Bonds

When you buy a bond, you lend money to its issuer — the central or a state government, a public sector undertaking, a bank or a company. In return the issuer promises two things: periodic interest, called the coupon, and repayment of the face value on the maturity date. Those promises are only as good as the issuer's ability to keep them.

A bond's coupon is fixed, so its price adjusts to market conditions. When interest rates rise, existing bonds with lower coupons become less attractive and their prices fall; when rates fall, their prices rise. The longer the remaining maturity — and the higher the modified duration — the larger the move. If you hold to maturity and the issuer pays, interim price moves don't change what you receive.

Credit ratings from SEBI-registered agencies grade an issuer's ability to pay, from AAA (highest safety) down to D (default). Bonds rated BBB- and above are called investment grade. A rating is an informed opinion, not a promise — ratings can be cut, and sometimes quickly. Higher yields usually mean higher credit risk.

• Government securities (G-secs), state development loans and treasury bills — issued by the central and state governments. Individuals can buy them through the RBI Retail Direct platform or through brokers.
• PSU and bank bonds — issued by public-sector undertakings and banks.
• Corporate bonds and debentures — issued by companies and NBFCs, rated across the spectrum.
• Tax-free bonds — issued by certain public-sector entities in the past and now available only in the secondary market.
• Zero-coupon bonds — issued at a discount and redeemed at face value, with no periodic interest.
• Perpetual bonds — no fixed maturity; the issuer may call them back. Some bank perpetual bonds can be written down if the bank is in distress.

A secured bond is backed by specific assets the bondholders can claim if the issuer defaults; an unsecured bond relies on the issuer's general ability to pay. Senior bonds are repaid before subordinated ones in a winding-up. Read the offer document for security cover, ranking, call and put options, and what counts as an event of default.

Most corporate bonds trade infrequently. You may not find a buyer at a fair price before maturity, so plan to hold bonds to maturity unless you are comfortable with that risk. SEBI-regulated online bond platforms have made buying easier, but they don't change how often a bond trades.

The Bond Yield & Cashflow tool lays out the coupon schedule, total coupons, principal repayment, current yield and an approximate YTM for any face value, price, coupon, frequency and maturity you enter.

CompoundX explains how bonds work and helps you see the cash flows before you commit. If you'd like to explore bonds further, register your interest and a CompoundX expert will be in touch. Bond availability depends on regulated partners; we will only describe offerings that are genuinely available.

For illustration, take a bond with face value ₹1,000, a 7% annual coupon and three years to maturity, bought at ₹980. The coupon is ₹70 a year. Current yield is ₹70 ÷ ₹980, about 7.14%. Because you also gain ₹20 at maturity, the YTM is higher still — a little under 7.8%. All figures are hypothetical.

YTM assumes you hold to maturity, every payment arrives on time, and coupons are reinvested at the same yield. Change any of those and the realised return changes.

Duration measures how long, on average, you wait for a bond's cash flows; modified duration turns that into price sensitivity. A modified duration of 4 means the price moves roughly 4% for a 1 percentage point change in yields, in the opposite direction.

Longer maturities and lower coupons mean higher duration. If you may need the money before maturity, duration tells you how much an interest-rate move could cost you.

• AAA and AA — high to very high safety for timely payment.
• A and BBB — adequate to moderate safety; BBB- is the lowest investment grade.
• BB and below — speculative; meaningful risk of default.
• D — in default.

Look beyond the letter: the rating outlook, the agency's rationale, recent rating changes, and whether the bond is secured. Ratings are opinions that can change.

• Coupons are added to your income and taxed at your slab rate. TDS may apply on interest.
• Listed bonds sold after more than 12 months: long-term gains taxed at 12.5% under current rules; within 12 months: taxed at your slab rate.
• Unlisted bonds and debentures: under rules in force since July 2024, gains are taxed at your slab rate regardless of holding period.
• Tax-free bonds: interest is exempt; gains on sale are taxable.
• Zero-coupon bonds have their own treatment for the discount at redemption.

Tax rules change and depend on your circumstances. This is general education, not tax advice — check the latest provisions or speak to a tax professional.

Neither is better in general. The trade-offs are liquidity, credit exposure and how much price movement you can live with.