KNOW THE COMPLETE LIFE CYCLE OF A BOND

Bonds are issued in the primary market via a bond issuance process, which makes the issue open to the public for the first time. Issuers get capital via this process, and in exchange, investors get bonds that describe the issuer’s commitments.

After the bonds are issued and in circulation, they are traded in the secondary market among investors and dealers. Bondholders receive the last coupon payment and are repaid the face value on the maturity date. Issuers have the option of refinancing their debt obligations in the primary market by issuing new bonds.

The Market

The term “market” is often used to refer to primary and secondary markets. The primary market is where new bonds originate, while the secondary market is where existing bonds are traded in the debt capital markets. The market serves as a means of exchanging capital and is highly regulated.

Bond Origination – Primary Market

Corporations and government entities raise capital from investors in the primary market. This is conducted by issuing new fixed income instruments in exchange for funds to investors. Fixed income securities, in other words, “originated” in the primary bond market. Dealers facilitate bond issuance by operating as an intermediary between issuers and investors.

Bond Trading – Secondary Market

Existing bonds are traded among holders of fixed income securities in the secondary bond market (i.e., investors). Fixed-income securities are commonly traded over the counter via a decentralised dealer network. In contrast, securities may be easily traded on centralised exchanges in the equity markets. Investment banks’ (dealers’) sales and trading desks, in particular, facilitate transactions between buyers and sellers. Electronic trading platforms, particularly in the form of inter-dealer networks, offer a different way to trade fixed income securities.

Key Bond Features

A credit rating is a non-biased evaluation of an issuer’s financial health and potential to fulfil its debt commitments. The credit rating takes into account the commercial and financial risks of investing in a company’s bonds. Credit ratings should be used to augment issuer-specific research and analysis by investors.

• Term to Maturity 

Long-term bonds (10 years or more) provide a larger yield than short-term bonds, but they also have a higher interest rate risk.

•  Floating vs. Fixed Interest 

Floating-rate bonds with interest coupons connected to a benchmark rate (G-sec) safeguard investors from increasing interest rates in the market. This is because as G-sec moves up, investors receive greater interest payments. Fixed-rate bonds, on the other hand, offer investors substantial returns when market interest rates fall because the coupons are higher than the market interest rate.

• Optionality 

Option features are common in bonds. Call and put options are two popular option characteristics. A bond with a call option, sometimes known as a “callable” bond, enables the issuer to repurchase the bond at predetermined dates and prices; investors are rewarded for the call risk by receiving a higher yield. A bond with a put option, sometimes known as a “puttable” bond, allows bondholders to sell the bond back to the issuer at predetermined dates and prices, lowering the investment risk and hence lowering the yield.

Summing Up:

Investors should make their own decisions about whether to invest their money in bonds or not. SMEST provides information related to past returns of bonds or capital security. You can also compare different bonds for better decision making. Visit https://smest.in/ to know the latest bonds in Indiaor bonds to buy in India.