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What is a Financial Bond?
If you want to build a strong investment portfolio, you must look beyond traditional investment options like Fixed Deposits and invest in diverse securities. Investing in Financial Bonds is a great option for diversification and for earning stable returns.
Understanding the meaning of financial bonds
You can define Bond Finance as a loan given by you to the issuer of the Bond. When you purchase a Bond, you lend the principal amount to the issuer. The issuer pays pre-decided interest on the principal amount periodically until the Bond matures. You get the principal amount back on maturity. You can buy and sell Bonds in the secondary market as well.
Importance of financial bonds
Financial Bonds allow government entities and private companies to raise funds for their projects and expansion. Through Financial Bonds, you get to invest in the growth of these companies while earning fixed returns.
Features of financial bonds
- Face value: The basic value or principal amount of the Bond which is returned to you on maturity.
- Coupon rate: The interest rate of the Bond, which is a percentage of the face value.
- Maturity date: The date when the Bond's principal is repaid to you.
- Credit rating: A rating which represents the creditworthiness of the issuer of the Bond. It is issued by credit rating agencies like CRISIL.
- Call option: An option that allows the issuer to repay the Bond before maturity.
- Put option: An option that lets you sell the Bond back to the issuer before maturity.
Benefits of investing in financial bonds
- Steady income: You get a fixed income periodically at the pre-determined interest rates.
- Capital preservation: Bonds are less volatile, helping you protect the principal amount.
- Diversification: You can invest in Bonds alongside stocks and other securities for diversification.
- Safety; Government and investment-grade Bonds (Bonds with credit ratings of BBB and higher) offer a lower risk.
- Liquidity: Bonds are easily tradable in secondary markets for quick access to cash.
Risks associated with financial bonds
- Market risk: Bonds purchased in secondary markets have a market risk.
- Default risk: If the issuer fails to repay interest or principal payments, you can incur losses.
- Liquidity risk: Some Bonds, especially corporate, may be hard to sell in the secondary market.
- Call risk: Callable Bonds may be redeemed early, reducing potential returns.
Comparison with other investment instruments
- Bonds vs stocks: Unlike Bonds, stocks do not offer a fixed income. They have a higher risk but can provide exceptional returns through capital appreciation.
- Bonds vs Mutual Funds: Mutual Funds are more volatile and riskier than Bonds. They provide variable returns, unlike Bonds.
- Bonds vs debentures: Debentures are unsecured, have a higher risk and often provide higher returns than Bonds.
Conclusion
Financial Bonds offer predictable returns and can be low risk if their credit rating is higher. You can invest in Bonds to diversify your portfolio and earn stable returns for the long term. Make sure you check the creditworthiness of the issuer while investing.
Also Read: What are the benefits of Sovereign Gold Bonds?
FAQs
Who can issue Financial Bonds?
Government entities, corporations, and municipalities can issue Financial Bonds.
&How is interest earned on a Financial Bond?
You earn interest on Financial Bonds through periodic coupon payments at a fixed rate.
What is the maturity date of a Financial Bond?
The maturity date is the day when the principal is repaid to you.
Are Financial Bonds a safe investment option?
Financial Bonds can be safe, especially if they are government and investment-grade Bonds.
Disclaimer: This article is for information purpose only. The views expressed in this article are personal and do not necessarily constitute the views of Axis Bank Ltd. and its employees. Axis Bank Ltd. and/or the author shall not be responsible for any direct / indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information. Please consult your financial advisor before making any financial decision.
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