will immediately affect mutual funds that hold these bonds. If the
value of the bonds in a trading portfolio falls, the value of the portfolio also falls. This can be
damaging for professional investors such as banks, insurance companies, pension funds, and
asset managers (irrespective of whether the value is immediately “marked to market” or not).
If there is any chance a holder of individual bonds may need to sell his bonds and “cash out”,
the interest rate risk could become a real problem.

Bond prices can become volatile depending on the credit rating of the issuer – for instance if
credit rating agencies like Standard and Poor’s and Moody’s upgrade or downgrade the credit
rating of the issuer. An unanticipated downgrade will cause the market price of the bond to
fall. As with interest rate risk, this risk does not affect the bond’s interest payments (provided
the issuer does not actually default), but puts at risk the market price, which affects mutual
funds holding these bonds, and holders of individual bonds who may have to sell them.

A company’s bondholders may lose much or all their money if the company goes bankrupt.
Under the laws of many countries (including the United States and Canada), bondholders are
in line to receive the proceeds of the sale of the assets of a liquidated company ahead of some
other creditors. Bank lenders, deposit holders (in the case of a deposit taking institution such
as a bank) and trade creditors may take precedence. There is no guarantee of how much
money will remain to repay bondholders. In a bankruptcy involving reorganization or
recapitalization, as opposed to liquidation, bondholders may end up having the value of their
bonds reduced, often through an exchange for a smaller number of newly issued bonds.

Some bonds are callable, meaning that even though the company has agreed to make
payments plus interest toward the debt for a certain period of time, the company can choose
to pay off the bond early. This creates reinvestment risk, meaning the investor is forced to
find a new place for his money. As a consequence, the investor might not be able to find as
good a deal, especially because this usually happens when interest rates are falling.

1.Management fees
Some bond funds are actively managed, and they charge a management fee, which may have
a drain on the investor’s returns. Even when compared to stock ETFs, bondETFs usually have
higher expenses ratios.

2.Uncertainty with the tax bill

As mentioned before, when individual bonds in a portfolio are sold, it may create capital
gain/lose. It is hard to predict these gain/losses for individual bonds, which makes it difficult
to anticipate the tax consequences of investing in the bond fund.

3.Net Asset Value (NAV) fluctuation in the market

As interest rates change, the net asset value (NAV) of the fund changes due to price, changes
of individual bonds in portfolio. It is difficult to anticipate the NAV of the fund, and it makes
bond funds less attractive to investors compared to individual bonds.

What are the advantages of bonds?

The major advantages of bonds include fixed returns and regular interests. Some of the
common benefits of purchasing bonds are listed below.

1.Fixed Returns on Investment

Fixed investment in Bonds yields regular interests at timely intervals. Also, once a bond
matures, you receive the principal amount invested earlier. The best advantage of investing in
Bonds is that the investors know exactly how much the returns will be.

2. Less Risky
Although Bonds and stocks are both securities, the clear differences between the two are that
the former matures in a specific period, while the latter typically remain outstanding
indefinitely. Also, the bondholders are paid first over stockholders in case of liquidity.

3. Less volatile
Investing in bonds is safer than the stock market, which also has several other risks. Although
a bond’s value can fluctuate according to current interest rates or inflation rates, these are
generally more stable compared when compared to stocks.
4. Clear Ratings

Unlike stocks, bonds are universally rated by credit rating agencies. This gives further assures
investors about the right time for investing in bonds. Based on the clear ratings, you can
choose to buy bonds of any issuer with a better face value of bonds. However, it’s still
recommended to conduct your own research before investing.

5. Investor Protection is one of the major advantages of Bonds

Bondholders are also secured against many failures. Legal protection is something investors
can benefit from investing in Bonds. If a company goes bankrupt, its bondholders will often
receive some money back in the form of a recovery amount.

What are the disadvantages of bonds?

Since it’s the money involved, there are certain Disadvantages of investing in bonds the
investors or issuers may face at times. Bankruptcy is among the commonly talked
disadvantages of Bonds.

1.Larger Investment needed

The cost of purchasing bonds is always among the disadvantages of Bonds. The cost is
directly proportional to a company’s reputation. Even though some bonds can be purchased
for relatively low sums ($1,000) , you may need a larger investment to buy some bonds. This
means access to some bonds will be impossible for investors.

2. Bankruptcy

Bondholders may lose much or all their investment in case a company goes bankrupt. In the
economy such as the USA, bondholders are given much leverage and protection laws in case
of bankruptcy. This means investors are expected to receive some or all of the invested
money. But in many countries, there are no protection for investors.

3. Less liquid compared to stock

Most major corporations may have high liquidity, but bonds issued by a smaller or less
financially stable company may be less liquid as fewer investors are willing to buy them.
Bonds with a very high face value will also be less liquid, but the companies with low face
value won’t find any investors Credit risk: When the issuer fails to timely make interest or
principal payments and defaults on its bonds.

4. Risks Involved are concerning Disadvantages of Bonds

Fixed-rate bonds are subject to interest rate risk, which means that their market prices will
decrease in value when the generally prevailing interest rates rise. There are many other risks
involved with Bonds, namely, Credit risk, Inflation risk, Liquidity risk, and Call risk.

Fixed-rate bonds are subject to interest rate risk, which means that their market prices will
decrease in value when the generally prevailing interest rates rise. There are many other risks
involved with Bonds, namely, Credit risk, Inflation risk, Liquidity risk, and Call risk.

1.redit risk: When the issuer fails to timely make interest or principal payments and defaults
on its bonds.

2.Inflation risk: Rise in purchasing power due to inflation puts a risk for investors receiving a
fixed interest rate.

3.Liquidity risk: Investors may not find the market for the bond; this eventually prevents
them from buying or selling the bonds.

4.Call risk: Retiring a bond before it reaches the maturity date is something an issuer might
do in case if interest rates dip. This could be one of the biggest Disadvantages of Bonds.

Conclusion

Bonds are an effective option for those who need a steady and dependable source of income.
Investing in bonds is what elderly investors do after retirement majorly. Selecting bonds
carefully, purchasing them at the right time, and knowing the Advantages and Disadvantages
of Bonds can be a big help for prospective investors.

What are Bond Risks?

Bonds as an investment tool are considered mostly safe. However, no investment is devoid of
risks. In fact, investors who take greater risks accrue greater returns and vice versa.
Investors averse to risk feel unsettled during intermittent periods of slowdown while risk-
loving investors take such incidents of a slowdown in a positive way with the expectation of
gaining significant return over time. Hence, it becomes imperative for us to understand the
various risks that are associated with bond investments and to what extent they can affect the
returns.

Below is the list of most common types of Risks in Bond that investors should be aware of
Now we will get into a little detail to understand how these risks manifest themselves in the
bond environment and also how an investor can try to minimize the impact.
1.Inflation risks

Inflation risk refers to the effect of inflation on investments. When inflation rises,  the
purchasing power of bond returns (principal plus coupons) declines. The same amount of
income will buy lesser goods. For e.g., when the inflation rate is 4%, every $1000 return from
the bond investment will be worth only $960.

2.Interest rate risk

Interest rate risk refers to the impact of the movement in interest rates on bond returns. As
rates rise, bond price declines. In the event of rising rates, the attractiveness of existing bonds
with lower returns declines, and hence the price of such bond falls. The reverse is also true.
Short-term bonds are less exposed to this risk, while long term bonds have a very high
probability of getting affected.

3.Call risk

Call risk is specifically associated with the bonds that come with an embedded call option.
When market rates decline, callable bond issuers often look to refinance their debt, thus
calling back the bonds at the pre-specified call price. This often leaves the investors in the
lurch who are forced to reinvest the bond proceeds at lower rates. Such investors are,
however, compensated by high coupons. The call protection feature also protects the bond
from being called for a particular time period giving investors some relief.

4.Reinvestment risk

The probability that investors will not be able to reinvest the cash flows at a rate comparable
to the bond’s current return refers to reinvestment risk. This tends to happen when market
rates are lower than the bond’s coupon rate. Say, a $100 bond’s coupon rate is 8% while the
prevailing market rate is 4%. The $8 coupon earned will then be reinvested at 4%, rather than
at 8%. This is called the risk of reinvestment.

