Bonds and other fixed-income instruments form an important category within financial markets.
These instruments generally involve an investor providing funds to an issuer for a specified period in return for interest or another defined payment structure, subject to the terms of the instrument.
Although they are described as "fixed income," these investments are not necessarily free from risk.
What is a Bond?
A bond is a debt instrument issued by an entity to raise funds.
The issuer may be:
- Government
- Government-related entity
- Corporation
- Financial institution
- Other eligible organisation
The investor effectively lends money to the issuer according to the terms specified in the bond documentation.
Important Bond Terms
Face Value
The nominal value assigned to the bond.
Coupon Rate
The interest rate specified for the bond, where applicable.
Maturity Date
The date on which the bond reaches the end of its specified tenure and repayment becomes due according to its terms.
Yield
Yield represents the return characteristics of the bond based on factors such as its market price, coupon and remaining maturity.
Credit Risk
Credit risk refers to the possibility that an issuer may fail to make interest or principal payments according to the agreed terms.
Credit ratings may provide information about the assessed creditworthiness of an instrument or issuer, but ratings can change and should not be treated as guarantees.
Interest-Rate Risk
Bond prices and prevailing interest rates can have an inverse relationship.
When market interest rates rise, the market value of certain existing bonds may decline. Similarly, falling interest rates can affect bond prices differently.
This becomes particularly relevant when investors intend to sell bonds before maturity.
Liquidity Risk
Not all bonds trade frequently in secondary markets.
An investor wishing to sell a bond before maturity may not always find a buyer immediately or may need to accept a different market price.
Therefore, liquidity should be considered separately from the maturity value of the instrument.
Company Fixed Deposits
Company Fixed Deposits are deposit products offered by eligible companies according to applicable terms and regulations.
Their characteristics can include:
- Fixed tenure
- Predetermined interest structure
- Different payout frequencies
- Different credit profiles
Unlike bank deposits, company deposits may have different risk characteristics, and investors should carefully review issuer information, credit ratings, repayment terms and applicable documentation.
Bonds vs Mutual Funds
Bonds are individual securities.
Debt mutual funds, on the other hand, pool investors' money and may hold a portfolio consisting of multiple debt securities and money-market instruments.
Their structure, liquidity, taxation, costs and risk characteristics can differ substantially.
Information to Review
Before considering a fixed-income product, investors should understand:
Issuer details
Tenure
Coupon or interest structure
Credit rating, if available
Liquidity provisions
Early-exit conditions
Tax implications
Payment schedule
Default and credit risks
Conclusion
Fixed-income investments can vary considerably in structure, tenure, liquidity and credit quality. The term "fixed income" should therefore not be interpreted as meaning risk-free or guaranteed.
Understanding the issuer and product documentation is essential before participating in these instruments.
Disclaimer: Investments in bonds, company fixed deposits and other fixed-income securities are subject to applicable issuer, credit, liquidity, interest-rate and market risks. Investors should carefully review all relevant product documents before investing. This article is for general informational purposes only.
