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26 Feb 2024

Exploring the Diverse World of Bond Investing.

by Philip Shah
Exploring the Diverse World of Bond Investing.

Exploring the Diverse World of Bond Investing.

As the financial markets dance to the rhythm of equities, much like the fervent passion for cricket in Indian sports, there remains a symphony of bond enthusiasts orchestrating a movement of their own. This movement isn't adorned with the spotlight's glare but exudes an intricate harmony of liquidity and stability, reminiscent of the strategic depths found in a game of football. In this intricate world of bonds, the instruments play a varied tune, ranging from the secure notes of government- issued assets to the high-octave pitches of corporate offerings. Bonds, with their multifaceted structures and maturities, form an essential part of a well-rounded investment portfolio providing investors not only with stability amidst market volatilities but also with opportunities in quieter yet potentially rewarding corners of the financial markets. Let's gain an understanding of the different types of entities that participate in the market as issuers. Different Types of Bond Issuers in India.

The five most common bond issuer types are listed below.

  1. Treasury/Government Bonds: The central government issues treasury bonds through the Reserve Bank of India (RBI). Hence, it is the safest type of bond because there is virtually no credit risk. These bonds have a maturity period of ten to thirty years and pay a fixed interest rate, which is a factor in the prevailing market conditions. For eg: Sovereign Gold Bond (SGB), 7.75% Savings (Taxable) Bonds, 2018, State Development Loans (SDLs).
  2. Municipal Bonds: Municipal bonds issued by municipalities are known as municipal bonds also known as Munis. Local and state governments use these to gather funds for development projects such as schools, highways, and hospitals. Municipal Bonds are exempted from tax but may have lower liquidity. They are available in both short-term and long-term maturities. These bonds have a high credit rating which means very low risk. For eg: Pune Municipal Corporation, Greater Hyderabad Municipal Corporation, etc.
  3. Agency or Quasi Government bonds: These are issued by entities created by national governments for specific purposes such as financing small businesses or providing mortgage financing. Government-sponsored entities (GSEs) such as NABARD, National Housing Bank (NHB), etc are the issuers in India. Some quasi-government bonds are backed by the national government, which gives them high credit quality. Even those not backed by the government typically have high credit quality although their yields are marginally higher than those of sovereign bonds. For eg: 6.87% NATIONAL HOUSING BANK INE557F07033 Secured, 7.38% National Bank For Agriculture And Rural Development - AAA Rated (INE261F08683)
  4. Supranational Bonds: Supranational bonds are issued by supranational agencies that operate globally, also known as multilateral agencies. Examples are the World Bank, the IMF, and the Asian Development Bank. Bonds issued by supranational bonds typically have high credit ratings and high liquidity, especially large issues of well-known entities. Some issues of the World Bank are Green bonds, The Wildlife Conservation Bond ‘The Rhino Bond’ etc.
  5. Corporate Bonds: Companies or business conglomerates issue corporate bonds to raise capital for their business operations. These corporate bonds could be Public Sector Undertakings (PSUs) or private companies. Corporate bonds are listed on an exchange or unlisted which are transacted over the counter (OTC). They are typically riskier than treasury bonds because the creditworthiness of the issuing company backs them. Corporate bonds can have varying maturities and interest rates, embedded instruments, depending on the issuer's creditworthiness and market conditions. They usually have lower credit ratings than the Government bonds which means they carry a higher amount of risk. Some corporate bonds are Navi Finserv Limited - A Rated (INE342T07148), 9.35% Ntpc Limited - AAA Rated (INE733E07IS2), etc.

In conclusion, a single issuer can have multiple issues and multiple redemptions. Every issue depends on various factors like the overall economy and economic growth, interest rates, inflation variables, market factors, and sentiments like liquidity, competition, etc. The regulatory environment plays a prominent role in the framework of the issuance. In the same environment, we have credit rating agencies like Crisil, India Ratings, Moody's, S&P, etc. Lower credit ratings translate to higher risk for investors, leading to higher interest demands. After considering these aspects, at a micro level, the secret and treasure lies within the bond indenture which we will see in the next chapter. So, are you ready to crack open this treasure chest of financial knowledge?