5.Credit risk

Credit risk results from the bond issuer’s inability to make timely payments to the lenders.
This leads to interrupted cash flow for the lender, where losses might range from moderate to
severe. Credit history and capacity to repay are the two most important factors that can
determine credit risk.

6.Liquidity risk
Liquidity risk arises when bonds become difficult to liquidate in a narrow market with very
few buyers and sellers. Narrow markets are characterized by low liquidity and high volatility.

7.Market risk/systematic risk

Market risk is the probability of losses due to market reasons like slowdown and changes in
rates. Market risk affects the entire market together. In a bond market, no matter how good an
investment is, it is bound to lose value when the market declines. Interest rate risk is another
form of market risk.

8.Default risk

Default risk is defined as the bond issuing company’s inability to make required
payments. Default risk is seen as other variants of credit risk where the borrowing company
fails to meet the agreed terms of the issue.

9.Rating risk

Bond investments can also sometimes suffer from rating risk where a slew of factors specific
to the bond, as well as the market environment, affect the bond rating, thus decreasing the
value and demand of the bond. Different types of bond risks elucidated above almost always
decrease the worth of the bond holding. The decline in the value of bonds decreases demand,
thus leading to a loss of financing options for the issuing company. The nature of risks is such
that it doesn’t always affect both the parties together. It favors one side while posing risks for
the other.

Advantages of Understanding Bond Risks

Although the term advantages of risks is an oxymoron, it is very important to understand that
it is the risks only that warn investors beforehand so that they can diversify their portfolios
and be aware of what is coming. This not only prevents severe market unrest but also creates
an efficient market.

1.Proper assessment of every bond issue for the above risks is very important in order to
minimize the impact.

2. A new market entrant can be easily duped by an issue that looks good on the face but is
marred by so many risks that the eventual payout might not be attractive at all.

3. Good market knowledge is essential for bond investments; else otherwise, safe investment
heaven might turn out to be a loss-making exercise only.

4. Avoiding too much dependency on a particular type of bond can help mitigate these risks
to some extent.

5. Some debt instruments come equipped with clauses that aim to minimize a specific type of
risk. For e.g., Treasury Inflation-Protected Securities or TIPS have their returns tied up to
the consumer price index. In the event of rising inflation (Inflation risk), returns also get
adjusted accordingly, preventing the investor from losing purchasing power.

6. It is also very important to assess one’s risk appetite before jumping into investments.

Generally speaking, higher risks generate higher returns. However, all investments don’t
always perform as per expectations even after applying risk mitigation techniques mostly
since it is very difficult to quantify risks, and hence, complete elimination becomes
impossible.

What are the risks of government bonds?

You might hear investors say that a government bond is a risk-free investment. Since a
government can always print more money to meet its debts, the theory goes, you’ll always
get your money back when the bond matures.

In reality, the picture is more complicated. Firstly, governments aren’t always able to produce
more capital. And even when they can, it doesn’t prevent them from defaulting on loan
payments. But aside from credit risk, there are a few other potential pitfalls to watch out for
with government bonds: including risk from interest rates, inflation and currencies.

What is interest rate risk?

Interest rate risk is the potential that rising interest rates will cause the value of your bond to
fall. This is because of the effect that high rates have on the opportunity cost of holding a
bond when you could get a better return elsewhere.

What is inflation risk?

Inflation risk is the potential that rising inflation will cause the value of your bond to fall. If
the rate of inflation rises above the coupon rate of your bond, then your investment will lose
you money in real terms. Index-linked bonds are less exposed to inflation risk.

What is currency risk?

Currency risk only applies if you buy a government bond that pays out in a currency that is n
one year different to your reference currency. In this case, fluctuating exchange rates may
cause the value of your investment to drop.

Government bonds are guaranteed by the full faith and backing of their respective
governments. It’s important to note, however, that even government bonds are subject to
numerous risks, including credit risk.
Types of Bonds

Following are the types of bonds:

1. Fixed Rate Bonds

In Fixed Rate Bonds, the interest remains fixed through out the tenure of the bond.
Owing to a constant interest rate, fixed rate bonds are resistant to changes and
fluctuations in the market.

2. Floating Rate Bonds

Floating rate bonds have a fluctuating interest rate (coupons) as per the current market
reference rate.

3. Zero Interest Rate Bonds

Zero Interest Rate Bonds do not pay any regular interest to the investors. In such types
of bonds, issuers only pay the principal amount to the bond holders.

4. Inflation Linked Bonds

Bonds linked to inflation are called inflation linked bonds. The interest rate of
Inflation linked bonds is generally lower than fixed rate bonds.

5. Perpetual Bonds

Bonds with no maturity dates are called perpetual bonds. Holders of perpetual bonds
enjoy interest throughout.

6. Subordinated Bonds

Bonds which are given less priority as compared to other bonds of the company in
cases of a close down are called subordinated bonds. In cases of liquidation,
subordinated bonds are given less importance as compared to senior bonds which are
paid first.

7. Bearer Bonds

Bearer Bonds do not carry the name of the bond holder and anyone who possesses the
bond certificate can claim the amount. If the bond certificate gets stolen or misplaced
by the bond holder, anyone else with the paper can claim the bond amount.

8. War Bonds

War Bonds are issued by any government to raise funds in cases of war.

9. Serial Bonds

Bonds maturing over a period of time in installments are called serial bonds.

10. Climate Bonds

 Climate Bonds are issued by any government to raise funds when the country
concerned faces any adverse changes in climatic conditions.

What are government bonds?

A government bond is a debt instrument issued by the central and state government of the cou
ntry to finance their needs and also to regulate the money supply. When the government
requires funds for infrastructure development and for financing government spending such
bonds are often the answer. Thus, the government will sell bonds to the public, inviting
investments. The government will pay back the principal and interest as per the clauses
mentioned in the bond at the specified maturity date. The government issues bonds under the
supervision of the Reserve Bank of India (RBI). 

The RBI issues bonds on behalf of the government of India to finance the fiscal deficit. Over
the past few years, the bonds were issued to large market participants like companies,
commercial banks and financial institutions. However, in recent years, government bonds
have been available to smaller investors like individual investors, co-operative banks etc.
Also, individual investors are taking a lot of interest in investing in government bonds. 

Generally, Government bonds in India are long term investment tools. These bonds are for a
long duration ranging from 5 years to 40 years. Also, government bonds fall under the broad
category of government securities (G-secs). Both the central and state government can issue
government bonds. However, the bonds issued by state governments are also called State
Development Loans(SDLs).

The Government of India (GOI) issues different variants of bonds. Also, these bonds cater to
the diverse needs of the investor. The interest rate offered on the government bond is known
as the coupon rate. The coupon can be either fixed or floating disbursed on a semi-annual
basis. Mostly, GOI issues bonds which have fixed coupon rates in the market.

Types of government bonds

The following are the different types of Government Bonds.

1.Treasury bills

Treasury bills, also known as T-bills, are short term government bonds. They are
issued for maturity within one year. The government issues these bonds in three
categories, i.e. 91 days, 182 days and 364 days. The investors do not get coupon
payments. However, the difference between the face value and the discounted value is
the profit for the investors. 

.2. Cash management bills

These bonds are short term securities and are highly flexible. They are issued as per
the financing needs of the government. Hence, the tenure of the bond is mainly
 dependent on temporary cash needs. Usually, they must be less than 91 days. It is very
similar to treasury bills. 

3.Dated government securities

This type of bond comes with varying rates of interest. The investors will benefit from
the interest paid on these bonds. Dated Government securities are termed “dated”
owing to the element of the predetermined maturity date. The Reserve Bank of India
auctions these bonds. The following are types of dated government securities.

4.Fixed-rate bonds

Government bonds of this nature have a fixed coupon rate throughout the tenure of
the bond. In other words, the interest rate remains constant for the entire investment
tenure irrespective of the fluctuating market rates. 

5.floating rate bonds

As the name suggests, the interest rate of these bonds keeps fluctuating during the
investment. The interest rate changes are undertaken at intervals which are declared
before the bond is issued. 

For example, a floating rate bond (FRB) has a pre-announced interval of 6 months. It
means that the interest rate would reset every six months throughout the tenure. 

