When a company or government needs a large sum of money to complete its projects, it can raise funds through several methods. One easy and reliable method is issuing bonds. The government or company issues bonds, which investors purchase, thus raising funds from the market.
Why do companies issue bonds?
Companies issue bonds for several reasons, the main one being to raise funds. Every company needs capital to expand its business, set up new factories, or complete a project. For this, it issues bonds. Through bonds, the company borrows money for a period and then returns it with interest.
Bank loans can have higher interest rates and stricter terms.
On the other hand, through bonds, the company borrows money directly from investors and promises to return the money with interest after a certain period.
This method is considered easier for the company and safer for investors.
General Information About Bonds
A bond is a type of fixed income security. This means that when you invest in a bond, you receive regular payments at a pre-determined interest rate.
The company or government returns your principal over a fixed period.
Bond investments are considered less risky than stocks because the returns are fixed.
What is the difference between bonds and stocks?
Types of Bonds
Fixed Rate Bonds – The interest rate is fixed, and the investor receives the same interest every period.
Floating Rate Bonds – The interest rate varies over time depending on market conditions.
Zero Coupon Bonds – Interest is not paid regularly, but a lump sum is paid at the end of the term.
Convertible Bonds – Bonds that can be converted into shares in the future.
Perpetual Bonds – They do not have a fixed maturity and continue to receive interest over a long period.
Differences between Government and Corporate Bonds
- Government Bonds
These bonds are issued by the government. They carry very little risk because they are guaranteed by the government.
Interest rates are stable and returns are reliable.
Example: Government securities issued by the Reserve Bank of India.
- Corporate Bonds
These are issued by a company to raise capital. They carry slightly more risk than government bonds.
Interest rates are higher to attract investors.
Before investing, it’s important to check the company’s credibility and credit rating.