Home
Our Courses ▾
Mentorship Program 2027
Free Initiatives ▾
Free Prelims Tests Free CA Tests Free Answer Writing Free Essay Writing
Prelims Notes ▾
Polity Economy Environment International Relations Geography Science & Technology History & Culture Mapping
Mains Notes ▾
GS Paper 2 (Polity & IR) GS Paper 3 (Economy, Env, S&T) GS Paper 4 (Ethics) Ethics Hub Essay Hub Mains Q&A
About UPSC ▾
General Information
UPSC Syllabus Exam Pattern Eligibility Criteria Cut Off Marks UPSC Calendar 2027
Question Papers
UPSC Prelims 2026 Question Paper Prelims 2026 Provisional Answer Key UPSC Mains 2026 Question Papers Mains Previous Year Question Papers UPSC Mains Topic Wise PYQs
Results
UPSC CSE Prelims 2026 Result UPSC Result 2025
Blog Contact Us
.

Bonds

Shape Image One

Bonds

  • A bond is a debt instrument in which an investor loans money to an entity (typically corporate or government) which borrows the funds for a defined period of time at a variable or fixed interest rate. Bonds are used by companies, municipalities, states and sovereign governments to raise money to finance a variety of projects and activities.Owners of bonds are debt holders, or creditors, of the issuer.
  • They are usually secured against collateral.

Characteristics of Bonds

  • Fixed Interest Payments: Most traditional bonds pay interest to bondholders at a predetermined coupon rate. Coupon payments may be made annually, semi-annually, quarterly or at other specified intervals, providing a relatively predictable income stream.
    • Fixed coupon payments are not a feature of all bonds.For example, floating-rate bonds have variable coupon rates, while zero-coupon bonds make no periodic interest payments.
  • Maturity Date: Bonds have a specified maturity date, on which the issuer repays the bond’s face value (principal) to the bondholder.
  • Credit Rating: Credit rating agencies such as CRISIL, CARE and ICRA assign ratings to bonds based on the issuer’s creditworthiness and ability to meet its debt obligations. A higher credit rating generally indicates lower credit/default risk.
  • Bonds can be backed by collateral or not. Bonds with collateral are called secured bonds, while bonds without collateral are called unsecured bonds.

*A coupon payment is the regular interest that a bond issuer pays to an investor.

Secured bonds get paid first before unsecured debentures during a company’s liquidation or bankruptcy.

Types of Bonds

Based on Issuer

  • Government Bonds: Issued by governments to borrow funds. In India, Central Government dated securities and State Development Loans are examples.
  • Corporate Bonds: Issued by companies to raise debt capital.
  • Municipal Bonds: Issued by eligible urban local bodies/municipal entities to finance expenditure, particularly infrastructure projects.

Based on Interest Payment

  • Fixed-Rate Bonds: Pay interest at a predetermined fixed coupon rate.
  • Floating-Rate Bonds: Interest rate changes periodically with reference to a specified benchmark.
  • Zero-Coupon Bonds: Do not make periodic interest payments. They are generally issued at a discount and redeemed at face value.

Based on Convertibility

  • Convertible Bonds: Can be converted into equity shares according to specified terms.
  • Non-Convertible Bonds: Cannot be converted into equity and remain debt instruments until redemption.

Bond Price and Interest Rate Relationship

Bond prices and market interest rates generally have an inverse relationship:

  • Interest Rates ↑ → Existing Bond Prices ↓
  • Interest Rates ↓ → Existing Bond Prices ↑
  • Example
    • Imagine you own a bond that pays a fixed 5% interest rate (coupon).
    • If market rates rise to 6%: New bonds are now being issued at 6%. Investors will not want to buy your 5% bond at face value when they can get 6% elsewhere. To convince someone to buy your bond, you must lower its price.
    • If market rates drop to 4%: New bonds are only paying 4%. Your 5% bond is now highly attractive. Investors will compete to buy it, driving your bond’s price up.