6.zero coupon bonds

As the name suggests, Zero coupon bonds have no coupon payments. The profits
from these bonds arise from the difference in the issue price and redemption value. In
other words, these bonds are issued at a discount and redeemed at par. Further, these
bonds are not issued through auction but created through existing securities. 

7.Capital index bonds

The capital index bonds are those where the principal amount is linked to an accepted
index of inflation. This bond is issued to protect the principal amount of investors
from inflation. 

8.Inflation Index bonds

The inflation Index bonds (IIBs) are where the principal amount and the interest
payment is linked to an inflation index. The inflation index may be the Consumer
Price Index (CPI) or the Wholesale Price Index (WPI). Investments in such bonds
ensure real returns which remains constant. Also, it can safeguard the investor’s
portfolio against inflation rates. 

Bonds
Bonds are mainly of two types, i.e. Government Bonds and Corporate Bonds. Government
Bonds holds less risk than Corporate Bonds. Mostly, Corporate Bonds pay a higher interest
rate than Government Bonds. There are other Bonds like Municipal Bonds and Institutions
Bonds. The Bonds have a fixed coupon rate and pay that interest to the bondholder
periodically. And also repay the principal amount at the time of maturity. The interest rates of
bonds are variable in the case of Floating Rate Bonds.
Floating Rate Bonds provide a variable interest rate that fluctuates according to the changes
in the interest rates in the economy. Fixed-Rate Bonds gives fixed interest rates, irrespective
of any market changes. There are Zero-Coupon Bonds, which does not provide any interest
rate periodically or at the time of redemption. Rather These bonds are issued at a discount to
the par value or face value of the bond. And the redemption of such bonds at maturity at the
par value of the bond. The difference between the par value and the discount value is the
return for the investor or we can say that is the interest for the bondholders.

Issuance of Corporate Bonds sometimes takes place with a call option and put option. In the
case of a call option, the company can call back their bonds once a particular time has passed.
In the case of a put option, the investors can sell their bonds, back to the company after a
particular time or date as indicated at the time of issuance.
1.corporate bonds

Corporate bonds are a type of debt security an entity can structure to raise capital from the
entire investing public. Institutional mutual fund investors are usually some of the most
prominent corporate bond investors but individuals with brokerage access may also have the
opportunity to invest in corporate bond issuance as well. Corporate bonds also have an active
secondary market which is utilized by both individual and institutional investors.
A corporate bond is a debt security that is issued by a firm and sold to investors. The
company gets the capital it needs and in return the investor is paid a pre-established number
of interest payments at either a fixed or variable interest rate. When the bond expires, or
"reaches maturity," the payments cease and the original investment is returned.
Financial institutions or financial agencies may choose to bundle products from their balance
sheet into a single debt security instrument offering. As a security instrument, the offering
raises capital for the institution while also segregating the bundled assets.

Debt Market is a market place, where buying and selling of debt market financial instruments
take place. These financial instruments are fixed-income securities, giving fixed returns to the
investors. These securities provide regular interest payments at a fixed rate with principal
repayment at the time of maturity. The issuer of these securities can be local bodies,
municipalities, state government, central government, corporate, etc. Major Debt Market
securities are Bonds, Government Bonds, Debentures, Treasury Bills, Certificate of Deposits,
Commercial Papers, etc.

Understanding Corporate Bonds

In the investment hierarchy, high-quality corporate bonds are considered a relatively safe
and conservative investment. Investors building balanced portfolios often add bonds in order
to offset riskier investments such as growth stocks. Over a lifetime, these investors tend to
add more bonds and fewer risky investments in order to safeguard their accumulated capital.
Retirees often invest a larger portion of their assets in bonds in order to establish a reliable
income supplement.

In general, corporate bonds are considered to have a higher risk than U.S. government
bonds. As a result, interest rates are almost always higher on corporate bonds, even for
companies with top-flight credit quality. The difference between the yields on highly-rated
corporate bonds and U.S. Treasuries is called the credit spread.

2.Municipal bonds
Municipal bonds are a type of debt security instrument issued by agencies of the government
for the purpose of funding infrastructure projects. Municipal bond security investors are
primarily institutional investors such as mutual funds.

A municipal bond is a bond issued by state or local governments, or entities they create such
as authorities and special districts and they also planning for urban development. In the
United States, interest income received by holders of municipal bonds is often, but not
always, exempt from federal and state income taxation. Typically, only investors in the
highest tax brackets benefit from buying tax-exempt municipal bonds instead of taxable
bonds. Taxable equivalent yield calculations are required to make fair comparisons between
the two categories.
The municipal debt market is relatively small compared to the corporate market. Total
municipal debt outstanding was 4 trillion as of the first quarter of 2021, compared to nearly
15 trillion in the corporate and foreign markets.
Local authorities in many other countries in the world issue similar bonds, sometimes called
local authority bonds or other names.

Understanding Municipal Bonds

A municipal bond is a debt obligation issued by a nonprofit organization, a private-sector

corporation, or another public entity using the loan for public projects such as constructing
schools, hospitals, and highways.

Municipal bonds can generate tax-free income for qualified residents but pay lower coupon
(interest) rates as a result compared with taxable bonds.

Types of Municipal Bonds

A municipal bond is categorized based on the source of its interest payments and
principal repayments. A bond can be structured in different ways, offering various benefits,
risks, and tax treatments. Income generated by a municipal bond may be taxable. For
example, a municipality may issue a bond not qualified for federal tax exemption, resulting
in the generated income being subject to federal taxes.

 A general obligation bond (GO) is issued by governmental entities and not backed by
revenue from a specific project, such as a toll road. Some GO bonds are backed by
dedicated property taxes; others are payable from general funds.
 A revenue bond secures principal and interest payments through the issuer or via
sales, fuel, hotel occupancy, or other taxes. When a municipality is a conduit
issuer of bonds, a third party covers interest and principal payments.

Municipal Bond Risks

Default risk is low for municipal bonds compared with corporate bonds. However, revenue
bonds are more vulnerable to changes in consumer tastes or general economic downturns
than GO bonds. For example, a facility delivering water, treating sewage, or providing other
fundamental services has more dependable revenue than a park’s rentable shelter area.

As a fixed-income security, the market price of a municipal bond fluctuates with changes in

interest rates: When interest rates rise, bond prices decline; when interest rates decline, bond
prices rise. In addition, a bond with a longer maturity is more susceptible to interest rate
changes than a bond with a shorter maturity, causing even greater changes in the municipal
bond investor’s income. Furthermore, the majority of municipal bonds are illiquid; an
investor needing immediate cash has to sell other securities instead.

Many municipal bonds carry call provisions, allowing the issuer to redeem the bond prior to
the maturity date. An issuer typically calls a bond when interest rates drop and reissues
municipal bonds at a lower interest rate. When a bond is called, investors lose income from
interest payments and face reinvesting in a bond with a lower return.

3.Treasury bonds

Treasury bonds (T-bonds) are government debt securities issued by the U.S. Federal

government that have maturities greater than 20 years. T-bonds earn periodic interest until
maturity, at which point the owner is also paid a par amount equal to the principal.

Treasury bonds are part of the larger category of U.S. sovereign debt known collectively as
treasuries, which are typically regarded as virtually risk-free since they are backed by the
U.S. government's ability to tax its citizens.

Understanding Treasury Bonds (T-Bonds)

Treasury bonds (T-bonds) are one of four types of debt issued by the U.S. Department of the
Treasury to finance the U.S. government’s spending activities. The four types of debt are
Treasury bills, Treasury notes, Treasury bonds, and Treasury Inflation-Protected Securities
(TIPS). These securities vary by maturity and coupon payments.

All of them are considered benchmarks to their comparable fixed-income categories because
they are virtually risk-free. T-bonds are backed by the U.S. government, and the U.S.
government can raise taxes and increase revenue to ensure full payments. These investments
are also considered benchmarks in their respective fixed-income categories because they
offer a base risk-free rate of investment with the categories lowest return. T-bonds have
long durations, issued with maturities of between 20 and 30 years.

