What is a bond (debenture) and what are its features?

A bond is a long-term debt instrument, such as security usually redeemable after a certain period of maturity. The bond is issued by a party, such as the government to raise money. All bonds are not the same in nature. Some bonds may not be redeemable all the time and could be redeemed after maturity as well.

Bonds issued by the government are free from risk and the government will always pay the interest which is low in terms of public and private bonds. Public bonds are also quite dependable but they are not free from default. Private-sector bonds offer the best returns, but they are the riskiest among all the types of bonds.

Features of a Bond

Here are the major features of a bond −

  • Face Value − It is the price of a bond at par. The face value is often calculated as units of INR 100 or INR 1,000. The interest of a bond is paid on the face value of the bond. The face value is an important factor because investments are done depending on the face value of the bonds (debentures).

  • Interest Rate − The interest rate is probably the most important feature of a bond as investors want to be paid the most from their investment. The interest rates are offered on the face value of a bond. The interest rates are tax-deductible in India. The interest rate is also known as coupon rate where coupons refer to the detachable rate of interest.

  • Maturity − A bond or debenture is usually formed for a certain period of time known as maturity. The interest rates plus the principal is paid back to the investor on maturity.

  • Redemption Value − Redemption value is the value paid to the investor after maturity. The bonds and debentures may get a premium or a discount on their face value during the time of redemption.

  • Market Value − The debentures may be bought or sold in the share market. The value of the debenture may be different from the face value or the redemption value of the bond.

Points to Note

  • Many people invest in government-backed bonds as their future investments as the payment is secured over the entire lifetime of the bond. The government is also liable to pay the given returns as mentioned in the bond prospectus and they usually don't move away from their roles.

  • The market rate is not the redemption rate of a bond. The market rate is the rate at which the bond is traded at the market.