What are Bonds in Stock Market?

What is a Bond in Finance in Simple Terms?

Bonds are issued by governments, corporations, and other organizations to raise money. When you buy a bond, you are lending money to the issuer, and they agree to pay you back the principal (the amount you lent) plus interest over a certain period of time:

The bond yield is determined by a number of factors, including the interest rate, the creditworthiness of the issuer, and the maturity of the bond.

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Why Do We Need Bonds in Finance?

There are many reasons why organizations issue bonds. Some of the most common reasons include:

  • To finance capital projects, such as building new infrastructure or acquiring new equipment.
  • To refinance existing debt, such as when interest rates are lower.
  • To diversify their funding sources.

How Does Bonds Works?

When an organisation issues bonds, it works in the following steps:

  1. The issuer issues a bond. The bond will have a face value, which is the amount of money that the issuer promises to repay the bondholder. The bond will also have an interest rate, which is the amount of money that the issuer will pay to the bondholder each year.
  2. The issuer sells the bond to the bondholder. The bondholder gives the issuer money equal to the face value of the bond.
  3. The issuer repays the face value of the bond to the bondholder on the maturity date. The maturity date is the date on which the bond expires.

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What impact does bond have?

An issue of bonds will affect in various ways. Let’s look at the below table

ParticularsImpact
Financial MarketsBonds can impact financial markets by affecting interest rates and liquidity. When interest rates rise, the price of bonds typically falls, and vice versa.
GovernmentsGovernments often issue bonds to finance their operations, such as building roads or schools.
CompaniesCompanies often issue bonds to finance their operations, such as expanding their business or developing new products. Bonds can also help companies to manage their debt.
IndividualsBonds can impact individuals by providing them with a source of income. Individuals can buy bonds to generate a reliable stream of income which is comparatively less risky through interest payments.

Let’s see an example:

BondABC Ltd.
Face ValueINR 100
Coupon Rate8% Per annum
Maturity Date2033

Summary:

Government Bonds of India and has a face value of ₹100. The interest rate is 8% per annum, which means that the investor will receive ₹8 per year for every ₹100 of bond they own. The bond matures in 2033, which means that the investor will receive the full face value of the bond on that date. The bond is listed on the National Stock Exchange of India, which means that it can be bought and sold on the stock exchange.

Also Read: What are Reserves ? Meaning, Types & Impact