Let us understand what are Bonds in investment!!

Bonds are simple ways through which Governments or companies borrow money, These are very simple instruments which have a fixed date of maturity, fixed rate of interest which is referred as coupon & fixed principal

Example : If any X company as issued a bond of Rs 5,000/- a maturity period of 7 years & interest (Coupon) rate is 8% so as an investor you pay 5,000 and get an interest of 4,00 per annum for next 7 years and on completion of 7 years your principal of 5,000 is returned

But!!! What if one has to sell the bond before 7 years, so there exists a bond market where bonds are bought & sold, So the prices also does change & two factors influence the changes, One is change in interest rate other is the credit quality of that particular company (How promising the company is to pay the principal)

Let us understand interest rate risk with an example

Let us suppose you have bought a 10 year bond of value Rs 1000/- with interest rate of 8%, Now after 2 years if you wish to sell your bond, But during this time if interest rates other bonds are offering for same maturity of 8 years is now 10% so how will convince someone to buy a bond which is offering 8% as against 10% interest rate which new bonds are offering, Here you end up selling bond at a discount in principal amounts, So a 1000/- bond can be sold at 885/- (these are YTM calculations for time being you can just go with flow and understand YTM later), Now there is a loss of 115/- per bond & that’s true and its also true in opposite scenario

In a scenario if new bond interest rates decrease from 8% to 6% than you can sell your bond fetching good premium of approximately 1130/- making a profit of 130/- per bond, So here in concludes that bond price have inverse relation with interest rate, If interest rate increases bond price decreases and vice versa

Price of bond also varies with changes in inflation, economic growth & global liquidity

So one has to understand that bond market or the debt market is dynamic and changes will be there in prices even in debt also

Having worked several years into Life Insurance, Health Insurance, Mutual Funds & Closely with people into financial planning i am now putting my first step in investment advisory

One Thought on “Bond Not James Bond!!”

  • Nice to hear about plan to expand your horizons, making inroads into the arena of investment advisory. We wish you the very best.

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