A bond is a loan turned into a tradable security: the investor lends money to a government, a company or a bank, which promises to pay interest (the coupon) at fixed dates and to repay the principal at maturity. Governments finance their deficits with bonds, companies fund projects with them, and the Reserve Bank uses their yields to read and steer the economy.
How a Bond Works
- Face value (say Rs 100 or Rs 1,000) is what the issuer repays at maturity; the coupon is the annual interest as a percentage of face value; the tenor is the life of the bond.
- Price and yield move in opposite directions: if interest rates rise, older bonds with lower coupons fall in price so that their yield matches the market.
- Yield to maturity (YTM) is the total return if the bond is held to maturity; current yield is coupon divided by price.
- Duration measures how sensitive a bond’s price is to a change in interest rates – the longer the duration, the bigger the swing.
- A debenture is a bond issued by a company, usually unsecured, relying on the issuer’s creditworthiness rather than collateral.
Types of Bonds in India
- Government securities (G-secs): dated securities of the Central Government issued by the RBI through auctions; the 10-year G-sec yield is the benchmark for the economy.
- Treasury bills: short-term (91, 182 and 364 days) zero-coupon instruments sold at a discount.
- State Development Loans (SDLs): bonds of state governments, also auctioned by the RBI.
- Corporate bonds and NCDs: issued by companies and NBFCs, rated by credit rating agencies, regulated by SEBI.
- Sovereign Gold Bonds: government bonds denominated in grams of gold, paying 2.5% a year, issued from 2015 to 2024.
- Sovereign Green Bonds: issued since January 2023 to fund green public projects.
- Inflation-indexed, floating-rate, zero-coupon, perpetual (AT-1) and masala bonds (rupee bonds issued abroad), and municipal bonds issued by cities such as Pune and Indore.
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Safety and Credit Rating
- Government bonds carry sovereign backing and are treated as risk-free; they qualify for banks’ Statutory Liquidity Ratio.
- Corporate bonds are rated by agencies such as CRISIL, ICRA, CARE and India Ratings; AAA is the highest and anything below BBB- is non-investment grade.
- The higher the credit risk, the higher the coupon investors demand – the credit spread over G-secs.
Why Bond Markets Matter
- Yields on G-secs signal expectations of inflation and policy rates; an inverted yield curve often precedes a slowdown.
- The RBI conducts open market operations, Operation Twist and switches in the bond market to manage liquidity and the yield curve.
- Since 2021 individuals can buy G-secs and T-bills directly through the RBI Retail Direct portal, and Indian G-secs entered global bond indices (JP Morgan) in 2024, drawing foreign inflows.
Important Facts for Examsmost asked
- Bond price and yield move inversely; YTM is the standard measure of return.
- Central Government dated securities and T-bills are issued by the RBI; T-bill tenors 91, 182 and 364 days.
- Sovereign Gold Bonds pay 2.5% interest; Sovereign Green Bonds began in January 2023.
- Investment grade: BBB- and above; AAA is the best rating.
- RBI Retail Direct (November 2021) lets retail investors buy G-secs; the 10-year G-sec yield is the benchmark.
FAQs
Is a bond safer than a fixed deposit?
Government bonds are as safe as it gets, but their market price can move before maturity; a fixed deposit has no price risk but is only insured up to Rs 5 lakh by DICGC.
What is a bond yield spread?
The difference between the yield on a corporate or state bond and the yield on a comparable G-sec; it reflects credit and liquidity risk.
Why are bonds asked in RBI Grade B and NABARD exams?
The G-sec market, yields and the RBI’s operations are core to the finance and economy sections; definitions, tenors and the price-yield relationship are standard questions.
