- Investors can invest in bonds in both primary as well as secondary markets
- In the secondary market, customers can purchase or sell bonds at the prevailing prices
- Based on the prices at which the customer purchases the bond, certain returns in terms of yield is received over the maturity of the bond
- Once the bond matures, the notional amount of the bond is returned to the customer by the issuer
- By investing in the bond, the customer takes a credit risk on the Issuer. Other risks include market risks, liquidity risks etc.
- Bonds are units of debt issued by companies / issuers and securitised as tradeable assets
- A bond is a fixed-income instrument, since bonds traditionally pay a fixed interest rate (coupon) to debtholders
- Variable or floating interest rates are also quite common
- Bond prices are inversely correlated with interest rates: when rates go up, bond prices fall and vice-versa
- Bonds have maturity dates (or call dates for perpetual bonds) at which point the principal amount must be paid back in full or one can risk default.