Bonds

How Do Bonds Work?

When you buy a bond, you are effectively giving a loan to the issuer. In exchange, the issuer promises to pay you interest at a fixed rate and return your initial investment, called the face value, on a specified maturity date.

Example

Suppose you purchase a corporate bond worth ₹1,000 with a 5 percent coupon rate. You will receive ₹50 as annual interest, and at the end of the bond’s term, you will get back your original ₹1,000. If you invest in a 10-year Indian government bond with a yield of 6.58 percent, you would earn around ₹65.80 each year for every ₹1,000 invested.

Key Components of a Bond

• Face Value: The original amount you invest, which is repaid at maturity

• Coupon Rate: The annual interest rate the bond pays

• Maturity Date: The date on which the bond issuer returns your principal

• Credit Rating: A measure of the issuer’s ability to repay, given by agencies like CRISIL or ICRA

Benefits of Investing in Bonds

• Steady Income: Bonds offer fixed interest payments, which are predictable and regular

• Capital Protection: Government and high-rated corporate bonds are generally low risk

• Portfolio Diversification: Bonds can reduce overall investment risk when added alongside equities

Challenges and Risks

• Inflation Risk: If inflation rises, the fixed interest may lose real value

• Credit Risk: If the issuer defaults, you could lose your investment

• Liquidity Risk: Some bonds may be hard to sell quickly without a loss

Conclusion

Bonds play an important role in personal finance, especially for those looking for income stability and lower risk. In 2025, with market volatility and rising interest rate sensitivity, bonds remain a reliable tool for balancing investment portfolios. Choosing bonds with appropriate tenures and credit ratings can help you manage risk while earning predictable returns.