As is true for other government bonds, T-bonds make interest payments semiannually, and
the income received is only taxed at the federal level. Treasury bonds are issued at monthly
online auctions held directly by the U.S. Treasury. A bond's price and its yield are
determined during the auction. After that, T-bonds are traded actively in the secondary
market and can be purchased through a bank or broker.

Individual investors often use T-bonds to keep a portion of their retirement savings risk-free,
to provide a steady income in retirement, or to set aside savings for a child's education or
other major expenses. Investors must hold their T-bonds for a minimum of 45 days before
they can be sold on the secondary market.
Types of treasury bonds

The type of bond we’ve described above is also called a conventional gilt. These are issued
directly by the UK government, with a fixed yield paid out every six months until the gilt
expires. However, there’s a second type of bond to be aware of in the UK, called index-
linked gilts. These track the Retail Price Index (RPI) with a variable interest rate. As a result,
they’re designed to protect your investment from inflation.

There are also a few different ways to purchase bonds:

 Bidding at an auction
 Purchasing directly from a bank or broker
 Purchasing directly from the government
 Purchasing on the open market

What are the risks of treasury bonds?

Compared to other types of investments, treasury bonds are relatively low in risk. As with
any investment, it’s impossible to eliminate all risk from the equation. Bonds are particularly
sensitive to changes in government interest rates. When interest rates risk, bond holding
values will fall and vice versa. An additional risk is that of inflation, which reduces your
purchasing power and payment value. Interest-linked bonds are designed to combat this risk.

If you’re looking for a way to diversify your portfolio, UK treasury bonds are certainly worth
looking at as a long-term investment. Although rates of return are lower than higher-risk
options in the stock market, they provide balance to help hedge against losses over time.

4.Junk bonds
Junk bonds, or high-yield bonds, are risky investments that have higher rates of default but
offer significantly higher returns. Unlike lower-risk, investment-grade bonds, junk bonds are
not usually ideal for long-term investments, and can easily cause the investor to lose money if
she’s not careful.

A bond is a way of lending money to a company. The company accepts the money for the
bond with the agreement that it repays the initial loan with interest when the bond matures.
They usually have a credit rating from a financial services company like Standard & Poor’s
that reflects the ability of the company to meet its payment obligations when the bond
matures. A healthy rating means a bond is likely to generate a lot of revenue, which goes
toward the bond issuer’s payments on its principal and interest. These bonds are called
investment-grade.

Junk bonds have low credit ratings, meaning there’s a high risk of default or the potential for
other adverse credit events. However, where long-term investors favor reliable, income-
producing bonds, speculators may prefer to shoulder the risks of a high-yield, non-
investment-grade bond.

Understanding junk bonds

A junk bond is debt, known as a corporate bond, issued by a company that does not have an
investment-grade credit rating. Junk bonds are also known as high-yield bonds because the
interest payments are higher than for the average corporate bond. Companies that issue junk
bonds pay these high interest rates to entice investors to take on the higher risk of lending
them money.
While an investment-grade credit rating denotes little risk that a company will default on its
debt, junk bonds carry the highest risk of a company missing an interest payment (called
default risk). Yet even when considering default risk, junk bonds still are less likely than
many stocks to generate permanent portfolio losses since a company is obligated to repay
bondholders before shareholders if it goes bankrupt.

What are the risk of junk bonds?

A bond that has a high risk of the underlying company defaulting is called a junk bond.
Companies that issue junk bonds are typically start-ups or companies that are struggling
financially. Junk bonds carry risk since investors are unsure whether they'll be repaid their
principal and earn regular interest payments. As a result, junk bonds pay a higher yield than
their safer counterparts to help compensate investors for the added level of risk. Companies
are willing to pay the high yield because they need to attract investors to fund their
operations.

5.Bond funds
A bond fund, also referred to as a debt fund, is a pooled investment vehicle that invests
primarily in bonds (government, municipal, corporate, convertible) and other debt
instruments, such as mortgage-backed securities (MBS). The primary goal of a bond fund is
often that of generating monthly income for investors.

Both bond mutual funds and bond exchange traded funds (ETF)  are available to most
investors.

Understanding Bond Funds

A bond fund is simply a mutual fund that invests solely in bonds. For many investors, a
bond fund is a more efficient way of investing in bonds than buying individual bond
securities. Unlike individual bond securities, bond funds do not have a maturity date for the
repayment of principal, so the principal amount invested may fluctuate from time to time.

Additionally, investors indirectly participate in the interest paid by the underlying bond
securities held in the mutual fund. Interest payments are made monthly and reflect the mix
of all the different bonds in the fund, which means that the interest income distribution will
vary monthly.

An investor who invests in a bond fund is putting their money into a pool managed by a
portfolio manager. Typically, a bond fund manager buys and sells according to market
conditions and rarely holds bonds until maturity.

Bond Fund Benefits

Bond funds are attractive investment options as they are usually easier for investors to
participate in than purchasing the individual bond instruments that make up the bond
portfolio. By investing in a bond fund, an investor need only pay the annual expense
ratio that covers marketing, administrative and professional management fees. The
alternative is to purchase multiple bonds separately and deal with the transaction
costs associated with each of them.

Bond funds provide instant diversification for investors for a low required minimum

investment. Since a fund usually has a pool of different bonds of varying maturities, the
impact of any single bond’s performance is lessened if that issuer should fail to pay interest
or principal.
Another benefit of a bond fund is that it provides access to professional portfolio managers
who have the expertise to research and analyse the creditworthiness of bond issuers and
market conditions before buying into or selling out of the fund. For example, a fund
manager may replace bonds when the issuer's credit is downgraded or when the issuer
"calls," or pays off the bond before the maturity date.

Advantages of bond funds

Diversification
Bond funds typically own a number of individual bonds of varying maturities, so the impact
of any single bond’s performance is lessened if that issuer should fail to pay interest or
principal. Certain types of bond funds, such as broad market bond funds, are also diversified
across bond sectors, providing exposure to corporate, U.S. government, government agency,
and mortgage-backed bonds. The investment minimums for most bond funds are low enough
that you can get significantly more diversification for much less money than if you purchased
individual bonds.

Professional management
Professional portfolio managers and analysts have the expertise and technology to research
the creditworthiness of bond issuers and analyze market information before making
investment decisions. Fund managers identify which securities to buy and sell through
individual security analysis, sector allocation, and yield curve evaluation.

Liquidity and convenience

Bond funds allow you to buy or sell your fund shares each day. In addition, bond funds allow
you to automatically reinvest income dividends and to make additional investments at any
time.

Income stream
Most bond funds pay regular monthly income, although the amount may vary with market
conditions. This feature can make bond funds an appropriate choice for investors who desire
somewhat stable, regular income. If you do not wish to receive the monthly income, you can
choose to have your dividends reinvested automatically as one of several dividend options.

Potential for tax-free income

Many investors use municipal bond funds to help reduce their tax burden. Although
municipal bond yields are generally lower than taxable bond fund yields, some investors in
higher tax brackets may find they have a higher after-tax yield from a tax-free municipal
bond fund investment instead of a taxable bond fund investment. Tax-free investments are
usually not appropriate for tax-advantaged accounts such as IRAs.

Risks of bond funds

Interest rate risk

If interest rates rise, bond prices usually decline, and if interest rates decline, bond prices
usually rise. This inverse relationship is important to understand. The longer a bond's
maturity, the greater the bond’s interest rate risk. A bond fund with a longer average maturity
will see its net asset value (NAV) react more dramatically to changes in interest rates as the
prices of the underlying bonds in the portfolio increase or decline. The effect that interest
rates have on the prices of bonds owned by the fund will cause the income that the fund
distributes each month to vary.

Credit risk
Bond funds are typically classified as either investment-grade quality (medium-to-high-
credit-quality) or below-investment-grade quality, depending on the individual bonds in
which they invest. (The bonds that funds own each carry the risk of default if the issuer is
unable to make further income or principal payments.) Many individual bonds are rated by a
third-party rating agency, such as Moody’s or Standard & Poor’s, to help describe the
creditworthiness of the issuer. Credit risk is a greater concern if the fund invests in lower-
quality bonds such as high-yield bond funds. The fund's prospectus will describe its credit
quality policies.

