Bonds & Debt Instruments

When you buy a Stock, you become an Owner. When you buy a Bond, you become a Lender.

What is a Bond?

A Bond is a loan you give to a company or the government. In return, they promise to:

1. Pay you regular interest (Coupon).
2. Return your principal amount at the end (Maturity).

Example:

• You buy a "Tata Power Bond".
• Face Value: ₹1,000.
• Coupon: 8% per year.
• Tenure: 5 Years.
• You get: ₹80 every year for 5 years. At end of 5th year, you get back ₹1,000.

Key Terms

1. Face Value (Par Value): The original price of the bond (usually ₹1,000 or ₹100).
2. Coupon Rate: The fixed interest rate paid on Face Value.
3. Maturity Date: When the loan expires.
4. Yield: The actual return you get if you buy the bond from the market today.
   • Price and Yield are Inversely Related.
   • If Bond Price goes UP, Yield goes DOWN.
   • If Bond Price goes DOWN, Yield goes UP.

Types of Bonds

1. Government Bonds (G-Secs)

• Issued by Govt of India.
• Risk: Zero (Sovereign Guarantee).
• Return: Low (7-7.5%).

2. Corporate Bonds

• Issued by companies (Reliance, Tata, Adani).
• Risk: Low to High (Depends on company).
• Return: Medium to High (8-11%).
• Credit Rating: AAA (Safest) to D (Default).

3. Tax-Free Bonds

• Issued by PSUs (NHAI, REC, PFC).
• Interest is 100% Tax-Free.
• Great for high tax bracket individuals.

4. Zero Coupon Bonds

• No yearly interest.
• Issued at a discount (e.g., ₹80) and redeemed at Face Value (₹100).
• Profit = ₹20.

Why Invest in Bonds?

1. Stability: Unlike stocks, bonds don't crash 20% in a day.
2. Regular Income: Good for retirees.
3. Diversification: When stocks fall, bonds usually stay stable or rise.

Risks in Bonds

1. Credit Risk: The company might default (not pay back).
   • Solution: Stick to AAA or Sovereign bonds.
2. Interest Rate Risk: If market interest rates rise, your old bond's price falls.
   • Why? Because new bonds offer higher rates, so nobody wants your old low-rate bond unless you sell it cheap.

7-Day Action Plan

Day 1: Check the current "10-Year G-Sec Yield" of India (Benchmark rate).
Day 2: Go to a bond platform like GoldenPi or Wint Wealth. See what bonds are available.
Day 3: Check the Credit Rating of a bond. Is it AAA, AA, or A?
Day 4: Calculate the post-tax return of an FD vs a Bond.
Day 5: Read about "Sovereign Gold Bonds" (SGB) - a special type of bond.
Day 6: Understand "Yield to Maturity (YTM)". It's the true return.
Day 7: Decide if you need bonds in your portfolio (Rule of thumb: Age = % allocation to Debt).

Quiz

💡 Final Wisdom: "Gentlemen prefer Bonds." Stocks make you rich; Bonds keep you rich.