What are bonds

What are bonds? Should You Invest? Explained by CA Rachana Ranade

today we are talking about What are bonds? , Should You Invest?

What are bonds?

it is said that never put all your eggs in one basket there are some people who believe that the interpretation of this saying is that don’t put your entire money in a single stock in the stock market.

I think that’s so way too aggressive I would interpret it like don’t put your entire money only in stock market and in fact you should diversify your money in different investment avenues

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but then if it were not to the stock market then what is there any other opportunity which gives me better returns than empty but that to act almost the same amount of risk if you want to know about this check out the article.

welcome you all to a brand-new redness day article

the first part of article which gives me a possibility of earning more than 5 days and almost at the same risk exposure the security or the type of investment Avenue which I am talking about is bonds okay not all types of bonds a specific type of bonds

which we able to discuss in today’s video will help us to understand about this better investment opportunity but first come first let’s understand the meaning of bond for that I am reading out the definition for you it is a fixed income security which allows a lender to lend a predetermined amount of funds and be eligible for interest on those funds

okay that is a plain definition but let us understand in simple terms okay assume that I am a company who wants money I mean need of funds

okay possibility

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What are bonds?

number 1 I can raise money by issuing equity shares ok possibility

number 2 I say I want to loan I go to the bank Bank is putting me so so many terms and conditions I say forget it I won’t borrow from a bank

I would love to borrow from you on are you ready to give me money ok example I don’t want money but are you ready to borrow are you ready to lend 1 to me okay so who are you you are the lender okay you’re lending money to me

Who am I I am the borrower okay so I am the company who is wanting to borrow the funds from your and you are the ones who are the lenders to the company simple Thalia but then the very first question.

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if we lend funds to you what will we get in return?

okay so I will tell you that I am ready to pay you let us say 8% interest on the amount which are which you are lending to me okay so will you tell me in advance that we are going to lend you X amount of rupees yes okay so let us say you tell me that resna we will pay you ten thousand rupees each okay

10,000 you have promised to give me and I have promised to give you 8% return I hope it is later now okay so let us wrap up once again now let us see reread the definition

and I’m sure you will be able to understand this in a much better fashion so what is the bond bond is a fixed income security why fixed income I promise to give you 8% come what may even if share market goes down or up I promise you eight percent that so it’s a fixed income security

second which allows the lender who is the lender you all were the lenders and the borrower and the corporate okay which allows a lender to lend a predetermined amount of funds and what was the predetermined amount of funds ten thousand which would promise to me and be eligible for interest on those funds absolutely clear now please understand

one more thing that in case of a bond okay why I use that word ten thousand okay it could be one thousand or so it could be one lakh also it could be 10 lakhs also okay there is a predetermined amount that’s a fixed amount and this fixed amount is called as the face value

okay you can invest in multiples of this but that would be the minimum amount that you have to invest okay so in simple words one bond can have a face value of 100 rupees one bond can we have a face value of thousand rupees can have a face value of ten thousand one lakh ten lakh rupees

also okay so face value is the value which is written on the face of the bond simple that’s a face value in fact all such simple terms I have explained in my basics of stock market lecture series

if you are interested to learn more about stock markets and in systematic manner and definitely suggest that you should go through this course

okay so coming back to our definition I hope this point is absolutely clear the meaning of bond is clear you have understood many concepts

but one more point there are many more concepts relating to bonds and which exactly is what we are going to cover in the next section of the article now that you have understood a lot about the meaning of bonds let’s talk about the different terms which come up in words as of now

you know that there is something known as face value of the bond that is absolutely clear the value which is written on the face of the bond second and very important concept which is known as the coupon okay many people get confused with this terminology coupon rate in simple words that is nothing

but the rate of interest okay but whenever we talk about bonds we never say what is the interest rate on bonds we ask what is the coupon rate of the bond okay so that that’s a terminology which is to be used one more important thing which you should know about bonds is what is the tenure of the Varner

okay so like there is no tenure for a share a share is issued till perpetually till the company closes the share exists but if I’m talking about a fixed deposit is there a tenure yes there is a term so for example you will have a one-year empty you’ll have a six-month seventy then one year or six months is nothing but the tenure of the MD similarly

there will be a tenure for a bond okay so the tenure of the bond can be like three years five years ten years whatever so that is nothing but tenure I hope this point is also clear then then comes up an important point is what is the coupon payment to date okay so coupon payment date is nothing but a date which is declared by the issuer of the bond

wherein they’re going to pay you interest so coupon can be paid quarterly it can be paid monthly it can be paid semi-annually it can be paid annually okay so everything will be given in the offer document so you need to know that what is the coupon payment date of course there is something known as a date of redemption and also Redemption value okay let us understand