Principal risk
When you sell shares in a fund, you receive the fund’s current net asset value (NAV), which
is the value of all the fund’s holdings divided by the number of fund shares. If the fund’s
NAV is lower on the day you sell shares than it was when you purchased them, you could
lose some or all of your initial investment.

2.LITERATURE REVIEW

Suhas L Ketkar, Dilip Ratha

World Bank Policy Research Working Paper, 2007
A diaspora bond is a debt instrument issued by a country-or potentially, a sub-sovereign
entity or a private corporation-to raise financing from its overseas diaspora. Israel and India
have raised $35-40 billion using these bonds. Drawing on their experiences, this paper
discusses the rationale, methodology, and factors affecting the issuance of diaspora bonds for
raising external development finance. The Government of Israel has offered a flexible menu
of diaspora bonds since 1951 to keep the Jewish diaspora engaged. The Indian authorities, in
contrast, have used this instrument for balance of payments support, to raise financing during
times when they had difficulty in accessing international capital markets. Diaspora bonds are
often sold at a premium to the diaspora members, thus fetching apatrioticdiscount in
borrowing costs. Besides patriotism or the desire to do good in the investor's country of
origin, such a discount can also be explained by the fact that diaspora investors may be more
willing and able to take on sovereign risks of default in hard currency as well as devaluation
as they may have local currency liabilities and they may be able to influence the borrower's
decision to service such debt. The paper discusses several conditions for successful diaspora
bond issuance having a sizeable diaspora, especially first-generation migrants, is
understandably an important factor affecting the issuance of diaspora bonds. Countries with
strong and transparent legal systems for contract enforcement are likely to find it easier to
issue such bonds. Absence of civil strife is a plus. While not a pre-requisite, presence of
national banks and other institutions in destination countries facilitates the marketing of
bonds to the diaspora

Vaibhav Jain
International Journal of Economics and Finance 4 (10), 2012
This research attempts to explain India as an upcoming Debt Market with the introduction of
the new instruments like “Inflation Indexed Bonds”(both for the retail and the institutional
buyers) followed by the explanation about both the technical and the conceptual aspect of the
“Inflation Indexed Bonds (IIB)” and their applicability in Indian Debt Market.
After discussing about the literature on IIB’s, in the last section, we have seen the yield of a
hypothetical “Inflation Indexed Bond” higher as compared to “Normal bond”(non-inflation
adjusted). We have also commented upon the real value of the returns keeping in mind the
Investor’s perspective (purchasing power) and his behavior in buying and evaluating such
instruments. Lastly, we have compared both the bonds in the rising inflation scenario. We
have analyzed that for an Inflation Indexed Bond, bond value increases with increase in the
Inflation and vice-versa but for a Normal Bond, it remains unaffected by the rising Inflation
levels (keeping interest/reinvestment rate as constant for both the bonds).

Krishnan Sharma
Innovative Financing for Development, 79, 2006
The introduction of GDP-indexed bonds could have a number of positive effects for
developing countries, for investors, and for the international financial system. The proposal
for such an instrument is not new, and a first wave of interest in indexing debt to GDP
emerged in the 1980s, propounded by economists such as John Williamson (2005). In later
years, this practice has been encouraged by the work of economists such as Shiller (1993,
2005a), 1 Borenzstein and Mauro (2004), and the US Council of Economic Advisers (CEA
2004). Though the idea of GDP-indexed debt has so far been implemented to a limited extent,
2 it received new impetus after the wave of financial and debt crises in a number of
developing countries in the 1990s. There has been a revival of interest in instruments that
could reduce developing countries’ cyclical vulnerability. In particular, GDP-indexed bonds
have attracted discussion in recent years, since a variant of this instrument has played a role
in Argentina’s debt restructuring following the collapse of convertibility at the end of 2001.
In the simplest terms, GDP-indexed bonds pay an interest coupon based on the issuing
country’s rate of growth. An example would be a country with a trend growth rate of 3
percent a year and an ability to borrow on plain vanilla terms at 7 percent a year. Such a
country might issue bonds

Sanjay Banerji, Krishna Gangopadhyay, Ila Patnaik, Ajay Shah

National Institute of Public Finance and Policy 12, 106, 2012
In this paper, we examine the factors behind underdevelopment of corporate bond market in
India. We assess that one of the major bottlenecks to the development of this market lies in
relatively larger costs of financing which dissuade the firms to raise finance from this avenue.
We argue that the lack of transparency, inefficient market making and illiquidity of the
instrument not only lead to such extra costs of financing that hampers investment in the real
sector but can trap the bond market in a low level equilibrium.
To alleviate such problems, we prescribe policies that ensure better production of information
and increased volume of transactions that will lessen both liquidity and transparency
problems and ensure efficient market making. A combination of such policies include
mandatory disclosure of ratings by firms and assignment of multiple agencies for rating an
issue at different points of time, minimum size of placements of (infrastructure) bonds,
establishing stop loss threshold, among others will help breaking the trap and improve quality
of issues and would eventually lead to a vibrant bond market with reduced costs of financing
investment.

Amarendra Acharya
RBI Occasional Papers 32 (3), 67-106, 2011
A well developed corporate bond market supports economic development. It provides an
alternative source of finance and supplements the banking system to meet the requirements of
the corporate sector to raise funds for long-term investment. It is believed that this segment
acts as a stable source of finance when the equity market is volatile, and also enables firms to
tailor their asset and liability profiles to reduce the risk of maturity. It also helps in the
diversification of risks in the system. In view of huge investment requirement for
infrastructure sector, the presence of a well developed corporate bond market assumes
significance in India. With the declining role of development finance institutions (DFIs), a
developed and robust corporate bond market becomes all the more important.
Shyamala Gopinath
Debt, Finance and Emerging Issues in Financial Integration, 1-26, 2007
Page 1. 1 Development of Local Currency Bond Markets: The Indian Experience Shyamala
Gopinath1 It gives me great pleasure to participate in the Workshop on "Debt, Finance and
Emerging Issues in Financial Integration", being organized by the Financing for
Development Office, United Nations in collaboration with the Commonwealth Business
Council and Commonwealth Secretariat. In my presentation, I would like to highlight the
Indian experience with regard to the development of debt markets. As you are all aware.

Biswa Nath Bhattacharyay

Journal of Asian Economics 24, 124-137, 2013

One of the major reasons behind the Asian financial crisis in 1997 was the excessive
dependence of the Asian economies on commercial banks for domestic financing. The region
failed to diversify its sources of corporate financing as it relied mainly on banks since its
other types of financing, namely bond markets, were still underdeveloped and their sizes
were quite small. On the other hand, the 2008 global financial crisis and the ongoing
European debt crisis have led to constraints in acquiring local currency and foreign currency
liquidity in the …

Tanweer Akram, Anupam Das

Journal of Post Keynesian Economics 38 (4), 565-587, 2015

John Maynard Keynes held that the central bank’s actions mainly determine long-term
interest rates through short-term interest rates and various monetary policy measures. His
conjectures about the determinants of long-term interest rates were made in the context of
advanced capitalist economies and were based on his views on liquidity preference,
ontological uncertainty, and the formation of investors’ expectations. Is Keynes’s conjecture
that the central bank’s action is the main driver of long-term interest rates valid in emerging
markets, such as India? This paper empirically investigates the determinants of changes in
Indian government bonds’ nominal yields. Changes in short-term interest rates, after
controlling for other crucial variables, such as changes in the rate of inflation and the rate of
economic activity, take a lead role in driving the changes of the nominal yields of Indian
government bonds. This suggests that Keynes’s views on long-term interest rates can also be
applicable to emerging markets. The empirical findings reveal that higher fiscal deficits do
not appear to exert upward pressures on government bond yields in India.
Shubhomoy Ray, Jyoti Bisbey
Journal of Infrastructure, Policy and Development 4 (1), 87-120, 2020
The project finance scenario has changed significantly around the world after the 2008
financial crisis and following the subsequent Basel III recommendations. Project finance
loans from commercial banks and financial institutions have largely dried up, leaving it
mostly to the export credit agencies and the bilateral and multilateral development banks to
provide the institutional credit. Unfortunately, those sources are not enough, given the huge
needs for construction of new infrastructure and renovation of the old ones across Asia,
Africa and Latin America. The need for capital markets, through market listed financial
products across asset class, unlocking a large part of domestic and corporate savings, has
never been felt as strongly before. This article seeks to analyze the development story of
various Asian capital markets and examine financial products, which have succeeded in their
short history in receiving investor interest. The article also delves into the challenges to
market development, policy imperatives and the issues relating to market liquidity and credit
rating, which are the most significant influencers for public market float and investor interest.

