HDFC Bank Bonds

Just as people need money, so do companies and governments. A company needs funds to expand into new markets, while governments need money for everything from infrastructure to social programs. The problem large organizations run into is that they typically need far more money than the average bank can provide. The solution is to raise money by issuing bonds (or other debt instruments) to a public market. Thousands of investors then each lend a portion of the capital needed. A bond is nothing more than a loan for which you are the lender. The organization that sells a bond is known as the issuer. You can think of a bond as an IOU given by a borrower (the issuer) to a lender (the investor).

For example, say an investor buys a bond with a face value of Rs 1,000, a coupon of 8%, and a maturity of 10 years. This means the investor receives a total of Rs 80 (Rs 1,000 * 8%) of interest per year for the next 10 years. Actually, because most bonds pay interest semi-annually, the investor receives two payments of Rs 40 a year for 10 years. When the bond matures after a decade, the investor gets your Rs 1,000 back.

The different types of bonds include government securities, corporate bonds, commercial paper, treasury bills, strips etc. These bonds are either fixed interest bonds or floating rate bonds. In fixed interest bonds, the interest component remains the same throughout the tenure of the security. Say a 10-year bond issed today bears 8% interest. Even if 5 years hence, the interest rate in the economy goes down to 5%, this 8% bond will continue to earn the investor 8% interest. In a floating rate bond, the interest rate varies depending on the interst rate of a security that the bond chooses to benchmark it's interest rate to.