Bond:

In finance, a bond is a debt security, in which the authorized issuer owes the holders a debt and is
obliged to repay the principal and interest (the coupon) at a later date, termed maturity.

A bond is simply a loan in the form of a security with different terminology: The issuer is equivalent to
the lender, the bond holder to the borrower, and the coupon to the interest. Bonds enable the issuer to
finance long-term investments with external funds. Note that certificates of deposit (CDs) or
commercial paper are considered to be money market instruments and not bonds.

Bonds and stocks are both securities, but the major difference between the two is that stock-holders are
the owners of the company (i.e., they have an equity stake), whereas bond-holders are lenders to the
issuing company. Another difference is that bonds usually have a defined term, or maturity, after which
the bond is redeemed, whereas stocks may be outstanding indefinitely. An exception is a consol bond,
which is a perpetuity (i.e., bond with no maturity).
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Debenture:
A debenture is defined as a certificate of agreement of loans which is given under the company's stamp
and carries an undertaking that the debenture holder will get a fixed return (fixed on the basis of
interest rates) and the principal amount whenever the debenture matures.

In finance, a debenture is a long-term debt instrument used by governments and large companies to
obtain funds. It is defined as "a debt secured only by the debtor’s earning power, not by a lien on any
specific asset."[1] It is similar to a bond except the securitization conditions are different. A debenture
is usually unsecured in the sense that there are no liens or pledges on specific assets. It is, however,
secured by all properties not otherwise pledged. In the case of bankruptcy debenture holders are
considered general creditors.

The advantage of debentures to the issuer is they leave specific assets burden free, and thereby leave
them open for subsequent financing. Debentures are generally freely transferrable by the debenture
holder. Debenture holders have no voting rights and the interest given to them is a charge against profit.

TYPES OF BONDS

Government Bonds – Private Sector Bonds

Government bonds are government debt securities (GDS) issued by the Undersecretariat of Treasury.
Bonds issued by municipalities and public institutions are also deemed government bonds. Private
sector bonds are issued by companies to meet their financial needs.

Premium Bonds – Par Bonds

If a bond is issued at its nominal value, it is called a par bond. If a bond is put to sale at a value lower
than its nominal value, it is a premium bond.
Lottery Bonds
In order to encourage the sale of bonds, bonuses other than interest and early sale premium can be
given. However, in Turkey it is not permitted to provide any benefits to bond holders including cash
bonus lotteries, whatsoever, except interest.

Registered - Bearer Bonds

Bonds can be in the form of registered or bearer bonds as with all other securities. However, it is
customary in our market to issue bonds as bearer bonds.

Cash Convertible Bonds

Cash convertible bonds can be converted to cash along with the accrued daily interest whenever desired
provided that a certain period of time has elapsed since the issue. In some bonds, this opportunity can
be used any time, whereas in others, such bonds are included in redemption if a request is submitted to
the company to that effect.

Guaranteed - Non-guaranteed Bonds

In guaranteed bonds, the guarantee of a bank or the holding company of the issuer is secured. The
guarantee of the bank or the holding covers repayment of principals and interest of the issued bonds at
maturity.

Flat - Floating Rate Bonds

Flat-rate bonds guarantee a certain return if they are held until maturity. In the case of flat-interest
bonds, the return to be earned by the investor at maturity is known at inception of the term.

Floating-rate bonds protect the investor against excessive volatility in interest rates between inception
and expiry of the term especially in highly inflationary periods. The bond interest rate changing
according to market condition mitigate the interest risk for the bond holder and enables the issuer to
borrow funds on a long term.

Indexed Bonds
In indexed bonds, the principal is increased in proportion to the rate of increase in gold prices or certain
exchange rates between the issue date and redemption date, and is paid to the bond holder. Indexed
bonds protect the investor against inflation as with the floating-rate bonds.

Preferred Bonds
Companies may give pre-emptive rights to all of the bonds they have issued or a portion thereof to be
determined by a draw of lots, or to a certain percentage, or a portion in excess of a certain limit,
applicable to the first capital increase to be undertaken in the future. Such bonds are called preferred
bonds.

Profit-sharing Bonds
In profit-sharing bonds, issuers may choose one of the following principles in determining the profits
for the dividends payable to bond holders:

- In addition to interest, payment of the amount falling onto the bond out of the amount calculated over
the dividend percentage determined for the bond series;
- Interest of payment if dividend is less than interest; if the dividend accrued is equal to or higher than
the interest earnings, then payment of the dividend;
- Without any interest, payment of the amount falling onto the bond out of the amount calculated over
the dividend percentage determined for the bond series.

