What are Bonds And Bond's Advantages
When you need money in such a way, you either fulfill your need by saving or take a loan from someone. In the same way, when the government suffers a fiscal deficit or needs money for important works, the government issues a bond to collect the money. The government issues this bond for big investors and common people.
The bond issue is also called a 'letter of credit', because the bond is in the format of a letter. On this letter, the face value of the bond or the price of the bond is also written and the interest rate on it is also written. Coupons also rate the bond interest rate. For how long it is, all these things are also written on this letter of credit. All things are decided beforehand as to what the bond is to be.
The time period of the bond i.e. the time period can be from one year to five years or ten years or even more. The time period of the bond is also known as MATURITY PERIOD. And when the bond period ends, you get your money back according to the fixed terms and conditions.
What Are Bonds?
A bond can be a note issued by a corporation or government to its lenders. A bond is proof of debt upon which the issuing company promises to pay the bondholder a specified amount, often at specified time intervals, and to repay the principal loan by the expiration date. A bond investor gives money to the issuer and, in return, the issuer promises to repay the bond amount on specific maturity date.
What is a Debenture?
The company raises money from bonds from time to time to expand its business. The government also takes loans to meet the gap between income and expenditure. She takes this loan through bonds. The bonds issued by the government are called government bonds.
Bonds are considered very safe if seen from an investor's point of view. Especially government bonds are very safe because the reason is that they are guaranteed by the government. The bonds of the company are secured according to its financial position. This means that if the company's financial position is sound, then its bonds will also be safe. If the financial position of the company is not good, its bonds are not considered good from the point of view of security. Company bonds are called corporate bonds.
The interest on the bond is paid at a pre-determined rate. This is called a coupon. Since the interest rate of a bond is pre-determined, it is also called a fixed-rate instrument. This interest rate is fixed during the tenure of the bond. It doesn't change.
The government issues bonds to meet its fiscal deficit. Government bonds are called Government Securities (G-Secs). Through these, money is raised from investors. Earlier only big investors could invest in them. But now even small investors are allowed to invest in them. The maturity period of the bond can range from one to 30 years.
The return from the bond is called the yield. A bond's yield and its value are inversely related. This means that when the price of a bond falls, its yield increases. As the price of a bond increases, its yield decreases (it's opposite work).
It is usually issued by a company with a fixed rate of interest which is usually paid semi-annually on specified dates and the principal is paid by debentures (by redemption) on a specified date. Debentures are generally secured/charged in favor of the debenture holder against the assets of the company.
What are Bonds / Debentures?
Bonds / Debentures are similar to loans in a way. When the company requires funds for a project or they take loans from a bank or they take loans from public/investors and can issue bonds/debentures to the borrower, they have to repay in stipulated time. The companies are paying interest on the bond/debenture at the signing rate and making payment against the band after the maturity of the bond.
Bonds/Debentures are a safer investment option for any investor as compared to shares as they pay interest at the rate fixed by the company on time and are repaid on maturity (maturity of the bond).
Advantage of bonds
- More Predictable Returns.
- A way to diversify their portfolio.
- More faithful.
- Better Than the Bank.
- More Safer.
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