The Bond market is part of the debt market. A debt market is also known as a ‘fixed income market’ as debt instruments pay fixed returns. Bonds are fixed income securities and offer a predictable stream of payments by way of interest and repayment of principal at the maturity of the instrument. Bonds are issued by the eligible entities against the moneys borrowed by them from the investors on these instruments and include PSU bonds, Corporate bonds and even certain Government securities like Oil Bonds, Food Bonds, Fertilizer Bonds, etc.
Public Sector Undertaking Bonds (PSU Bonds) : These are Medium or long term debt instruments issued by Public Sector Undertakings (PSUs). The term usually denotes bonds issued by the central PSUs (i.e. PSUs funded by and under the administrative control of the Government of India). Most of the PSU Bonds are sold on private placement basis to the targeted investors at market determined interest rates. Often investment bankers are roped in as arrangers to this issue. PSU Bonds are issued in demat form. In order to attract the investors and increase liquidity, issuers get their bonds rated by rating agencies like CRISIL, ICRA, CARE, etc. Some of the issues may be guaranteed by Central / State Government enabling them to get a better rating. The bonds may carry call / put option.
Corporate Bond : Corporate Bonds are issued by private corporations for a wide range of tenors normally upto 15 years although some Corporates have also issued perpetual bonds. One can usually invest in Corporate Bonds starting from a minimum of Rs. 10 lacs (face value) only. Compared to government bonds, corporate bonds generally have a higher risk of default. This risk depends, of course, upon the particular corporation issuing the bond, the current market conditions, the industry in which it is operating and the rating of the Company. Corporate bond holders are compensated for this risk by receiving a higher yield than government bonds. Corporate bonds generally offer higher returns than Government Securities, fixed deposits, CD’s & CP’s. Corporate bonds are rated by approved rating agencies (e.g. CARE, ICRA, CRISIL, FITCH). Some corporate bonds have an embedded call option that allows the issuer to redeem the debt before its maturity date. Other bonds, known as convertible bonds, allow investors to convert the bond into equity. Secondary market trading is possible, depending upon demand. There will be no TDS deduction as per Budget Announcement for 2008-09. However, despite being listed on exchanges, the vast majority of trading volume in corporate bonds in most developed markets takes place in decentralized, dealer-based, over-the-counter markets.
Financial Institutions and Banks : They form a major source of bonds and hybrid instruments. In F.Y. 2007-08, more than 80 per cent of the non-gsec issues were from this category and mostly on private placement basis. As this category is generally well-regulated and the issues carry good ratings, they are a popular form of investments for Mutual funds and other large investors.
As a part of diversification, SBI DFHI Ltd. has become an active investor / player in the bond market. SBI DFHI Ltd. offers investment opportunities in the Bond market through its SBI DFHI Invest Plus scheme.