A bond is a loan you give to a government or company. In return, the issuer promises to pay you regular interest, called the coupon, and to repay the original amount, the face value, on a fixed date called maturity. Bonds are a major part of the debt, or fixed income, market.
What a bond is
When you buy a share, you become an owner. When you buy a bond, you become a lender. Bondholders do not share in a company's profits, but they have a stronger claim on repayment than shareholders: if a company runs into trouble, lenders are paid before owners.
How bonds work in India
Major types include government securities (G-secs) and treasury bills issued by the central government, state development loans issued by states, and corporate bonds and debentures issued by companies. Retail investors can buy government securities directly through the RBI Retail Direct platform, and many bonds are listed and traded on the NSE and BSE. Credit rating agencies rate corporate bonds, from AAA (highest safety) downward, to indicate the risk of default.
Key terms
Face value: the amount repaid at maturity. Coupon: the yearly interest, as a percentage of face value. Maturity: the repayment date. Yield: the return you actually earn based on the price you pay. Yield to maturity (YTM): the total yearly return if you hold to maturity and all payments are made.
A simple example
You buy a bond with a face value of ₹1,000, a 7% coupon and five years to maturity. You receive ₹70 a year for five years and get ₹1,000 back at the end. If you bought it at ₹980, your yield is a bit higher than 7%; if you paid ₹1,020, it is a bit lower.
Prices and interest rates
Bond prices move opposite to interest rates. If rates rise, new bonds pay more, so older bonds with lower coupons fall in price. If rates fall, older bonds become more valuable. Longer-maturity bonds are more sensitive to rate changes. This only matters if you sell before maturity; holding to maturity returns the face value, assuming no default.
Risks
Credit risk: the issuer may fail to pay. Interest-rate risk: prices fall when rates rise. Liquidity risk: some bonds trade rarely. Inflation risk: fixed payments lose purchasing power. Government bonds carry minimal credit risk; lower-rated corporate bonds pay more because they carry more.
Why it matters for investors
Bonds provide regular income, stability and diversification, often holding up when shares fall. Many investors use bonds or debt funds to balance the risk of equity.
Government bonds as a benchmark
Yields on government bonds, especially the 10-year government security, act as a benchmark for interest rates across the economy. Loan rates, deposit rates and corporate bond yields all move in relation to them. When government bond yields rise, borrowing generally becomes more expensive, which can affect company profits and share prices. This is why market news often mentions the 10-year yield.
Common misconceptions
"Bonds can't lose money." Prices fall with rising rates, and issuers can default.
"A higher coupon is always better." It often signals higher risk.
"Coupon and yield are the same." Yield depends on the price you pay.
Frequently asked questions
How can I buy government bonds in India?
Through RBI Retail Direct, brokers, or debt mutual funds.
What does AAA mean?
The highest credit rating, indicating very low default risk.
Is bond interest taxable?
Generally yes, as per applicable income tax rules.
Bond or debt fund?
Debt funds offer diversification and liquidity; direct bonds offer certainty if held to maturity.
How to use this on PositoAI
PositoAI focuses on listed companies. Company pages show debt data, which tells you how much a company relies on borrowing, the other side of the bonds and loans it has taken.
Summary
A bond is a loan to a government or company that pays a coupon and returns the face value at maturity. In India, investors can buy G-secs via RBI Retail Direct and corporate bonds rated by agencies. Bond prices move opposite to interest rates. Bonds offer income and stability but carry credit, rate, liquidity and inflation risks.