What is bond?
A bond is a financial security where some institution/Company/Sometimes Government also borrows money from an investor, which is paid back at a specific time at a specific interest rate.

Bonds are two types
Short-term issues with terms of one year or less.
Long-term issues with terms over a year.

Intrinsic specifications
Most bonds are term bond with a single end date of maturity. However, Serial bonds (or installment bonds) describes a bond issue that matures in portions over several different dates.

Eg: 10 year bond of 1 lakh rupees is issued by the company. The maturity period starts from the end of 5 years with an interval of one year, i.e., 50000 rupees matured on 5-year end and 6th-year end 10000 rupees bond, 7^th year 10000 and so on.

Factors Affecting Maturity
Call options affect the life and value of bonds. Callable bonds have a call premium which is the amount above par value the issuer must pay the holders for ending the bond early.

Call options

• Freely callable allows the issuer to recall the bond at any time with a common grace time frame of 30 to 60 days
• Non-callable means issuer cannot retire the bond prior to maturity
• Deferred call means the issue cannot be called for a certain time after issue. Then, they are called freely

Types of Bonds

Convertible Bonds: A convertible bond is a type of bond that the holder can convert into shares of common stock in the issuing company or cash of equal value, at an agreed-upon price.

Inflation-linked Bonds/Inflation-indexed Bonds: Inflation-indexed bonds are bonds where the principal is indexed to inflation. The bonds are designed to protect investors, so that principle and interest rate fluctuates with respect to inflation.

Treasury Inflation-Protected Securities/TIPS Bonds: Provide protection against inflation. The principal of a TIPS increases with inflation and decreases with deflation, as measured by the Consumer Price Index. When a TIPS matures, you are paid the adjusted principal or original principal, whichever is greater.

RBI Relief Bond: Issued by the RBI, the minimum investment limit for these bonds is INR. 1,000 and the interest of these bonds are compounded every 6 months. These bonds have a maturity period of 5 years and the interest earned on these bonds is tax-free.The holders of these bonds can opt to either receive the interest every 6 months or after maturity. The half-yearly RBI bonds are preferred by investors who want a consistent and fixed income. The fact that RBI is the apex banking institute in India makes these bonds is safe investment option.

NHAI/REC Bonds: These bonds offer tax benefits as stated under the Section 54EC of the Income Tax Act of 1961. Taxpayers can save taxes if they invest capital gain derived from transferring a long-term capital asset in REC or NHAI bonds. These bonds provide yearly interest payments and their maturity period is 3 years. Its minimum investment limit is 10,000 rupees.

Infrastructure Bonds: These are the type of bonds issued by government and government authorized. Borrowing is to be invested in government-funded infrastructural projects within the country. Governments and companies need to borrow money for projects or expansion. Infrastructure bonds are good for people who need a fixed income. They offer a decent rate of interest and tax benefits. The maturity of these bonds is often between 10 to 15 years with an option to buy-back after a lock-in of 5 years. The low risk involved, since issuing companies have high credit ratings.

Things to remember:

• An investor should keep the following points in mind while investing in tax saving bonds.
• Maximum amount – The maximum deduction permitted under Section 80CCF is INR. 20,000 and investments over this amount are taxable.
• Interest – The interest earned on these bonds is taxable and an investor will have to pay tax on it. But no tax is deducted at source if the annual interest is less than INR. 5,000
• Term – Tax Saving Bonds are typically long-term bonds, having tenures of more than 5 years, with a lock-in period of 5 years in most cases. It is possible to sell them after the lock-in period.
• Investment type – Investment can be made in a number of bonds, but the maximum deduction in a year is limited to INR. 20,000 only.
• Joint Investors – In the case of joint investors, only the first applicant can claim tax deductions. In the case of Hindu Undivided Families, only one member of the family can claim deductions.