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these two terms also the word itself is number one date of redemption so whenever a company issues the bond they are also going to redeem the one okay so for example I have told you

that I need 10,000 rupees from you I have to read pay that to you as well okay so the date on which I repay you the funds that will be the rate the date at which I repay you the funds that will be the date of redemption of the ones okay so as I mentioned right now what could be the date of redemption it could be three years later it could be five years later

depending on the tenure of the one okay and redemption value very important concept now in the full document itself it may be written that at what price or at what value the bond is going to be redeemed

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it can be redeemed that path that is at face value what was the example let us say the face value of the bond is thousand so it can be redeemed at thousand it can be redeemed at less less than thousand it can be redeemed at more than thousand this is nothing

but Redemption at par redemption at discount and redemption at premium I hope all these concepts are also very clear okay last last part if you did not understand when I want to redeem the bond

okay you invested thousand rupees in me now I’m going to give back this thousand rupees to you or if you invested ten thousand with me I’m going to give you ten thousand back to you but then I may say

that I’m going to give you only ten thousand that is nothing but at par I may say that I’m going to give you ten thousand plus ten percent that’s the redemption at premium and if I say I’ll I’ll redeem the bond for you at ten thousand minus two percent that is redemption at discount

okay so I hope this redemption concept is also very clear in the immediate next section I am going to talk about what different bonds are available in the market right now for investment which are tax-free bonds

so just keep on watching this video now that you know so much about bonds let’s move on to a practical example about the actual investment opportunity which is available in the market right

now okay so here you can see on the screen that there are four bonds which are available for investment right now which is re C limited hood coal imited Housing and Urban Development Corporation Limited basically power Finance Corporation and NHAI national highway authorities of India okay let me tell

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you that all these entities have already issued bonds way back so just as an example Ric and invested in these same bonds in 2013 okay it’s like at that time it was like an IPO of these wants and right now they are trading in the secondary market

I hope this is clear but at that time those who did not invest who did not know about this investment opportunity or those who did not have funds or for any other matter did not invest at that time

you still have a good opportunity to earn interest and this interest is a tax-free interest now how do you get to know about this if you check just below the name it will it is written C PSU tax-free so it’s it’s a bond which is issued by a public sector undertaking so comparatively definitely safe it is a public sector undertaking

and also if you see the credit rating it is triple a crystal rating even if you talk about cuoco it is triple a rating so crystal care all these are the credit rating companies okay who are rating the one so Triple A is always considered to be pretty safe as far as a credit is concerned in simpler words there is very less chance of default

okay so these are the four bonds which are available very important as I mentioned these are tax-free aperture it is available for you so whatever interest you will get that is not to be tax-free interest

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now let’s see if you get the meaning of all these terms quickly what is tenure tenure is nothing but what tenure is the timeframe available before maturity so in simple words re C is going to mature 41 months from date okay or grouper will mature within 22 months so but roughly

who’ll Co has two more years before maturity okay price per unit now this price is this the face value no face value of all these bonds a thousand rupees this is the current market price these ones okay in simple words now that you know the concept can I say that all these bonds are trading at a premium as compared to the face value

yes third one is YTM okay this is a very very intense discussion topic if I were to start what is YTM then it will take a lot of time easily ten fifteen minutes from here so if I ask you that do you want me to sit make a separate video on this concept I’m sure your answer would be

okay so going going ahead YTM I’m sure yes that is going to be your answer so I will make a separate concept on that separate article on that coupon rate is something

I’m sure everyone knows by now that’s the interest rate frequency yearly so ever to get interest yearly and taxable very important noise answer okay

well let’s have a quick recap of what ever did we did till now we talked about face value ten you are we talked about the current price per unit YTM I told you that it’s a very you know a very tricky concept you need to discuss that in detail and yes you want to discuss

that in the upcoming sessions coupon rate frequency taxable coupon payment dates Redemption value data production everything but the whole big question is should we invest or not I think the answer should not be given in this article for a simple reason you need to understand the nitty gritties

okay because there are so many people who get confused a whether I should use number one YTM or I should use the coupon rate coupon it if I look at it and if I just say Oh coupon it is eight point zero one percent I should buy it right away without thinking it you may end up taking a wrong decision

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then I should jump into it I don’t think we are in a hurry to jump to this conclusion because I told you all these bonds which are off the board which are available in the right now they have so much 10 euro to maturity iris

he wants 41 months to mature I would have got 22 months for my joy they have seen her two months to mature and NHAI 130 months for my Julia a lot of time in hand

well I hope you have enjoyed the thirst in you to learn more about bonds

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