What is the Bond Market and How Does It Operate?

The formal and virtual setup to transact different types of bonds is known as the bond market. Bonds are the instruments issued by corporations and government organisations to raise funds in the form of debt. 

Compared to equity, these markets have lower risk due to fixed-income instruments. They are classic instruments but are less famous among retail investors. Investors can understand what the bond market is, its significance and future trajectory to diversify their portfolio by investing in bonds.

What is the Bond Market?

A marketplace to trade or issue different types of bonds is known as the bond market. Debt instruments like bonds play a significant role in the financing cycle. Also, bonds are priority for the issuer during repayment, which makes the bond market comparatively a secure avenue.

Moreover, the formal setup of bond markets helps discover the price with market forces. This market exposure also affects the risk levels. Therefore, bonds are rated based on their safety and creditworthiness for investor’s convenience. 

Bonds are issued for a specific maturity period with a coupon rate. Their yields change due to the market pressure. There are mainly two types of bond markets:

1. Primary market –  It is the avenue where new bonds are issued for the first time in the market. Similar to Initial Public Offer (IPO) in the equity markets, bond markets also raise funds with debt instruments. However, an organisation can issue different bonds multiple times in the bond market. 
2. Secondary market – It is a regular market where already issued bonds are traded and prices are discovered. 

What is the Bond Market and How Does it Work?

Financial markets function based on their stakeholder’s perspective and confidence. Similarly, bond markets process with the help of market forces. Some of the following features can simplify the mechanism of the bond market:

• Maturity – Bonds are issued for a specific period. The end of this period is maturity. It is when the issuer repays the principal and interest amount to the investor. This maturity can be from 3 months to more than 10 years.
• Coupon rate – It is the interest rate prescribed while purchasing the bond. This coupon rate would decide the premium over investment that investors will earn in the form of period interest income.
• Yield to maturity – The annual return that can be earned at a particular time if the investment is held up to maturity is yield to maturity. It can be easily calculated with bond price, face value, coupon rate, maturity period, frequency, etc.
• Liquidity – The bond market helps gather different buyers and sellers in one place to transact as per the suitability. However, the liquid also depends on type, yield, issuer, performance, etc.
• Credit rating – Different characteristics, and specifically, credit repayment capacity, are analysed by the credit rating agencies to assign a credit rating. The higher rating indicates better safety. It is also the feature that makes the bond market comparatively safer than equities.

Significance of Bond Market

Understanding what the bond market is, will be followed by analysing its importance in the finance domain and for investors. It helps mobilise the funds in exchange for debt instruments like bonds. Moreover, its yield movement is significant to analyse the monetary flow direction in the economy. Overall, bonds are a crucial alternative to regular bank deposits for investors willing to invest a lump sum with sufficient market exposure.

Different Types of Bonds in India

Exploring what the bond market is and how it works is followed by exploring different types of bonds to select the most suitable.

Based on Issuer
Government	Central and state governments and other organisations like municipal corporations issue such bonds.
Corporate	These are bonds issued by corporations and are most popular due to their market exposure.
Based on the Interest rate
Floating Rate	The coupon rate in this type of bond is revised at the decided intervals.
Fixed Rate	These bonds generate a fixed interest rate throughout the duration up to maturity.
High-Yield	Usually, these bonds have low credit ratings due to their high interest income.
Based on Conversion
Convertible	These bonds are allowed to be converted to equity shares after completing a specific period.
Non-Convertible	It does not give investors the right to convert the bonds to equity shares after completing a specific period.
Based on the call-put option
Callable	Here, the issuer will decide the price and date for redemption and can call the bonds anytime as per their particular norms.
Putable	In this, investors can redeem the bonds based on pre-decided conditions.

Exploring what is bond market in India and its types can help investors build a perspective. However, investors should also analyse the future trajectory of the bond market in the country for investments.

What is the Bond Market Future in India?

The Indian bond market has been growing at a nearly 12% compounded annual growth rate for the past 10 years. In this, the share of corporate bonds is steadily growing. Recently, many crucial reforms such as reduction in face value, online bond platforms, Electronic Book Provider (EBP) system, etc., indicate the confidence of regulators in the bond market.

Therefore, the upcoming few years seem stable for the total bond market in India. Moreover, only corporate bonds are expected to increase to ₹100-₹120 trillion by 2030. Bond market growth and expectations indicate a potential opportunity for investors suitable with bond investing.

Conclusion

A bond market is a virtual financial market to transact and trade debt instruments called bonds. It is a crucial avenue for maintaining the debt flow for companies and government from investors. Moreover, it provides the desired diversification for an investor’s portfolio. Understanding what the bond market is in India may not suffice. Investors need to explore the types of bonds, their suitability and the viability of the Indian bond market in the upcoming years.Stay updated with concepts and news from the financial world. Just log in to PowerUp Money or download their financial planning app today!