Bonds are instruments that help companies and governments borrow money from the public. If the Government needs money, it issues government bonds. On the other hand, when companies need debt financing, they issue corporate bonds.
How do bonds work?
Bonds work by returning a regular amount to the investor, also known as a “coupon rate,” and are thus pertained to as a type of fixed-income security.
Bonds usually carry a fixed rate of interest. coupons. These coupons are paid at specified intervals, i.e., annually or half-yearly. Other features of bonds are as follows –
- They might be offered for a specific tenure after which you can redeem them
- There are different types of bonds available in the market
- Some bonds also give you the option to convert them to equity after a specified period
- You can trade bonds on the stock exchange and sell them to other investors before their maturity
- You can buy and sell bonds physically or through a Demat account
So, when you invest in bonds, you are essentially lending money to the issuer, and you get the benefit of guaranteed returns in the form of interest payments. Moreover, you can trade bonds and earn capital gains if the price paid for buying the bond is lower than the price at which you sell them.
Is it worth investing in bonds?
Bonds are beneficial, because –
- They are liquid in nature as they can be traded on the stock exchange
- They are a form of debt instruments that give guaranteed interest earnings on your investments
- They help you diversify your portfolio
- Some bonds are also tax-efficient as they yield tax-free interest income
Also, for senior citizens and investors looking for stable and steady returns, bonds can prove to be a good investment option as they promise guaranteed interest income.
Bonds, when used strategically alongside stocks and other assets, can be a great addition to your investment portfolio, many financial advisors say. Unlike stocks, which are purchased shares of ownership in a company, bonds are the purchase of a company or public entity’s debt obligation.
So, if you are looking for portfolio diversification through debt exposure and your investment strategy permits, bonds can prove to be a worthy investment avenue.
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