Investors buy bonds to earn interest. In essence, purchasing a bond is lending money to an issuer. This could be a government or a private company. The bond will have a fixed maturity date and an interest rate. On this maturity date, the issuer is committed to repaying the loan principal. The issuer will also pay the investor interest in the period leading up to the maturity date.

Takeaways from the Key Notes

• Bonds are debt securities that are issued by companies, governments or other organisations and sold to investors.
• Private investors cannot easily trade all securities and bonds.
• Bonds have a relatively low correlation between their price and the stock market. The lower correlation makes bonds an excellent tool for diversifying portfolios.
• Investors can diversify their bond portfolios by investing in funds such as exchange-traded fund (ETF) bonds.
• The majority of bonds offer regular and stable interest rates, which makes them a good choice for people on a fixed income.

In most cases, bonds serve two purposes in your portfolio. They provide a predictable and steady income stream through regular interest payments. They are, therefore, attractive to investors who want a steady return. They also help you diversify your portfolio. Bonds are typically negatively correlated with stocks so that they can offset losses from other investments.

Types of Bonds

Bonds are a symbol of stability and safety in finance. There are many types of bonds, all with their unique advantages and characteristics. There are so many options available that it is essential to know the subtle yet significant differences between the most popular types.

Corporate Bonds

Corporate bonds are fixed-income securities issued by companies to finance their operations or expansions. These bonds are purchased by private or institutional investors, who lend money to the company to finance operations and expansions in exchange for interest (the coupon), as well as the return of principal at maturity.

Treasury Bonds

Treasury bonds are long-term investments issued by the U.S. government. They have a maturation of 10, 20, or 30 years. They are very safe because the United States backs them up. Due to their low risk, they offer lower returns than other bonds. When market interest increases, these lower-yielding and longer-running bonds may be under pressure. Treasury bonds are a safe long-term investment for investors.

International Government Bonds

International government bonds are securities issued by foreign governments. However, they can be a riskier investment because of the additional risks they may have, such as political instability, currency volatility, and more.

Municipal Bonds

Municipal Bonds are debt securities issued by cities, counties, and states to fund public projects and operations. Like other types of bonds, they can provide investors with a steady cash flow. These bonds are often tax-efficient, as the interest is usually exempt from both federal and state taxes.

Bonds for Agency

Government-sponsored companies or federal agencies are the most common issuers of agency bonds. Although they are not backed directly by the U.S. Government, they offer a high level of security due to their affiliation with the government. These bonds are used to finance public projects and usually offer higher yields than Treasury Bonds. They may have a risk of falling, which means the issuer could repay the bond prior to its maturity date.

Green Bonds

 Investors can support sustainability and earn interest. These bonds are similar to regular bonds except that the funds are designated for green initiatives. They are a great way to invest responsibly. However, you must ensure they fund initiatives that have a positive impact on the environment and avoid “greenwashing”.

RBI Gold Bonds

The Reserve Bank of India (RBI) Gold Bonds, also known as Sovereign Gold Bonds (SGBs), are government securities denominated in grams of gold. They are a substitute for physical gold and are aimed at investors looking to invest in gold without the need to hold physical gold. Here are some key features of RBI Gold Bonds:

1. Denomination and Tenure: These bonds are denominated in grams of gold, with a minimum investment of 1 gram. The tenure of the bond is 8 years, with an option to exit after the 5th year.
2. Interest Rate: RBI Gold Bonds offer a fixed interest rate, typically around 2.5% per annum, which is paid semi-annually to the investors.
3. Redemption: On maturity, the redemption is based on the prevailing gold prices, providing both the interest income and capital gains linked to the gold price.
4. Tax Benefits: The interest earned on these bonds is taxable, but the capital gains tax arising on redemption is exempted, making it a tax-efficient investment option.
5. Safety and Convenience: These bonds are backed by the government, ensuring safety and eliminating risks associated with physical gold, such as theft and storage costs.
6. Tradability: SGBs can be traded on stock exchanges within a specified date, providing liquidity to the investors.

Bond ETFs

Bond Exchange-Traded Funds (ETFs) are investment funds that trade on stock exchanges, similar to stocks. They hold a diversified portfolio of bonds, providing investors with exposure to various types of bonds, including government, corporate, municipal, and other fixed-income securities. Here are some key features of Bond ETFs:

1. Diversification: Bond ETFs hold a variety of bonds, which helps in spreading the risk and reducing the impact of any single bond’s performance on the overall portfolio.
2. Liquidity: These ETFs can be bought and sold on stock exchanges throughout the trading day, offering high liquidity compared to individual bonds.
3. Transparency: Bond ETFs provide transparency of prices, as their holdings are typically disclosed daily, and their market prices are continuously updated during trading hours.
4. Lower Investment Thresholds: Investors can buy bond ETFs in small quantities, making them accessible to retail investors who may not have the capital to invest in individual bonds.
5. Cost Efficiency: Bond ETFs generally have lower expense ratios compared to actively managed bond funds, making them a cost-effective option for investors.
6. Interest Rate Risk: Like individual bonds, Bond ETFs are subject to interest rate risk. When interest rates rise, the value of bonds generally falls, and vice versa. This can affect the market price of Bond ETFs.
7. Other Risks: In addition to interest rate risk, Bond ETFs also face credit risk, liquidity risk, and market risk, which can impact their performance.

Both RBI Gold Bonds and Bond ETFs offer unique benefits to investors. The former provides a safe and convenient way to invest in gold, and the latter offers diversified exposure to the bond market with high liquidity and transparency.