Architecture of Bonds: A Deep Dive into Fixed Income Securities

Bonds are often referred to as debt securities, and they are a critical component of the financial market, offering a safer investment alternative compared to equities. Bonds are favored by conservative investors due to their relatively lower risk and predictable returns.

- Nilotpal Banerjee Chief Manager (Faculty) Staff Training Centre Powai

In India, the bond market has evolved significantly over the years, offering a wide range of products to cater to the diverse needs of investors. This article delves into the various aspects of bonds, their types, valuation methods, and the factors affecting their prices, with a specific focus on the Indian market. Bonds are a cornerstone of the global financial system, providing a stable and reliable form of investment for institutions and individual investors alike.

Definition of Bond:

A bond is a fixed-income financial instrument that represents a loan made by an investor to a borrower, typically a corporation or government. In essence, when you purchase a bond, you are lending money to the issuer in exchange for periodic interest payments and the return of the bond's face value when it matures.

Bonds are often referred to as debt securities, and they are a critical component of the financial market, offering a safer investment alternative compared to equities. Bonds are favored by conservative investors due to their relatively lower risk and predictable returns.

Who Issues Bonds and Why?

Bonds are issued by various entities, including:

1. Governments (Central and State): To finance public projects like infrastructure development, healthcare, education, and defence. In India, government bonds are known as Government Securities (G-Secs) or Treasury Bills (T-Bills).

2. Corporations: To raise capital for business expansion, mergers and acquisitions, or to refinance existing debt. Corporate bonds in India are issued by companies across various sectors like banking, manufacturing, and utilities.

3. Municipalities: Local governments issue bonds to fund public projects within their jurisdiction, such as schools, highways, and water systems. These bonds are less common in India but are gaining traction.