A bond is an intriguing product for many people.
Normally bonds are conventionally held till maturity by Indian investors. As retail investors did not have the option to trade in bonds.Bonds are better vehicles for taking trade positions because normally they are secured. Even in case of unsecured bonds bondholders as creditors have higher claim to the companies assets then equity holders.If we hold bonds till maturity we receive only interest which does not cover inflation at most times.However since underlying capital is considered safe the volatility is less then stocks.Bond prices rise and fall with interest rates,normally bonds move in opposite direction to interest rates.
In case of companies the market perception of the ability of the company to pay affects the price. For example a 100 rupee face value bond of LT FINANCE bearing 8% is available at par, if the rate in the market goes up then price of bond will fall so you will be able to buy a 100 rupee bond for 98 rupees the two rupee fall compensates the buyer for the loss of interest in current scenario.If there is fear that l&t will default you will be able to buy the bond even cheaper at 90 rupees to compensate you for the risk.When the tide turns either you can sell the bond close to par which is 100 in our case.
If the process takes one year you will receive 8 rupees interest and a profit of 10 rupees for holding the bond the total money earned is rs 18 a return of 20% for investing in a safe instrument.Open trading of bonds forces discipline on the borrower or the person issuing the bonds.In any market the government is the biggest borrower falling bond prices mean higher interest payment in the future.Argentine bonds are trading at 60 cents to a dollar because of default by the government. Thus any government is sensitive to rising yield or falling bond prices.
If you are careful, have chosen bonds with care and follow the market updates regularly then bonds can be a safe and useful product to secure your wealth!
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