Glossary — Bond terms in plain English

The basics

Bond: A bond is like a Fixed Deposit, but instead of giving your money to a bank you give it to a company or government that pays fixed interest and returns the principal. Corporate bonds give fixed returns of 8 to 14%. Government bonds give fixed returns of 6 to 8%.
Bonds vs Fixed Deposits: Both give fixed income. FDs return 6 to 8% and can be opened easily with a bank. Corporate bonds return 8 to 14% and are bought using your demat account. Unlike FDs, bonds can be traded on the exchange.
Debenture / NCD: There is no difference between a bond, a debenture and a non-convertible debenture — they are different names for the same thing, just as equity and stocks mean the same.
Income from bonds: Bonds pay regular interest just like FDs, deposited directly to your bank account. Investing in bonds may also generate capital gains, if the bond was bought or sold at a price different from its face value.

Yield and returns

Coupon rate: The interest earned from a bond is called the coupon. Your overall return may differ from the coupon rate depending on the price you paid — the overall return is reflected in the bond's yield.
Yield to Maturity (YTM): Yield is the overall annualised return you earn on a bond investment. It factors in the purchase price, all interest payments and the principal at maturity. Think of it as the XIRR on your bond investment. Also called fixed returns.
Volatility of returns: Once you have purchased a bond, your returns are fixed if you hold it till maturity. There is zero volatility in your returns unless you sell the bond before maturity or the issuer defaults.
Returns on corporate bonds: Corporate bonds typically give 8 to 14% fixed returns; government bonds give 6 to 8%.
Penalty on sale of bonds: No penalty applies if you sell your bonds before maturity. The sale price is determined by market conditions, so you may make a capital gain or loss.

Dates and tenure

Record date: The specific date on which a company finalises the list of bondholders eligible for its forthcoming interest or principal payment. Whoever holds the bond on the record date receives the next payment from the issuer.
Maturity date: The specific date on which a bond completely matures and the final principal payment is made to the bondholder.
Tenure / Tenor: Tenure indicates the time left for the bond to mature.

Tax

Taxation of bonds: Bonds give regular interest, which is taxed at your slab rate. There may also be capital gains, which are taxed at the capital gains tax rate.
Capital gains tax on bonds: Long-term capital gains tax is 12.5% if bonds are held for 12 months or more. Below that they are classified as short term and taxed at your slab rate.
TDS (tax deducted at source): Interest income from bonds is subject to TDS of 10%, similar to FDs. You can claim it in your income tax returns. Check Form 16 or Form 26AS for TDS deducted on bond interest.
Income tax returns: Show interest income from bonds under the head "Income from Other Sources". Show capital gains from bonds under the "Capital Gains" head.
Tax saving with bonds: Certain PSUs issue tax-free bonds where the interest income is completely tax free.

Risk and ratings

Safety of bonds: Bonds are regulated by SEBI and are considered safe instruments. Government bonds have the highest safety because they are backed by the government. Corporate bonds carry some risk, which is reflected in their credit ratings.
Risk of losing money in bonds: All investments carry some risk. FDs carry the risk of the bank defaulting; bonds carry the risk of the issuer defaulting on interest or principal payments. That risk is reflected in the credit rating given to the bond, which ranges from Triple A to D, similar to a riskometer.
Credit rating: Rating agencies give bond issuers a credit rating ranging from Triple A to D, indicating their level of safety. Think of a credit rating as a riskometer for bonds. Government bonds are given a Sovereign rating since they are backed by the government and carry almost no risk.
Credit rating scale: AAA is highest safety. AA+, AA and AA- are high safety. A+, A and A- are adequate safety. BBB+, BBB and BBB- are moderate safety. BB+, BB and BB- are moderate risk. B+, B and B- are high risk. C+, C and C- are very high risk. D is default.

