A government bond is a debt instrument issued by the government of a country to finance government spending.
What Is A Government Bond?
A government bond is a debt instrument issued by the government of a country to finance government spending. It signifies a debt owed by the government to the holder of the bond. In simple language, a bond is a loan taken by the government, on which it pays interest.
This loan matures after a fixed period of time, at which point, the government redeems the bond by paying back the principal amount. Depending upon the type of government bonds, the tenure is between 91 days to 40 years.
Any individual, Non-Resident Indian (NRI), Hindu Undivided Family (HUF) or institution can buy these bonds from the government. Bonds are issued at a minimum face value of Rs 1,000 and in multiples thereof and there is no maximum limit for investing in government bonds. Government bonds are sold by the Reserve Bank of India (RBI) on behalf of the government.
Types of Government Bond
Bonds can be classified into three broad categories based on their price.
- Standard Bond : Standard bonds are issued and traded at their par value or face value. The existing price of these bonds is neither above nor below their face value.
- Premium Bond : When a bond is issued at a price higher than its face value, it is known as a premium bond. Any bond that is trading in the secondary market at a price higher than par value is also a premium bond.
- Discount Bond : Sometimes, bonds are issued at a value less than their face value, or traded in the secondary market at less than their face value. These types of bonds are known as Discount Bonds.
Terms related to Government Bonds
- ZERO-COUPON BONDS: These investment bonds are issued at a discount, but redeemed at the principal amount.
- G-SEC BONDS: These are issued by the government and are one of the safest types of bonds to invest in.
- CORPORATE BONDS: These types of bonds are simple bonds, wherein a company borrows and pays interest at regular intervals.
- INFLATION-LINKED BONDS: In these types of bonds, principal amount and interest payments are indexed to inflation.
- CONVERTIBLE BONDS: The bond holder has the option to convert these types of bond into equity on pre-specified terms.
- SOVEREIGN GOLD BOND: Sovereign Gold Bonds are the safest way to buy digital Gold, as they are issued by Govt. of India
- RBI BOND: The Government of India decided to issue 7.75% Savings (Taxable) Bonds, 2018 with effect from January 10, 2018 to enable resident citizens/HUF to invest in a taxable bond, without any monetary ceiling.