Sriranga Vishnu, Ankit Sharma

European Journal of Business and Management 4 (20), 135, 2012

In their endeavor to sustain high level of economic growth rate, emerging economies are
prone to financial distress and bourgeoning indebtedness. Exceeding reliance on foreign
investments exposes to the risk of growth rate fluctuations. GDP-Indexed Bonds have been
proposed as an instrument to hedge against debt trap, growth rate fluctuations and external
economic turbulences. Return on these bonds is in direct relationship with GDP growth rate.
The economic growth rate impacts interest rates as well, thereby affecting the returns on
vanilla bonds. Anticipating a correlation between returns on GDP-Indexed bonds and plain
vanilla bonds, monthly data has been collected on GDP growth rate and 10-Year bond yield
to determine the strength of association between the two types of bonds. Furthermore, this
study explores the hedging possibilities for investors and comments upon the utility of GDP-
indexed bonds in Indian context. The results may find use with large corporations, pension
funds and overseas investors.

Golaka C Nath
Available at SSRN 2062269, 2012
The Indian corporate bond market is still developing, and as such there are some peculiarities
that might not be found in a matured market. This paper describes the state of development
and key obstacles to further development. It reveals some unusual market behavior and
patterns from available statistics. In particular primary and secondary market activity clusters
around a small number of issuers and issues, with some resulting distortions. Some of the
unusual patterns can be explained by market factors, and others remain puzzling. Despite a
few unusual artifacts, statistical analysis verifies that the Indian corporate bond market
largely maintains expected pricing relationships with ratings, maturity, optionality and
industry type. Similarly the structure of probability of default of the corporate bonds and the
behavior of credit spreads follow reasonable patterns.

Vikramaditya S Khanna, Umakanth Varottil

Available at SSRN 2021602, 2012
The corporate bonds market is not only underdeveloped in India in comparison with the
equity market, but also considerably lags that market in point of time. Despite various efforts,
the corporate bonds market has not expanded to any meaningful extent. In this paper, we
identify the elements of an appropriate legal framework that undergirds a liquid and vibrant
corporate bonds market. These elements are the proper and timely enforcement of contracts, a
robust corporate insolvency framework, standardization and transparency in the primary
markets, and greater protection against opportunistic behavior between creditors and
borrowers. Our central argument in this paper is that the weaknesses in these elements in
India amount to legal impediments that inhibit the smooth operation of the bonds market in
India. Consequently, any reform process ought to address these legal impediments.

Rajesh Kumar, in Strategies of Banks and Other Financial Institutions, 2014

4.2.2.1.8 Corporate bonds

Corporate bonds are debts issued by industrial, financial, and service companies to finance
capital investments. There is wide range of choices for corporate bonds in terms of bond
structures, coupon rates, maturity dates, credit quality, and industry exposure. A short-term
corporate bond has a maturity of less than 5 years, an intermediate bond has a maturity of 5-
10 years, and long-term bond have a maturity of 10 years.
Corporate bonds are rated by one or more primary rating agencies, including Standard and
Poor’s, Moody’s, and Fitch. Bond ratings are based on various financial parameters of the
company that issues the bond. The rated bonds fall into two categories: investment grade or
noninvestment grade (high-yield bonds). Bonds that are considered to carry a minimal
likelihood of default are labeled “investment grade” and are rated Baa3 or higher by
Moody’s, or BBB − or higher by Standard and Poor’s and Fitch ratings. High-yield bonds
have a rating of BB (Standard and Poor’s, Fitch Ratings) or Ba (Moody’s) and are considered
speculative as they have a greater risk of default than investment-grade bonds. Such bonds
have to offer higher coupon rates to attract investors. These bonds are issued by new or
startup companies. Investment bonds have maturities of over 10 years as compared to the
shorter maturities of high-yield bonds. The corporate bond market is one of the largest OTC
financial markets in the world.

Muhammadriyaj Faniband, Taranum Faniband

Indian Journal of Research in Capital Markets 8 (1-2), 61-71, 2021

A new data set of government bond prices, that is, the Clearing Corporation of India
Limited’s Broad Total Return Index (BTRI) was introduced in this paper. The Total Returns
Index (TRI) provides the change due to both the price movements and accrued interest. TRI
reflects the change in the index due to market capitalized weighted price movement and
accrued interest. This paper investigated volatility spillovers between government bonds and
the stock market in India by following the GARCH (1, 1). By using a broad weekly data set
during 2004–2019, with a total of 835 observations, this paper addressed a key research
question: Does the effect of volatility spillover exist between government bonds and Nifty?
Does causality exist between government bonds and Nifty? The results of Granger causality
indicated that BTRI did not Granger cause Nifty. Further, the reverse was also not true,
meaning that there existed no lead-lag relationship between BTRI and Nifty. The squared
residuals’ coefficient of Nifty had a positive sign but was insignificant, showing that there
was no effect of volatility spillover from the Nifty to the BTRI. Hence, the volatility in Nifty
did not influence volatility in the BTRI but vice versa, this statement is also not true. This
research is mainly useful to those investors who invest in both government bond market and
stock market.

Prachi Deuskar
Journal of Banking & Finance 129, 106165, 2021

Using a comprehensive dataset of orders and trades in the Indian government bond market,
this study presents new evidence on the effect of funding liquidity on market liquidity. We
find no evidence that lower short-term interest rates – the key instruments of monetary policy
– boost market liquidity. However, consistent with models that stress the role of intermediary
capital, we find that market liquidity measures have a strong, positive association with short-
term borrowing by primary dealers. We provide additional evidence linking these firms’
borrowing to their balance sheet strength and secondary market participation. The results
suggest that localized funding conditions specific to marginal suppliers of intermediation
services are more important for market liquidity than the broader economy-wide funding
environment.

Sunder Raghavan, D Sarwano

International conference on economics and finance research, IPEDR 32, 2012
This study is a pioneering study on the factors influencing the corporate bond market in India.
Important aims of this study are to trace the development of corporate bond markets in India,
identify factors which have influenced its development and suggest policy reforms to enhance
its development. Based on multivariate regression analysis this paper analyses the factors that
have influenced the development of the corporate bond markets in India. Our results show
that while the growth of the government bond market has been a major positive influence in
the development of the corporate bond markets in India, bank lending in India may have
slowed the development of the corporate bond market. Other factors such as the size of the
economy, openness, size of the stock market and institutional factors like corruption have had
little or no impact on the development of the corporate bond market. Based on our study we
suggest policy reforms to improve the corporate bond market in India. Suggested policy
reforms includes improving the retail investment markets through issue of Swadeshi or
patriotic bonds, encouraging foreign participation by relaxing regulations and providing tax
incentives, providing credit enhancements and introduction of new instruments such as credit
default swaps and corporate repos.

Bhavya Gupta

LegisNations, 2020
Two broader types of securities issued in the financial market of an economy are Equity and
Debts. Equity is a perpetual liability because it signifies an owner’s legal claim after all
liabilities are met, upon the assets of the entity in which the equity share is held. Bonds are
debt securities, in which the authorized issuer owes the holders a debt and, depending on the
terms of the bond, is obliged to pay interest (the coupon) and/or to repay the principal at a
later date, termed maturity. Depending on the issuer of bonds, it can be classified as Govt.
Securities, ie bonds issued by the Central/State Govt. of an economy, and Corporate Bonds,
ie bonds issued by private and public corporations. Debt instruments can also be categorized
in terms of their maturity, nature of interest, special features embedded in it, etc. Short term
debt instruments, issued by the Central Govt. and by corporates, are respectively known as
Treasury Bills and Commercial Papers. Similarly, securities issued with a maturity of more
than one year are known as dated securities. The original maturity of a debt security may
range from 1 year to 30 years.”

