How Do Bonds Work?
Bonds are used when a government or a company needs money. Instead of going to a bank, they borrow from people. When you buy a bond, you are giving your money for a fixed time.
During this time, you receive interest at regular intervals. This continues until the bond reaches its end date. Once that happens, the amount you invested is returned.
- Terms are set at the beginning
One has to fix the value, rate, rate of interest, and the period of the bond when the bond is declared. These usually stay the same throughout the duration. - Interest is paid in intervals
The issuer makes interest payments at fixed intervals. This could be every few months or once a year, depending on the bond. - Amount is returned at maturity
When the bond completes its term, the full invested amount is paid back to the investor. - Prices can change
If bonds are traded, their price may go up or down depending on market conditions.
Types of Bonds
Bonds are not all the same. They differ based on who issues them and how they are designed. Some are linked to government borrowing, while others are connected to company funding needs.
- Government bonds
Issued by the government to raise money for public spending. These follow a fixed structure with a set time period and defined interest payments. - Corporate bonds
These come from companies looking to raise funds. The terms, including interest and duration, are decided at the time of issue. - Municipal bonds
Local bodies issue these bonds to support development work. The money is often used for projects like roads, water supply, or other civic services. - Zero-coupon bonds
No regular interest is paid here. These bonds are issued at a lower price and repaid at full value when the term ends. - Convertible bonds
These bonds can be turned into company shares after a certain period. The conditions for conversion are already defined at the start.