Bonds and Government Securities
Chapter 1 of 4
How a bond works
7 min read
A bond is a loan you make to a government or company. In return it promises regular interest and the return of your money on a set date.
The key terms
- Face value: the amount repaid at maturity, commonly ₹1,000 or ₹100.
- Coupon: the fixed interest the bond pays, as a percentage of face value.
- Maturity: the date the face value is repaid.
- Price: what the bond trades for in the market today, which can differ from face value.
- Yield: the return you actually earn given the price you pay.
Coupon versus yield
- A bond with face value ₹1,000 pays an 8% coupon, so ₹80 a year.
- If you buy it for ₹950, the current yield is 80 ÷ 950 = 8.42%.
- If you buy it for ₹1,050, the current yield falls to about 7.6%.
- Yield to maturity also counts the gain or loss between your price and the face value at maturity.
Why bonds are used
- Regular income.
- Lower volatility than shares, in general.
- A way to balance a portfolio that is heavy in equity.
Key takeaways
- A bond pays a coupon and returns face value at maturity.
- Yield depends on the price you pay, not just the coupon.
- Bonds carry interest-rate and credit risk.
This content is for education only and is not investment or tax advice. Mutual fund investments are subject to market risks; read all scheme-related documents carefully.