Buying and selling

Investing process: Bonds are bought and sold on NSE and BSE, just like stocks. You can also invest in bonds during their IPO. Use your broker account to log in and invest.
Buying your first bond: Log in to your existing broker account, click on the Bonds tab and start investing. No additional account or setup is needed.
Bond evaluation: When evaluating bonds, focus on three key parameters: the yield, the credit rating, and the maturity date. Filter on these in your broking account to identify bonds to invest in.
Minimum investment amount: The minimum investment amount for Government Securities is ₹100, and for corporate bonds it is ₹1,000.
Online Bond Platform Provider (OBPP): Online bond platforms hold a small selection of bonds that they sell to investors at a price they determine. Buying bonds directly on NSE and BSE using your existing stockbroker account gives a wider selection and completely transparent pricing.

Types of bonds

Zero coupon bond: A bond where the interest is paid cumulatively at maturity rather than at regular intervals.
Secured and unsecured bonds: Secured bonds are backed by assets, similar to a loan backed by underlying collateral. Unsecured bonds are not backed by specific assets.
Callable bonds: Callable bonds allow the issuer to redeem them before maturity. They typically give higher yields than non-callable bonds, but the issuer may redeem them earlier.
Government bonds (G-Secs): Government bonds are issued by the Central Government. They carry the highest level of safety, guaranteed by the Central Government.
State Development Loans (SDL): Bonds issued by the various states in India, called State Development Loans. They are perceived to be of high safety since they are backed by a state government.
Municipal bonds: Issued by local municipalities to fund development activities like city development, urban transportation and healthcare infrastructure. Popularly called Muni Bonds.
Public sector bonds: Issued by organisations where the government holds more than 50% ownership, such as NHAI, REC and ONGC.
Corporate bonds: Large corporations and financial institutions issue these bonds to fund their business operations. Corporate bonds give fixed returns of 8 to 14%.
State government guaranteed bonds: Bonds issued by institutions where the payments are guaranteed by a state government, and hence considered very safe. Examples are Kerala Infrastructure Investment Fund Board and Andhra Pradesh State Beverages Corporation Limited.
Tax-free bonds: Certain PSU companies issue tax-free bonds. The interest income earned from investing in these bonds is 100% tax exempt.
Sovereign Gold Bonds (SGB): Government bonds linked to gold prices. They offer an annual interest rate of 2.5%, providing regular income alongside potential capital appreciation from gold. You can buy or sell SGBs on NSE and BSE.

The basics

Bond

A bond is like a Fixed Deposit, but instead of giving your money to a bank you give it to a company or government that pays fixed interest and returns the principal. Corporate bonds give fixed returns of 8 to 14%. Government bonds give fixed returns of 6 to 8%.

Bonds vs Fixed Deposits

Both give fixed income. FDs return 6 to 8% and can be opened easily with a bank. Corporate bonds return 8 to 14% and are bought using your demat account. Unlike FDs, bonds can be traded on the exchange.

Debenture / NCD

There is no difference between a bond, a debenture and a non-convertible debenture — they are different names for the same thing, just as equity and stocks mean the same.

Income from bonds

Bonds pay regular interest just like FDs, deposited directly to your bank account. Investing in bonds may also generate capital gains, if the bond was bought or sold at a price different from its face value.

Yield and returns

Coupon rate

The interest earned from a bond is called the coupon. Your overall return may differ from the coupon rate depending on the price you paid — the overall return is reflected in the bond's yield.

Yield to Maturity (YTM)

Yield is the overall annualised return you earn on a bond investment. It factors in the purchase price, all interest payments and the principal at maturity. Think of it as the XIRR on your bond investment. Also called fixed returns.

Volatility of returns

Once you have purchased a bond, your returns are fixed if you hold it till maturity. There is zero volatility in your returns unless you sell the bond before maturity or the issuer defaults.

Returns on corporate bonds

Corporate bonds typically give 8 to 14% fixed returns; government bonds give 6 to 8%.

Penalty on sale of bonds

No penalty applies if you sell your bonds before maturity. The sale price is determined by market conditions, so you may make a capital gain or loss.

Dates and tenure

Record date

The specific date on which a company finalises the list of bondholders eligible for its forthcoming interest or principal payment. Whoever holds the bond on the record date receives the next payment from the issuer.

Maturity date

The specific date on which a bond completely matures and the final principal payment is made to the bondholder.

Tenure / Tenor

Tenure indicates the time left for the bond to mature.

