Bonds and Non-Convertible Debentures (NCDs):
Bonds and Non-Convertible Debentures (NCDs) are fixed-income instruments issued by corporations, government entities, or financial institutions to raise capital. These instruments serve as a means for investors to lend money in exchange for regular interest payments and the repayment of the principal amount at maturity.
Key Features of Bonds and NCDs:
- Fixed Interest Payments: Bonds and NCDs offer fixed or floating interest rates, providing investors with a predictable income stream. Interest payments are typically made semi-annually or annually, depending on the terms of the instrument.
- Maturity Period: These instruments have a predefined maturity period, ranging from a few months to several years. Investors can choose bonds or NCDs with varying tenures based on their investment horizon and financial goals.
- Credit Ratings: Bonds and NCDs are assigned credit ratings by rating agencies based on the issuer's creditworthiness. Higher-rated instruments are considered less risky and usually offer lower interest rates, while lower-rated instruments may offer higher returns but come with increased credit risk.
- Liquidity: While bonds and NCDs are tradable instruments, their liquidity may vary depending on market conditions and the issuer's reputation. Investors looking to sell their holdings before maturity may face liquidity constraints, especially for less actively traded securities.
- Redemption Options: Some bonds and NCDs come with call or put options, allowing issuers or investors to redeem the instrument before maturity under certain conditions. Call options give issuers the right to repay the debt before maturity, while put options give investors the right to demand early redemption.
Types of Bonds and NCDs:
1. Corporate Bonds:
- These are debt securities issued by corporations to raise capital for various purposes, such as expansion, acquisitions, or working capital. Corporate bonds may offer higher interest rates than government bonds to compensate investors for the additional credit risk.
2. Government Bonds:
- Also known as sovereign bonds, these are issued by governments to finance public spending and manage budget deficits. Government bonds are considered the safest form of fixed-income investment as they are backed by the full faith and credit of the issuing government.
3. Convertible Bonds:
- Convertible bonds give bondholders the option to convert their bonds into a predetermined number of equity shares of the issuing company at a specified conversion price. These instruments offer the potential for capital appreciation along with regular interest payments.
4. NCDs (Non-Convertible Debentures):
- Unlike convertible debentures, NCDs cannot be converted into equity shares of the issuing company. They offer fixed interest rates and are redeemable at par value upon maturity. NCDs are popular among investors seeking stable returns without exposure to equity market volatility.
Risk Factors:
Investing in bonds and NCDs carries certain risks, including:
- Credit Risk: The risk of default or delayed payment of interest and principal by the issuer.
- Interest Rate Risk: Fluctuations in interest rates may impact the market value of bonds and NCDs.
- Liquidity Risk: Difficulty in selling the securities at fair market prices due to low trading volumes or adverse market conditions.
- Inflation Risk: The risk that inflation erodes the purchasing power of future interest payments and the principal amount at maturity.
