How do bonds work?
A bond is a form of debt financing, and they are not the same thing as stocks. Organizations issue bonds with the aim of raising funds for a variety of needs like purchase of machinery, purchase of land, company expansion, construction of a new site or a factory, and more.
When the issuer issues bonds, it borrows money from investors who buy them in the bond market.
The investors receive regular interest payments from them for the amount they have loaned, and they pay back the principal when they mature, typically after several years.
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What is the bond market, and how do Indian bonds work?
A bond market is the market where investors can buy debt instruments issued by either government enterprises or private sector organizations.
The bond market in India plays an essential role in the country’s economic development, and the government is taking steps to enhance the bond market.
Earlier, foreign investors did not have full access to the government bond market. However, the Indian government has announced a plan which will allow international investors to buy government bonds with no restrictions.
The inclusion of India in the global bond index came as a result of this new strategy.
India is anticipated to be included in global bond indices in early 2022, which might bring over $40 billion in capital from investors in 2022 -23. Furthermore, allowing foreign investors to invest in government bonds is a good decision that demonstrates India’s confidence in its stability.
A market-making institution for corporate bonds was proposed in the most recent budget.
This will have several advantages, including providing much-needed liquidity to the bond market and allowing investors to feel more comfortable with bonds.
The Indian bond market has diversified dramatically during the previous two decades, contributing significantly to the development of the country’s infrastructure.
However, compared to the equity market, India’s bond market is still in its early phases, with much room for expansion.
Now the next question arises - how the bond market works in India?
As discussed above, the Indian bond market consists of numerous sorts of bonds.
There are two types of markets in the Indian bond market. They are as detailed below:
1. PRIMARY MARKET
The primary bond market is a bond market segment where new and seasoned issuers, including corporations, municipalities, and governments, sell securities to investors.
2. SECONDARY MARKET
The secondary bond market includes bonds that have already been issued. These bonds can be traded between investors on exchanges or over the counter.
Secondary bond markets are used by investors to trade existing bonds, instead of purchasing newly issued bonds.
These bonds can be purchased through a broker, who acts as a middleman between the purchasing and selling parties.
The Indian bond market includes both government and private-sector bonds, but the government bonds dominate the Indian bond market.
Government bonds are believed to be quite safe and have a lot of liquidity.
