Everything about Government Bonds
Government Bonds also referred to as G-Sec are one of the safest investments as the bonds are guaranteed by the government of the country. Bonds are explored very little by retail investors. Most of the retails investors will know about the bonds at a later stage and will ignore investing in Bonds in the initial period as the cost of investment is slightly high. Government bonds are one of the best and safest investment to get guaranteed returns and also secure capital.
In this article, we will explain all the details about the government bonds and how this help to safeguard the capital at the same time appreciating the capital with consistent returns.
What Are Bonds
Bonds are a financial instrument that is traded and these represent a loan that is taken by the issuer from the Bond Holder promising fixed or floating interest rates based on the type of bonds that are issued. The Issuer will Issue the Bonds to raise capital for the company and to attract investors, the issuing company will promise certain returns in the form of a fixed payment at regular intervals such a quarterly or annually. And also the issuers mentions the Maturity period after which the issuer will pay the Principle amount and Buys back the Bond. In this manner, investors who buy the bonds will get fixed returns at regular intervals and also will get back the Principle amount at Maturity.
Government Bonds (G-SEC)
Government Bonds is similar to any other conventional bonds in the Bond Market. These Bonds referred to as G-Sec are issued by the RBI on behalf of the Government of India. In other words, the government of India is the Issuer of the Bonds. These bonds are issued with a short maturity period and a long maturity period. Treasury bills are a type of G-Sec with a short maturity period and government Bonds will have a long maturity period.
Governments Bonds are issued by Both the Central government and State governments. These are issued to cover the Budget deficit for the financial year.
Investing in G-Sec
Government Bonds are traded on the stock exchanges in India and will provide a convenient way for investors to buy and sell these bonds. And also investors can subscribe to the government bonds when they are issued and the notification of the same can be found in this link
Government Bonds can also be purchased by Retail investors even with a small amount such as ₹5,000. The minimum investment that is required in Government Bonds is much less when compared to the Conventional Corporate bonds which require quite a high amount and hence are very least explored by retail investors.
What are the various types of government bonds?
- Fixed-Rate Bonds
- Floating Rate Bonds
- Inflation Index Bonds
- Capital Indexed Bonds
- Special Securities
- Bonds with CALL/PUT Options
- STRIP
- Sovereign Gold Bonds
- 7.75% Savings (Taxable) Bonds, 2018
- State Development Loans
1. Fixed-rate bonds
IN India most of the Bonds that are issued are of type fixed-rate bonds. These bonds have a fixed maturity and a fixed interest rate that is paid on Semi-Annual or on an annual basis.
2. Floating rate bonds
These are the type of bonds in which the coupon rate or interest rate is not fixed but is modified at consistent intervals based on the bond pricing. These bonds hence have an income that keeps changing based on the coupon rate which is modified regularly.
3. Inflation indexed bonds
This is a special type of bond issued by the government of India to protect the investors against inflation. Both principal amount and coupon rate are adjusted with a price index. The index used could be the Wholesale Price Index (WPI) or Consumer Price Index (CPI). An inflation-indexed bond linked to the wholesale price index was issued by RBI on behalf of the Government of India in June 2013.
4. Capital indexed bonds
This is a type of inflation-indexed bond. Here, only the principal amount of the bond is revised by adjusting to an accepted inflation index. Capital indexed bonds are usually issued for longer periods. The first capital indexed bond holding a maturity period of 5 years was issued in December 1997.
5. Special securities
Special securities are issued by the government to companies like Fertilizer Companies, FCI, Oil Marketing Companies etc., as compensation instead of cash subsidies. These securities usually are long-dated securities having a higher coupon compared to other similar securities. For raising funds, the companies are free to sell these securities in the secondary market.
6. Bonds with call/put option
In this type of bond, there is an option for put only, call only, or both. Here, the investor would have an option to sell the bond(put option) and/or the issuer of the bond is given the option to buy back(call option) during the tenure of the bond. However, this option can be exercised only after the completion of 5 years from the date of issuance of the bond.
7. STRIPS
STRIPS expand to Separate Trading of Registered Interest and Principal of Securities. This is a special type of zero-coupon bond wherein, a single bond is bifurcated into multiple securities. Each coupon cash flow is treated as a separate STRIP, and the principal payment is also considered as a STRIP. These are eventually traded in the secondary market. These STRIPs are created out of existing bonds only.
8. Sovereign gold bonds
The price of this type of bond is linked to the commodity price of Gold. The Bonds are denominated in units of one gram of Gold and multiples thereof. This bond may be held by an Indian resident, a Trust, HUFs, Charitable Institution and University. The Bonds are repayable only on the expiration of eight years from the date of issue of the Bonds. The interest rate on such bonds is fixed at 2.5%p.a on the nominal value of the bond.
9. 7.75% Savings (Taxable) Bonds, 2018
7.75% Savings (Taxable) Bonds,2018 were issued by the Government of India with effect from 10-01-2018. The interest earned by the investor on these bonds attract Income tax but do not attract Wealth Tax. These bonds are issued only at par, for the face value of Rs.1,000 and multiples thereof.
10. State development loans
State governments issue bonds in the form of State development loans. These are also issued through an auction process. The coupon is paid half-yearly and principal paid at maturity.