Profit-sharing bonds are issued on condition to pay principal at maturity, and the payment of principal
is not spread over years.

Convertible Bonds (CB)

A convertible bond gives the holder to replace (the bond) with stocks issued by the issuing company to
represent the increased capital.

CB’s should have a term no less than 2 years and no more than 7 years. Conversion can be executed no
earlier than the end of 2 years after the inception of the term.

Conversion of the bond to a stock may be triggered by the corporation’s request or the request of CB
holder.

Stocks which are left to the corporation due to CBs that are not converted to stock at the end of the
conversion period are offered to public in accordance with the "Communiqué on Registration of
Stocks" by the Board.

In the case of conversion upon the request of CB holder, the CB holder who fails to exercise the
conversion right forfeits that right, and may only take the principal and the accrued interest upon
redemption. In the case of conversion upon the request of the corporation, CB holders are informed via
an advertisement to be published twice on the Turkish publication of minimum two newspapers by the
incorporation no later than 1 month prior to the conversion date.

Individuals have surplus funds in the form of savings which they want to invest. Companies need
funds to undertake good projects with high returns. Companies provide individuals with instruments to
invest their savings in.

One such instrument is corporate bonds. Similarly, governments also need funds for various
developmental projects. Further, the government also needs to raise money to finance the fiscal deficit.
They too tap the savings by issuing various kinds of bonds.
Characteristics of a bond
A bond, whether issued by a government or a corporation, has a specific maturity date, which can range
from a few days to 20-30 years or even more. Based on the maturity period, bonds are referred to as
bills or short-term bonds and long-term bonds.
Bonds have a fixed face value, which is the amount to be returned to the investor upon maturity of the
bond. During this period, the investors receive a regular payment of interest, semi-annually or annually,
which is calculated as a certain percentage of the face value and know as a 'coupon payment.'
A story goes that in the old days, bond certificates used to come with coupons to claim interest from the
issuer of the bond; hence, the name coupon payments. However, nowadays, with paperless issues of
scrips (demat), coupons are no longer in use, but the name has stuck and the interest payments are still
known as coupon payments.
Issuing a bond
The government, public sector units and corporates are the dominant issuers in the bond market. The
central government raises funds through the issue of dated securities (securities with maturity period
ranging from two years to 30 years, long-term) and treasury bills (securities with maturity periods of 91
or 364 days, short-term).
The central government securities are issued for a minimum amount of Rs 10, 000 (face value).
Thereafter they are issued in multiples of Rs 10,000. They are issued through an auction carried out by
the Reserve Bank of India [ Get Quote ].
State governments go about raising money through state development loans. Local bodies of various
states like municipalities also tap the bond market from time to time. Bonds are also issued by public
sector banks and PSUs. Corporates on the other hands raise funds by issuing commercial paper (short-
term) and bonds (long-term).
Bonds can be issued at par, which means that the price at which one unit of the bond is being sold is
same as the face value. Alternatively, they can be issued at a discount (less than the face value) or a
premium (more than the face value).
For example, a bond with a face value of Rs 100, if issued at Rs 100, is said to be issued at par. If it is
issued at, say, Rs 95, it will be said to have been issued at a discount and conversely, if issued for, say,
Rs 110, at a premium.
Investors
Banks are the largest investors in the bond market. In the low-interest scenario that prevailed, it made
more sense for banks to invest in government bonds than to give out loans. Mutual funds, in order
capitalise on low interest rates, started a good number of debt funds that mobilised a significant amount
of money from the investors.
Thus, mutual funds emerged as important players in the bond markets. However, in the recent past with
the interest rates on their way up, the performance of debt funds has not been good and so the presence
of mutual funds in the bond market has been limited.
Foreign institutional investors are also allowed to invest in the bond market, though within certain
limits. Also, regulations mandate provident funds and pension funds to invest a significant proportion
of their funds mobilised in government securities and PSU bonds.
Hence, they continue to remain large investors in the bond market in India. The same holds true for
charitable institutions, societies and trusts.
Since January 2002, individuals categorised by RBI as retail investors can participate in the auction
carried out by RBI. They can submit bids through banks or primary dealers to invest in these securities
on a non-competitive basis.
The minimum bid has to be for an amount of Rs 10,000 (and there on in multiples of Rs 10,000) and a
single bid cannot exceed Rs 1 crore (Rs 10 million).
Secondary market
Bonds issued by corporates and the Government of India can be traded in the secondary market. Most
of the secondary market trading in government bonds happens on the negotiated dealing system (an