Bond Yield

  • Bond Yield refers to the return earned by an investor from a bond, usually expressed as a percentage of the bond’s market price.For example, if a bond pays ₹100 annual interest and is currently priced at ₹1,000, its yield is 10%.
  • While the coupon rate is fixed with reference to the bond’s face value, the yield can change as the market price of the bond changes.

Bond Price and Yield

Bond price and bond yield generally have an inverse relationship:

  • Bond Price ↑ → Bond Yield ↓
  • Bond Price ↓ → Bond Yield ↑

Practical Example: Bond Price and Yield

  • Suppose Ravi buys a 10-year bond with a face value of ₹10,000 and a coupon rate of 5%.
  • The issuer will pay Ravi ₹500 every year and repay the ₹10,000 principal at maturity.
  • Initially:
    • Bond Price = ₹10,000
    • Annual Interest = ₹500
    • Current Yield = 5%
  • When Market Interest Rates Rise
    • After two years, new bonds start offering 7% interest. Ravi now wants to sell his bond to Priya.
    • Priya would not pay ₹10,000 for a bond paying only ₹500 annually when newer bonds offer higher returns. Ravi therefore has to sell the bond at a discount, say ₹8,500.
    • Priya still receives the fixed ₹500 annual interest.
    • Current Yield = ₹500 ÷ ₹8,500 × 100 = 5.88%
    • Thus: Market Interest Rate ↑ → Existing Bond Price ↓ → Bond Yield ↑
  • When Market Interest Rates Fall
    • Suppose instead that new bonds offer only 3% interest.
    • Ravi’s bond paying ₹500 annually becomes more attractive, so Priya may be willing to pay a premium, say ₹11,500.
    • Current Yield = ₹500 ÷ ₹11,500 × 100 = 4.35%
    • Thus: Market Interest Rate ↓ → Existing Bond Price ↑ → Bond Yield ↓
  • Core Logic
    • The coupon payment remains fixed, but the market price of the bond changes.
      • Bond Price ↑ → Yield ↓
      • Bond Price ↓ → Yield ↑

Bonds Vs Debentures

BasisDebenturesBonds
MeaningDebt instruments generally issued by companies to raise long term funds.Debt instruments typically issued by governments, government-backed institutions, or large public sector entities.
IssuersPrimarily companies and financial institutions.Governments, government agencies, and companies.
InterestUsually offers higher interest rates to compensate for higher riskMay offer lower interest rates, especially for government bonds, due to lower risk
CollateralGenerally unsecured (no collateral) and backed by the issuer's creditworthiness.Often secured by specific assets or government guarantees
RiskHigher risk as they may not be backed by collateralLower credit risk, especially on government bonds.

FAQs

1. What is a bond?
A bond is a debt instrument through which an investor lends money to an issuer for a specified period. The bondholder is a creditor of the issuer.

2. What is a coupon payment?
A coupon payment is the periodic interest paid by a bond issuer to the bondholder.

✍️ Curated by InclusiveIAS Editorial Team

At InclusiveIAS, our editorial team is led by experts who have successfully cleared multiple stages of the UPSC Civil Services Examination, including Mains and Interview. With deep insights into the demands of the exam, we focus on crafting content that is accurate, exam-relevant, and easy to grasp.

Whether it’s Polity, Current Affairs, GS papers, or Optional subjects, our notes are designed to:

  • Break down complex topics into simple, structured points

  • Align strictly with the UPSC syllabus and PYQ trends

  • Save your time by offering crisp yet comprehensive coverage

  • Help you score more with smart presentation, keywords, and examples

🟢 Every article, note, and test is not just written—but carefully edited to ensure it helps you study faster, revise better, and write answers like a topper.

Telegram Channel Links

InclusiveIAS

Answer Writing Group

Essay Writing Group

UPSC PRELIMS NOTES

Polity

International Relations

Environment

Economy

Science and Technology

Geography

History and Culture

Mapping

UPSC MAINS NOTES

General Studies - 4 (Ethics)

General Studies - 3

General Studies - 2

General Studies - 1

Recent posts