Bhanu Priya, Vignesh Ramanathan

Indian Institute of Management Bangalore, 2013

The budget proposed for the financial year 2013-2014 proposes the introduction of inflation
indexed bonds in India. The finance minister in his budget speech mentions introduction of
inflation indexed bond for the following reason: “Increasing savings and their optimal
allocation for productive uses lead to higher economic growth. After touching a high of 36.8
percent in 2007-08, gross domestic saving fell by 6 percentage points in 2011-12. The private
sector, comprising households and corporate, remains the main contributor to saving. The
household sector must be incentivised to save in financial instruments rather than buy gold.
Hence, I propose the following measure: In consultation with RBI, I propose to introduce
instruments that will protect savings from inflation, especially the savings of the poor and
middle classes. These could be Inflation Indexed Bonds or Inflation Indexed National
Security Certificates. The structure and tenor of the instruments will be announced in due
course” Inflation Indexed security are securities that guaranty a return higher than the rate of
inflation if it is held to maturity. Inflation-indexed securities link their capital appreciation, or
coupon payments, to inflation rates. Investors seeking safe returns with little to no risk will
often hold inflation indexed securities.

Rituparna Das
Commissioned Project awarded by National Stock Exchange, Mumbai, 2013

During the second quarter of the fiscal year 2013-2014, continuous rupee depreciation
haunted the Indian securities markets. The fear of inflation backed by the dealers’
expectations about active rupee-support from the Reserve Bank of India affected the yield
curves and hence trading in the bond market. In these circumstances, this study examined the
shapes and the behaviors of corporate (bond) yield curves in the Indian market. In the
process, the study (i) examined the credit profiles of various corporate bond issuers,(ii)
compared corporate and sovereign yield curves,(iii) analyzed the psychology of a dealer
facing rising yields, and (iv) examined the sources of data in India vis-à-vis those available
abroad. The policy implication of this study lies in the recommendation of a number of
measures towards thickening the depth of the corporate bond market.

Selim S

Control Engineering and Finance, 201-213, 2018

This Chapter defines various parameters of bonds like coupon, maturity, par value, ownership
type and indentures. Types of bonds differentiated by the type of collateral behind the issue
are introduced. Bond returns and valuations are derived heuristically based on the return
concept defined in the previous Chapter. Fundamental determinants of interest rates and bond
yields, together with the Macaulay duration are discussed with examples. The yield curve is
presented together with its implications for the economy

Suhas Dhande, Ms Ananya Mishra

The strangest thing about the Indian capital market is its retail investors. While they have
already mastered the art of losing money in the equities market almost on a daily basis, they
have no clue about a safe haven called the corporate bond market. And the result is that while
the key nations across the world have a well balanced capital market with the bond segment
complimenting the equities segment, India on the other hand has a capital market wildly tilted
towards the equities. Between 2005 to 2011, the ratio of outstanding debt to
 Chapter:3 Research methodology

Research is not only concerned to the revision of the facts and building up to date knowledge
but discover new facts involved through the process of dynamic changes in the society.
Methodology is defined as a system of methods and rule to facilitate the collection and
analysis of data. It provides the starting point for choosing and approach made of theories,
data, concept and definition of the topic (Hart, 1998).

2.1 Research design

Research design is a framework or blueprint for conducting the marketing research projects.
It explains the procedure necessary for obtaining the information needed to structure or solve
research problems. The present research design was exploratory in the initial stages then after
gaining the insights into the problem it was verified and quantified by conclusive research.
The form of conclusive research design adopted for the study.

The objective of exploratory research is to explore or search through a problem or situation

to provide insights and understanding. Descriptive studies involve collection of data through
structured design and survey method is followed in order to get the needed information. It is
typically based on representative sample which was used to description and define the
behavior of the respondents.

2.2 Research methodology

The researcher adopted convenient sampling technique for the selection of study area. A
sample of 51 respondents (Commerce undergraduate student individuals in Mumbai) was
taken. Well-structured questionnaire was used for collecting primary data by survey method.
The study is designed to gather descriptive information for conducting study in more
practical manner. For testing hypothesis and interpreting relationship analytical study is used,
therefore thestudy makes use of quantitative research approach.

2.3 Objectives of research

 The objective of my project is to gain knowledge and awareness about Types of bonds
amongst commerce undergraduate student.


2.4 Hypotheses on the study

 Undergraduates are aware about the Types of Bonds in India

 Undergraduates are not aware about the Types of Bonds in India

2.5 Scope of study

2.6 Limitation of study

1.The research was limited to a sample size of 51 respondents.

2.The researchers had limitation of time, area to covered and sampling.

In spite of the above limitation, all efforts were made to ensure correctness in the data
collection.

2.7 Data collection methods and instruments

This research primarily used the primary data. The data is mainly in quantitative form. The
intended primary data is collected through Survey Method. The survey conducted through a
Questionnaire Method as instrument of data collection. The researcher intended to include in
the questionnaire roughly not more than 20 questions. While preparing a questionnaire a care
is taken to include such questions which shall try to meet the need of obtaining responses in
line with the predetermined objectives of the study.Apart from the primary data, some
secondary information (wherever it is required) is collected through authentic reports,
journals, books and manuals

2.8 Data analysis methods

This work primarily demands quantitative data analysis through the interpretation of
responses obtained from the questionnaire. These responses anlayzed through descriptive
statistics for understanding the basic stastical characteristics of the qualitative data.

2.9 Sampling techniques

The researcher adopted convenient sampling method. In this sampling a questionnaire was
distributed to commerce Undergraduates in Mumbai city by making Google form. To
understand the problems a selected research was done by the researcher based on the
knowledge and personal judgement.

2.10 Data collection method

To fulfill the specific objective both primary and secondary sources were used to collect the
data. Primary data is the core methodology used by the research to conduct the research. A
structured questionnaire was the main tool for collecting the primary data. There was formal
and informal data collection from commerce undergraduate student in Mumbai to study on
awareness about types of bonds amongst commerce undergraduate student.
Relevant and reliable data was collected from various secondary data from reports, journals,
research papers, etc. Updated information was also gathered from authentic websites

Chapter 4
Data Analysis and Interpretation

“A Study on awareness about Types of bonds amongst Commerce

Undergraduates”
1.Gender
51 response
Table 4.1.1
Gender Frequency Percentage
Male 41 80.4
Female 10 19.6
Total 51 100

Chart 4.1.1
Conclusion: It is referred from the above chart that out of 51 respondents
surveyed,
 19.6% of the respondents are females and
 80.4% are males from the data collected through a survey.
The same has been depicted in above table and chart.

2.How old are you?

51 response

Table 4.1.2
Age groups Frequency Percentage
Under 18 8 15.7
19-20 21 41.2
21-23 16 31.4
24 and above 6 11.8
Total 51 100
 Chart 4.1.2

Conclusion: It is referred from the above chart that out of 51 respondents

surveyed,
 15.7% of the respondents are Under 18
 41.2% of the respondents are 19-20
 31.4% of the respondents are 21-23 and
 11.8% of the respondents are 24 and above.

The same has been depicted in above chart and table.

3.Place of residence
51 response

Table 4.1.3
 Place of residence Frequency Percentage
Goregaon 38 74.5
Malad 5 9.8
Kandivali 5 9.8
Borivali 3 5.9
Total 51 100

Chart 4.1.3

Conclusion: It is referred from the above chart that out of 51 respondents

surveyed,
 74.5% of the respondents are in Goregaon
 9.8% of the respondents are in Malad
 9.8% of the respondents are in Kandivali and
 5.9% of the respondents are in Borivali. The same has been depicted in
above chart.
From the above analysis it can be concluded that,
 Most of the people i.e. approx. 74.5% amongst the respondent from
goregaon
 Very few people i.e. approx. 25.5% amongst the respondent from malad,
kandivali, and borivali.

