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What are bonds and how do they work?

Curious about Bonds

What are bonds and how do they work?

In India, bonds are a type of debt security issued by entities such as the government, companies, and financial institutions to raise funds from investors. When you buy a bond, you are effectively lending money to the issuer for a specified period of time, in exchange for regular interest payments and the return of your principal investment at maturity.

Bonds have a face value or par value, which is the amount that the issuer agrees to repay to the investor at maturity. They also have a coupon rate, which is the interest rate that the issuer pays to the investor as a percentage of the face value. Coupon payments are usually made semiannually or annually.

Bonds can be traded on the bond market, and their prices can fluctuate depending on changes in interest rates, credit ratings, and other market conditions. When interest rates rise, the price of existing bonds falls because investors can get a better return from new bonds issued at the higher interest rate. Conversely, when interest rates fall, the price of existing bonds rises because they offer a higher yield than newly issued bonds with lower interest rates.

Bonds can provide a stable source of income for investors, and they can also serve as a diversification tool in a wellrounded investment portfolio. However, like all investments, bonds carry risks, including credit risk, interest rate risk, and inflation risk. It's important to carefully consider your investment goals and risk tolerance before investing in bonds.

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