electronic platform provided by the RBI for facilitating trading in government securities) and the
wholesale debt market (WDM) segment of the National Stock Exchange.
Corporate bonds and PSU bonds can also be traded on the WDM. The secondary market transactions in
the bond market for the year 2003-04 was Rs 27,21,470.6 crore (Rs 272,147.06 billion), an increase of
36.6 per cent over the previous year.
Of this, government securities accounted for 98.4 per cent of the total turnover. The number of retail
trades in the year 2003-04 formed an insignificant 73 per cent of the total number of trades (189,518) in
the secondary market.
Returns from the bond
The return on investment into bonds is in the form of coupon payments, as already mentioned before,
and through capital gains. Capital gain occurs when the bond is bought at a discount. Bonds bought at a
premium would result in capital loss.
And bonds bought at par would have no capital gain or loss. Together, the total return is known as the
Yield from the bond. Let us explain this with the help of an example. Let's say, that an investor buys
one unit of a Long-term bond issued by a Company X Ltd for Rs 95 (i.e at a discount).
The face value of the bond is Rs 100. The coupon is 5 per cent per annum, paid annually, and the
maturity period of the bond is two years.
This means, that the investor will get a payment of Rs 5 every year (calculated as 5 per cent of the face
value) and at the end of the second year, he will receive Rs 100, the face value. The yield on this long-
term bond can be calculated by solving for r in the equation below.
95 = 5/(1 + r) + 5/(1 + r)2 + 100/(1 + r)2
We get r=7.8%
If we notice, in the above equation, the coupon payments are fixed, the face value is fixed; the maturity
of the bond is fixed. Hence the yield from the bond effectively depends on the price of the bond.
The price of the bond is determined by the issuer, by taking the market forces into account. For
example, if the price of a similar bond is Rs 94 in the market (all other characteristics being same) no
one will be willing to pay Rs 95 for the bond being issued by company X (assuming similar risk as
well).
Hence, company X must ensure that the price, at which they are offering their Bond, is competitive
with similar bonds in the market, and should provide similar yield to the investors.
Interest rate risk
Price and Yield share an inverse relationship. When price is high, yield is lower and when price is low,
yield is higher (As can be seen in the way equation 1 would work). This brings us to the problem of
Interest rate risk faced by bonds.
If the government suddenly decides to raise the prevailing interest rates, the expected yield from bonds
held by the investors would go up. This would result in a drop in the price of the bonds. And if the
investor wants to sell the bond for some reason, instead of holding it till maturity, he will have to suffer
a capital loss.
On the contrary, if the interest rates are falling, the price of the bonds will rise and the investors can sell
their bonds at higher prices in the secondary market than the price at which they bought the bond
initially.
The reason for this inverse relationship is that, when interest rates are raised, the newer bonds issued by
the government and the corporates, other investments like fixed deposits, post office savings schemes,
et cetera offer greater return, with more or less the same kind of risk.
So an existing bond becomes less attractive. Investors want to sell off their existing investment in
bonds and switch to other more attractive investments. The selling pressure in the bond market causes
the prices of the bonds to drop. Similarly, when interest rates are dropped, price of bonds increases due
to increase in demand.
Over the last few years the treasury departments of banks in India have been responsible for a
substantial part of profits made by banks. Between July 1997 and Oct 2003, as interest rates fell, the
yield on 10-year government bonds fell, from 13 per cent to 4.9 per cent. With yields falling, the banks
made huge profits on their bond portfolios.
Govt bond:

Bonds refer to the statements of debt. It is a promise to repay money borrowed after a perticular period
of time with certain rate of interest. The issuer is equivalent to the borrower and the bond holder to the
lender. Bonds enable the issuer to finance long-term investments with external funds.

Government bonds refer to the bonds issued by the Government or the government department of a
country in its own currency. The money raised from the bonds maybe used to finance various activities
like building roads, hospitals, infrastructure etc.

RBI bonds refer to the bonds issued by Reserve Bank of India. The money rased may be used to
finance its various projects like long term lending, development of the economy etc.

Investing in bonds is different from investing in shares. The bonds are traded more on over the counter
basis than on the stock market. Usually the Govt and RBI bonds are available in designated branches of
banks and post offices. They may be procured to a broker too. You will have to fill in a form and apply
for the bonds. Usualy one bond is worth 1000 rupess and if you want to invest above 50,000.00 you
will have to submit a PAN card. Once you fill the form and submitt it you will recive a bond certificate
in your name.

The returns depend on the type of the bond! Some have a fixed rate of interest, say 8%, and some are
linked to the market or the inflation in the country. That means the interest maybe 4% plus the
fluctuations to the parameter to which it is linked. The returns maybe paid out to you in the form of a
demand draft or maybe a direct credit to your bank account.