Bonds Explained
What is it?
A bond is essentially a loan you give to a government or company. In return, the issuer promises to pay you periodic interest and return your original amount (the principal) at a fixed future date (maturity).
Why should you care?
Bonds are generally lower-risk than stocks and provide steadier, more predictable income, which makes them a common way to balance out the higher volatility of equity in a portfolio.
Real-life example
If you buy a ₹10,000 government bond with a 7% annual coupon and 5-year maturity, you'd typically receive ₹700 in interest each year, and get your ₹10,000 principal back at the end of 5 years — assuming you hold it to maturity.
Common mistakes
- Assuming all bonds are risk-free — a bond's safety depends heavily on the issuer's creditworthiness (government bonds are generally safer than lower-rated corporate bonds).
- Not accounting for interest rate risk — a bond's market price can fall if interest rates rise before it's sold before maturity.
- Confusing a bond's coupon rate with its actual return if bought or sold before maturity at a different price.
Stocks vs Bonds at a glance
| Aspect | Stocks | Bonds |
|---|---|---|
| What you own | A share of the company | A loan to the issuer |
| Income | Uncertain (dividends, if any) | Usually fixed interest |
| Risk | Higher, more volatile | Generally lower, steadier |
| Priority if issuer fails | Paid last | Paid before shareholders |
FAQ
Are government bonds completely safe?
Government bonds are considered among the safest investments because the government is highly unlikely to default, but they still carry interest-rate and inflation risk, and their prices can fluctuate before maturity.
What is a coupon rate?
The coupon rate is the fixed annual interest rate a bond pays on its face value, usually paid out periodically until maturity.
Can individual investors buy bonds directly in India?
Yes, retail investors can buy government securities directly via the RBI Retail Direct platform, or gain bond exposure indirectly through debt mutual funds.
Why do bond prices fall when interest rates rise?
Existing bonds with lower fixed coupon rates become less attractive compared to new bonds issued at higher rates, so their market price adjusts downward to remain competitive.
See this concept applied to your own portfolio
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