5 min read • Published 28 Feb 25
What Is the Meaning of Bond?
Table of Contents
The debt instruments generating interest income at prescribed intervals are known as bonds. It is one of the most popular investment instruments among investors. There are varied types of bonds, categorised based on their issuers, interest frequency, tenure, credit ratings and specific purpose. Investing in bonds can provide potential diversification for the portfolio, secure capital, create income sources, etc. However, some risks may lurk over bond investments. Therefore, investors can understand the bond’s meaning, analyse its aspects, explore its types and seek its suitability for their portfolio before investing.
What is the Meaning of Bond?
A bond is a debt instrument with the characteristics of generating a frequent income through interest at a prescribed interval. Issuers like corporations and governments procure debt from mass investors through these instruments.
Against this finance, the issuers pay interest (based on the coupon rate) and after the maturity, the capital is also returned to the investors. Compared to regular equity investment, it is a secure asset as debt is prioritised during liquidation.
Types of Bonds
The bond’s meaning is associated with its various characteristics. Further, combinations of these characteristics help categorise different types of bonds. Investors can explore these types to select the most suitable option based on their investment aspirations.
- Based on Issuer
| Government Bonds | These are issued by central and state government organisations for procuring funds for specific purposes or managing monetary flow. |
| Municipal Bonds | These are issued by local municipal organisations to finance specific public welfare projects. |
| Corporate Bonds | Issued by corporations, these bonds potentially generate high interest due to their market exposure. |
- Based on Interest Frequency
| Fixed-rate Bonds | These bonds generate a fixed interest income throughout the investment tenure. |
| Floating-rate Bonds | In these bonds, the coupon rate is variable and is adjusted semi-annually or annually. |
| Zero-Coupon Bonds | These bonds do not generate any interest income and are issued at a discount. Further, investors redeem it at the face value after attaining maturity. |
- Based on Tenure
| Perpetual Bonds | Here, bonds do not have any specific maturity date and pay interest forever. |
| Short-term Bonds | Usually, bonds with a maturity of 3 to 5 years are considered short-term, as per the Securities Exchange Board of India (SEBI). |
| Long-term Bonds | These bonds have a maturity of 10 or more years, as per SEBI. |
- Based on Credit Ratings
| Investment Grade Bonds | Usually, bonds with AAA, AA, A and BBB ratings are considered under these types of bonds. Investment-grade bonds have high security but moderate to low returns. |
| Junk Bonds | Junk bonds are low-rated bonds. They carry high default risk and are ranked lower in terms of safety but can generate potential returns. |
- Based on Specific Purpose
| Green Bonds | The bonds are issued for financing specific projects related to environment preservation, renewable energy, etc. |
| Inflation Indexed Bonds | These bonds provide a hedge against inflation by linking it to the inflation index. |
| Infrastructure Bonds | These are long-term bonds issued to finance infrastructure projects by public companies or Non-Banking Financial Companies (NBFCs). |
These are some of the types for the broad categories. Further, innovation in investment products can help expand these types and the bond meaning.
Benefits of Bond Investments
Understanding what a bond’s meaning is and its types can help clarify the scope of a bond investment. Investors should also explore how it can benefit their investment journey:
- It provides the desired diversification for the portfolio.
- Debt investment is less risky compared to equity.
- It can generate a fixed income source like interest along with long-term investment.
- Due to a wide variety of bonds, investors can select the most suitable alternative.
- Capital protection objectives are efficiently served by regular bonds.
Risks in Bond Investments
Investors should also consider and manage some common obstacles in the bond investments, along with understanding what is the bond meaning:
- Reinvestment risk: If the bond coupon rate falls, investors may have to reinvest at a lower interest rate.
- Inflation risk: Sometimes, in bond investment, focusing on the security costs market returns. Eventually, the investment may fall short of hedging against inflation.
- Interest rate risk: The inverse relation of bond yields and prices can affect the investment value in the long term.
- Rating downgrades: The credit rating agencies frequently analyse the debt management capacity of the issuer. Due to this, the bond credit rating may change and affect the investment security.
Indian Bond Market
Understanding what is the meaning of a bond may not be enough, investors should also explore the scope of the bond market to seek potential investment. A few years before, debt investments were not popular among retail investors compared to equities. However, modern regulatory reforms, reducing face value, digitalisation, growing financial literacy, etc., have attracted them toward instruments like bonds. As of FY 2024, the value of the total bond market in India is ₹217 trillion. and the market is expected to grow at a significant pace in the upcoming years.
Conclusion
Bonds are a crucial debt instrument that helps generate interest income along with potential safety from credit risk. There are varied types of bonds available in the market to cater to the needs of different investors. However, evaluating its benefits and risks is important before investing. Therefore, investors can understand what is the meaning of a bond, its features, types and market potential to diversify in this investment option. Stay updated about unique financial concepts by logging in to PowerUp Money or downloading its financial planning app!
Q: What are capital indexation bonds?
The bonds protecting capital or principal investment against inflation are known as capital indexation bonds. These are linked to a specific inflation index, which increases the principal value along with inflation.
Q: Can I invest in bonds offline?
Yes, investors can visit their nearest bank branch, stock exchanges or post office to invest in bonds. Apart from this, investors can also check the brokerage firms for offline investment, which can also help manage their investments.
Q: Which corporate bonds are suitable for security?
Bonds with high credit ratings are suitable for secure investments. Bonds with AAA, AA or A ratings are known as investment-grade bonds. These bonds may generate lower returns than other low-rated bonds, but they ensure the safety of the investor’s principal investment.
Q: What are bond credit ratings?
Credit rating agencies assign a rank or number to the bonds based on their default risk levels, which is known as bond credit rating. A high rating indicates better safety in that particular bond. However, this credit rating and interest rates have an inverse relationship.
Q: What is the corporate bond market size in India?
India’s corporate bond market is growing at a rapid pace. As of FY 2024, it is valued at ₹47.3 trillion and is expected to grow by 13%-17% CAGR up to FY 2030. The modern regulatory reforms, digitalisation and financial innovations are expected to catalyse its market growth.
