Bond's
Government Bonds
Treasury Bonds (T-Bonds): Issued by national governments, often considered the safest investments because they are backed by the government's credit. In the U.S., these include Treasury bonds, notes, and bills.
Municipal Bonds (Munis): Issued by local or state governments to finance public projects like schools, highways, and hospitals. They often offer tax-free interest payments, making them attractive to investors in higher tax brackets.
Sovereign bonds: : issued by foreign governments. These can be in the country's own currency or a foreign currency and carry different levels of risk, including political risk.
Corporate Bonds
Investment-grade bonds: issued by companies with strong credit ratings (BBB or higher by Standard & Poor's, Baa or higher by Moody's). These bonds are considered relatively safe but offer lower yields.
High-Yield Bonds (Junk Bonds): Issued by companies with lower credit ratings (below BBB/Baa). These bonds offer higher yields to compensate for the increased risk of default.
Capital Gain Bonds
Capital Gains Deferral: One of the primary benefits of capital gain bonds is the ability to defer capital gains taxes. Investors can reinvest capital gains from the sale of a property or other capital assets into these bonds to defer tax liability.
Low or No Regular Interest Payments:Unlike traditional bonds, which pay regular interest, capital gain bonds may offer low or no interest. Instead, the return to the investor comes from the appreciation in the bond's value.
Maturity and Redemption:These bonds typically have a fixed maturity period, during which the investor cannot access the principal. Upon maturity, the investor receives the face value of the bond, along with any accrued gains.
Tax Treatment:In some jurisdictions, the capital gains from the sale of capital assets can be reinvested into specified bonds to defer tax liability. In India, for example, under Section 54EC of the Income Tax Act, capital gains arising from the sale of a long-term capital asset can be reinvested in bonds issued by specific entities like the National Highways Authority of India (NHAI) or the Rural Electrification Corporation (REC) to defer capital gains tax.
Index Funds:Aim to replicate the performance of a specific market index, such as the S&P 500.
Safety and Security:Capital gain bonds are generally considered safe investments, often issued by government entities or backed by government guarantees. However, the low yield compared to other investments reflects their conservative nature.
Convertible Bonds
These bonds can be converted into a predetermined number of shares of the issuing company's stock. They offer potential for capital appreciation if the company's stock price rises.
Non Convertible Debentures (NCD)
NCD stands for "Non-Convertible Debenture." It is a type of fixed-income instrument issued by companies to raise capital from the public. Unlike convertible debentures, NCDs cannot be converted into equity shares of the issuing company. They have a fixed tenure and offer a fixed rate of interest to investors.
Key Features of NCDs:
Fixed Interest Rate:NCDs offer a predetermined interest rate, which is usually higher than the interest rates on fixed deposits or government bonds.
Tenure:The tenure of an NCD can range from a few years to a decade, depending on the terms set by the issuing company.
Liquidity:NCDs can be traded on stock exchanges, providing liquidity to investors, although this may vary depending on the market.
Credit Rating:NCDs are usually rated by credit rating agencies based on the creditworthiness of the issuing company. Higher-rated NCDs are considered safer investments but might offer lower returns compared to lower-rated NCDs.
Types of NCDs:
Secured NCDs:These are backed by the assets of the issuing company. In the event of a default, the assets can be liquidated to repay the investors, making them safer.
Unsecured NCDs:These are not backed by any collateral, making them riskier than secured NCDs. However, they often offer higher interest rates to compensate for the increased risk.
NCDs are attractive to investors looking for fixed returns over a specific period, but they should be aware of the credit risk associated with the issuing company.