4.Qualification
51 response

Table 4.1.4

Qualification Frequency Percentage

1-2 semester 9 17.6
3-4 semester 8 15.7
5-6 semester 20 39.2
12th and below 14 27.5
Total 51 100

Chart 4.1.4
Conclusion: It is referred from the above chart that out of 51 respondents
surveyed,
 17.6% of the respondents are in 1-2 semester
 15.7% of the respondents are in 3-4 semester
 39.2% of the respondents are in 5-6 semester and
 27.5% of the respondents are in 12th and below

5.Government bonds are directly issued by

51 response

Table 4.1.5

Available option Frequency Percentage

Corporate companies 6 11.8
SBI BANK 7 13.7
Government of India 36 70.6
Credit rating agencies 2 3.9
Total 51 100
 Chart 4.1.5

Conclusion: It is referred from the above chart that out of 51 respondents

surveyed,
 11.8% of the respondents thinks government bonds are directly issued by
corporate companies
 13.7% of the respondents thinks government bonds are directly issued by
SBI BANK
 70.6% of the respondents thinks government bonds are directly issued by
government of India and
 3.9% of the respondents thinks government bonds are directly issued by
credit rating agencies. The same has been depicted in above chart.

From the above analysis it can be concluded that,

 Most of the people i.e.approx. 70.6% amongst the respondent are
thinks government bonds are directly issued by government of India.
  Very few people i.e. approx. 29.4% amongst the respondent are thinks
government bonds are directly issued by corporate companies, SBI
BANK, and credit rating agencies.
6. Which bonds are rupee denominated bonds
51 response

Table 4.1.6

Available option Frequency Percentage

Zero-coupon 21 41.2
Masala 18 35.3
Inflation 7 13.7
Speculation 5 9.8
Total 51 100

Chart 4.1.6
Conclusion: It is referred from the above chart that out of 51 respondents
surveyed,
 41.2% of the respondents thinks zero-coupon bonds are rupee
denominated bonds
 35.3% of the respondents thinks masala bonds are rupee denominated
bonds
 13.7% of the respondents thinks inflation bonds are rupee denominated
bonds and
 9.8% of the respondents thinks speculation bonds are rupee denominated
bonds

7.Which bonds do not have a fixed coupon rate

51 response

Table 4.1.7

Available option Frequency Percentage

Floating rate 9 18.4
Zero 28 57.1
Junk 6 12.2
Tax-free 6 12.2
Total 51 100
 Chart 4.1.7

Conclusion: It is referred from the above chart that out of 51 respondents

surveyed,
 18.4% of the respondents thinks floating rate bond do not have fixed
coupon rate
 57.1% of the respondents thinks zero coupon bond do not have fixed
coupon rate
 12.2% of the respondents thinks Junk bond do not have fixed coupon rate
and
 12.2% of the respondents thinks Tax free bond do not have fixed coupon
rate.

8. Which bonds are issued and redeemed at face value

51 response

Table 4.1.8
Available option Frequency Percentage
Plain bonds 15 29.4
Floating bonds 15 29.4
Fixed bonds 18 35.3
Dividend bonds 3 5.9
Total 51 100

Chart 4.1.8
Conclusion: It is referred from the above chart that out of 51 respondents
surveyed,
 29.4% of the people thinks plain bonds and floating bonds are issued
and redeemed at face value
 35.3% of the people thinks fixed bonds are issued and redeemed at
face value and
 5.9% of the people thinks dividend bonds are issued and redeemed at
face value.

From the above analysis it can be concluded that,

 Equal no of people 29.4% are thinks plain bonds and floating bonds
are issued and redeemed at face value.

9.If you want to buy a bond from a dealer. Which one of the following
prices will you pay?
51 response

Table 4.1.9
Available option Frequency Percentage
Call price 12 23.5
Auction price 14 27.5
Bid price 16 31.4
Asked price 9 17.6
Total 51 100
 Chart 4.1.9

Conclusion: It is referred from the above chart that out of 51 respondents

surveyed,
 23.5% of the respondents thinks they want to buy a bond from a dealer
in call price
 27.5% of the respondents thinks they want to buy a bond from a dealer
in Auction price
 31.4% of the respondents thinks they want to buy a bond from a
dealer in Bid price and
 17.6% of the respondents thinks they want to buy a bond from a dealer
in Asked price.

10.Interest rates and bond prices are move in which direction

51 response
 Table 4

Available option Frequency Percentage

Move in the same 8 15.7
direction
Move in opposite 19 37.3
direction
Sometimes move in the 12 23.5
same direction
Sometimes move in 5 9.8
opposite direction
Have no relationship 7 13.7
with each other
Total 51 100

Chart 4.1.
Conclusion: It is referred from the above chart that out of 51 respondents
surveyed,
 15.7% of the respondents thinks interest rates and bond prices move in
same direction
 37.3% of the respondents thinks interest rates and bond prices move in
opposite direction
 23.5% of the respondents thinks interest rates and bond prices sometimes
move in same direction
 9.8% of the respondents thinks interest rates and bond prices sometimes
move in opposite direction and
 13.7% of the respondents thinks interest rates and bond prices they have
no relationship with each other.

11.Which market is bond market part of the following

51 response

Table 4.1.
Available option Frequency Percentage
Debt market 24 47.1
Equity market 13 25.5
Lot market 8 15.7
Cash market 6 11.8
Total 51 100
 Chart 4.1.

Conclusion: It is referred from the above chart that out of 51 respondents

surveyed,
 47.1% of the respondents thinks Debt market is a part of bond market
 25.5% of the respondents thinks Equity market is a part of bond market
 15.7% of the respondents thinks Lot market is a part of bond market and
 11.8% of the respondents thinks Cash market is a part of bond market.

12.The bonds that does not pay any interest rate and considered as
51 response
 Table 4.1.
Available option Frequency Percentage
Interest free bonds 12 23.5
Zero coupon bonds 24 47.1
Price less coupon bonds 11 21.6
Use less price bonds 4 7.8
Total 51 100

Chart 4.1.

Conclusion: It is referred from the above chart that out of 51 respondents

surveyed,
 23.5% of the respondents thinks Interest free bonds that does not pay any
interest rate
 47.1% of the respondents thinks zero-coupon bonds that does not pay any
interest rate
 21.6% of the respondents thinks price less coupon bonds that does not
pay any interest rate and
  7.8% of the respondents thinks Use less price bonds that does not pay any
interest rate.

13.The coupon payment accrued between last payment and settlement date
is classified as
51 response
Table 4.1

Available option Frequency Percentage

Paid interest 8 15.7
Unpaid interest 13 25.5
Zero interest 15 29.4
Accrued interest 15 29.4
Total 51 100

Chart 4.1.
Conclusion: It is referred from the above chart that out of 51 respondents
surveyed,
 15.7% of the respondents thinks coupon payment accrued between last
payment and settlement date is paid interest
 25.5% of the respondents thinks coupon payment accrued between last
payment and settlement date is classified as unpaid interest
 29.4% of the respondents thinks coupon payment accrued between last
payment and settlement date is classified as zero interest and
 29.4% of the respondents thinks coupon payment accrued between last
payment and settlement date is classified as accrued interest.

14.The bonds having longer maturity on original loans than promised

payments are classified as
51 response

Table 4.1
Available option Frequency Percentage
Developed bonds 12 23.5
Developing bonds 18 35.3
Brady bonds 14 27.5
Swapped bonds 7 13.7
Total 51 100
 Chart 4.1.

Conclusion: It is referred from the above chart that out of 51 respondents

surveyed,
 23.5% of the respondents thinks developod bonds having longer maturity
on original loans than promised payments
 35.3% of the respondents thinks developing bonds having longer maturity
on original loans than promised payments
 27.5% of the respondents thinks brady bonds having longer maturity on
original loans than promised payments and
 13.7% of the respondents thinks swapped bonds having longer maturity
on original loans than promised payments.

15.The bonds that are considered investment rating bonds are giving the
rating of
51 response
 Table 4.1.

Available option Frequency Percentage

Triple B 18 35.3
Double B 17 33.3
Triple A 8 15.7
Double A 8 15.7
Total 51 100

Chart 4.1.
Conclusion: It is referred from the above chart that out of 51 respondents
surveyed,
 35.3% of the respondents thinks investment rating bonds are giving the
rating of is Triple B
 33.3% of the respondents thinks investment rating bonds are giving the
rating is Double B
 15.7% of the respondents thinks investment rating bonds are giving the
rating is Triple A
 15.7% of the respondents thinks investment rating bonds are giving the
rating is Double A