Tax

Taxation of bonds

Bonds give regular interest, which is taxed at your slab rate. There may also be capital gains, which are taxed at the capital gains tax rate.

Capital gains tax on bonds

Long-term capital gains tax is 12.5% if bonds are held for 12 months or more. Below that they are classified as short term and taxed at your slab rate.

TDS (tax deducted at source)

Interest income from bonds is subject to TDS of 10%, similar to FDs. You can claim it in your income tax returns. Check Form 16 or Form 26AS for TDS deducted on bond interest.

Income tax returns

Show interest income from bonds under the head "Income from Other Sources". Show capital gains from bonds under the "Capital Gains" head.

Tax saving with bonds

Certain PSUs issue tax-free bonds where the interest income is completely tax free.

Risk and ratings

Safety of bonds

Bonds are regulated by SEBI and are considered safe instruments. Government bonds have the highest safety because they are backed by the government. Corporate bonds carry some risk, which is reflected in their credit ratings.

Risk of losing money in bonds

All investments carry some risk. FDs carry the risk of the bank defaulting; bonds carry the risk of the issuer defaulting on interest or principal payments. That risk is reflected in the credit rating given to the bond, which ranges from Triple A to D, similar to a riskometer.

Credit rating

Rating agencies give bond issuers a credit rating ranging from Triple A to D, indicating their level of safety. Think of a credit rating as a riskometer for bonds. Government bonds are given a Sovereign rating since they are backed by the government and carry almost no risk.

Credit rating scale

AAA is highest safety. AA+, AA and AA- are high safety. A+, A and A- are adequate safety. BBB+, BBB and BBB- are moderate safety. BB+, BB and BB- are moderate risk. B+, B and B- are high risk. C+, C and C- are very high risk. D is default.

Buying and selling

Investing process

Bonds are bought and sold on NSE and BSE, just like stocks. You can also invest in bonds during their IPO. Use your broker account to log in and invest.

Buying your first bond

Log in to your existing broker account, click on the Bonds tab and start investing. No additional account or setup is needed.

Bond evaluation

When evaluating bonds, focus on three key parameters: the yield, the credit rating, and the maturity date. Filter on these in your broking account to identify bonds to invest in.

Minimum investment amount

The minimum investment amount for Government Securities is ₹100, and for corporate bonds it is ₹1,000.

Online Bond Platform Provider (OBPP)

Online bond platforms hold a small selection of bonds that they sell to investors at a price they determine. Buying bonds directly on NSE and BSE using your existing stockbroker account gives a wider selection and completely transparent pricing.

Types of bonds

Zero coupon bond

A bond where the interest is paid cumulatively at maturity rather than at regular intervals.

Secured and unsecured bonds

Secured bonds are backed by assets, similar to a loan backed by underlying collateral. Unsecured bonds are not backed by specific assets.

Callable bonds

Callable bonds allow the issuer to redeem them before maturity. They typically give higher yields than non-callable bonds, but the issuer may redeem them earlier.

Government bonds (G-Secs)

Government bonds are issued by the Central Government. They carry the highest level of safety, guaranteed by the Central Government.

State Development Loans (SDL)

Bonds issued by the various states in India, called State Development Loans. They are perceived to be of high safety since they are backed by a state government.

Municipal bonds

Issued by local municipalities to fund development activities like city development, urban transportation and healthcare infrastructure. Popularly called Muni Bonds.

Public sector bonds

Issued by organisations where the government holds more than 50% ownership, such as NHAI, REC and ONGC.

Corporate bonds

Large corporations and financial institutions issue these bonds to fund their business operations. Corporate bonds give fixed returns of 8 to 14%.

State government guaranteed bonds

Bonds issued by institutions where the payments are guaranteed by a state government, and hence considered very safe. Examples are Kerala Infrastructure Investment Fund Board and Andhra Pradesh State Beverages Corporation Limited.

Tax-free bonds

Certain PSU companies issue tax-free bonds. The interest income earned from investing in these bonds is 100% tax exempt.

Sovereign Gold Bonds (SGB)

Government bonds linked to gold prices. They offer an annual interest rate of 2.5%, providing regular income alongside potential capital appreciation from gold. You can buy or sell SGBs on NSE and BSE.