Sovereign Gold Bonds: Bonds are issued by Reserve Bank of India or Federal bank on behalf of the central or national government in any country as a debt instrument. Sovereign bonds are denominated in either domestic currency or foreign currency. Most of the governments are issued in their own currency. SGBs are substitutes for holding physical gold in grams. Investors have to pay the cash while issuing and redeemable also in cash at the time of maturity.

Things to remember:

Eligibility: The bonds will be restricted for sale to resident Indian entities including individuals, HUFs, Trusts, Universities and Charitable Institutions.

Minimum size: Minimum permissible investment will be 1 gram of gold.

Maximum limit: Maximum limit of subscription shall be of 4 kg for individuals, 4 kg for Hindu Undivided Family (HUF) and 20 kg for trusts and similar entities notified by the government from time to time.

Hassle free: No risks and no cost of storage

Tax treatment: The capital gains tax arising on redemption of SGB to an individual has been exempted. The indexation benefits will be provided to long-term capital gains arising to any person on the transfer of bond.

Tradability: Bonds will be tradable on stock exchanges within a fortnight of the issuance on a date as notified by the RBI.

Transferability: Bonds shall be transferable by execution of an Instrument of transfer in accordance with the provisions of the Government Securities Act.

Municipal Bonds: A municipal bond, commonly known as a Muni Bond, is a bond issued by a local government or territory, or one of their agencies. It is generally used to finance public projects such as roads, schools, airports and seaports, and infrastructure-related repairs. The term municipal bond is commonly used in the United States, which has the largest market of such trade-able securities in the world.

The two basic types of municipal bonds are:

General Obligation Bonds: Principal and interest are secured by the full faith and credit of the issuer and usually supported by either the issuer’s unlimited or limited taxing power.

Revenue Bonds: Principal and interest are secured by revenues derived from tolls, charges or rents from the facility built with the proceeds of the bond issue. Public projects financed by revenue bonds include toll roads, bridges, airports, water and sewage treatment facilities, hospitals and subsidized housing. Many of these bonds are issued by special authorities created for that particular purposes.

• Bonds Undertaken by Public Sector: If people looking for a medium- to long-term investment in the Indian bond market, a Public-Sector undertaking bond can be a good choice. PSUs are issued and backed by the government of India. In other words, the Indian government targets investors themselves and offers the bonds to these investors at fixed rates.
  
• Corporate Bonds: A corporate bond is a bond issued by a corporation in order to raise financing for a variety of reasons such as to ongoing operations or to expand the business. The term is usually applied to long-term debt instruments, with the maturity of at least one year. Corporate debt instruments with the maturity shorter than one year are referred to as commercial paper.These are more traditional bond instruments, which are offered by private corporations in India for terms that can last up to 15 years. Unlike the government bonds mentioned earlier, anyone can purchase a corporate bond. However, there is a higher risk of default and that can depend upon the corporation backing the bond, market conditions, the company’s industry and its investment rating. But the risk comes with a higher return on the investment.
• Financial Institutions and Bank Bonds: Bonds issued by financial institutions and banks in India are a vibrant financial instrument and make up more than 80 percent of the bond market in that country. The reasons are simple. Bonds issued by financial institutions and banks are regulated well and come with good bond ratings. Large-scale investors are some of the most important investors in this category.
• Emerging Markets Bond: These bonds, issued by the Indian government, are issued abroad as hard currency to raise capital for economic development in third-world countries. What’s different about these bonds is that they are usually issued in U.S. dollars or the Euro, which can make them more attractive to investors in those countries. Also making these EM bonds attractive is the interest rate, which while high is typically paid by the issuer. The risk comes in that countries like India have a lower credit rating and the success of the bonds is tied to the success of the country’s economic development.
  
• Tax-Savings Bonds: The Indian government issues special bonds that allow its citizens to be either partially or fully released from paying taxes. Most of them are issued by India’s Reserve Bank. These five-year bonds are sold at an interest rate of 6.5 percent and interest is paid off every half-year. The upside for the investor is that by purchasing this bond, they are released from paying taxes on the related interest income, as long as they hold the bond until it matures.