Word of the Week
Accrued Interest
Accrued interest refers to the interest that has accumulated on a bond or other fixed-income security since the last interest payment date. It is typically calculated on a daily basis.
A
- Accrued Interest:
- Accrued interest refers to the interest that has accumulated on a bond or other fixed-income security since the last interest payment date. It is typically calculated on a daily basis.
C
- Capital Gains:
- Capital gains refer to the profits or gains realized from the sale or disposal of a capital asset, such as stocks, bonds, real estate, or other investments
- Capital Protection:
- Capital protection refers to investment strategies or products that aim to protect the principal amount invested or minimize the risk of losing the initial investment.
- Coupon:
- In the context of bonds, a coupon refers to the fixed interest amount a bondholder will receive periodically over the bond’s lifetime. It is the bond’s reward to the investor for investing money. Typically they are paid out annually (once a year), semi-annually (twice a year), quarterly (four times a year) or some bonds even monthly (every month)!
- Credit Rating:
- Credit rating represents the assessment of the creditworthiness of a bond issuer. It is provided by credit rating agencies and is based on various factors such as financial strength, ability to meet financial obligations, and risk of default. Most common credit rating agencies in India are CRISIL, ICRA and IND-RA.
D
- Dated Securities:
- Dated securities are bonds issued by the government for a period more than a year, with a fixed maturity date.
- Dated Securities:
- Dated securities are bonds issued by the government for a period more than a year, with a fixed maturity date.
- Debt Refinancing:
- Debt refinancing refers to the process of replacing existing debt with new debt, often at more favorable terms, to reduce borrowing costs or provide flexibility in managing financial obligations.
F
- Fixed Income Securities:
- These are essentially loans or IOUs with regular interest payments. These securities are called “fixed income” because the interest or cash flows are typically fixed, periodic and known in advance.
- Fixed-Rate Bonds:
- Fixed-rate bonds have a fixed coupon rate that remains constant throughout the bond’s life, till maturity. Investors receive regular coupon payments at this fixed rate, providing them with stability and a predictable income stream.
- Floating Rate Bonds:
- Floating rate bonds have variable coupon rates that are periodically reset based on changes in a reference interest rate. This allows the bond’s coupon payments to align with prevailing market interest rates, offering competitive returns.
G
- Green Bonds:
- Green bonds are debt instruments issued to finance projects or activities that have positive environmental or climate benefits. The proceeds raised from these bonds are used for projects related to renewable energy, energy efficiency, or sustainable infrastructure.
H
- Hybrid Funds:
- Hybrid funds are investment funds that combine different asset classes, such as stocks and bonds, in a single portfolio. They offer a mix of stable income generation and capital appreciation.
P
- Par Value:
- Par value, also known as face value or principal value, is the nominal or predetermined value assigned to a bond or stock at the time of issuance. It represents the amount repaid to the investor when the security matures or is redeemed. Par value is mainly used for accounting and legal purposes and may differ from the market price of the security.
- Perpetual Bonds:
- Perpetual bonds, also known as perpetual securities or perpetuals, are bonds with no fixed maturity date.They may pay a fixed coupon indefinitely or until a specific event triggers their redemption. Perpetual Bonds usually come with a call or put date, which the bond investor can exercise.
- Principal Amount:
- The principal amount, also known as the face value or par value, refers to the initial investment made by the bondholder. It is the amount that will be repaid by the issuer when the bond matures.
- Private Placement:
- Private placement involves the sale of securities directly to a select group of investors, such as institutional investors or high net worth individuals, rather than offering them to the general public. This type of placement is typically used for raising capital from a specific group without the need for extensive public marketing.
- Public Offering:
- Public offering commonly known as an Initial Public Offering (IPO) refers to the process of offering securities, such as bonds or stocks, to the general public for purchase. Companies or governments may undertake a public offering to raise capital from a large number of investors.
R
- RBI
- RBI stands for the Reserve Bank of India, the central bank of the country. It plays a crucial role in regulating and supervising the banking and financial system, including the bond market.
- RBI
- RBI stands for the Reserve Bank of India, the central bank of the country. It plays a crucial role in regulating and supervising the banking and financial system, including the bond market.
- Risk of Default:
- The risk of default refers to the possibility that the issuer of a bond may not be able to fulfill its financial obligations, i.e., repay the principal and make coupon payments to bondholders.
S
- Securities and Exchange Board of India (SEBI):
- SEBI is the regulatory body responsible for regulating the securities market in India, including the bond market. It ensures that the market operates in a transparent and fair manner and governs the issuance, trading, and settlement of bonds.
- Semi-annually:
- Semi-annually refers to an interest payment frequency where the bondholder receives interest payments twice a year, typically at fixed intervals.
- Sovereign Bonds:
- Sovereign bonds are debt securities issued by the government. They are considered to have the lowest risk of default as they are backed by the government’s guarantee to repay the principal and interest. Hence, Government issued bonds are generally classified under the Sovereign category.
- Sovereign Gold Bonds (SGB):
- Sovereign Gold Bonds are government securities denominated in grams of gold. SGBs offer a fixed annual interest rate and thereby are an alternative investment avenue for individuals to invest in gold without physically owning it.
T
- Tax Liability:
- Tax liability refers to the amount of tax that an individual or entity is legally obligated to pay to the government based on their taxable income or other taxable transactions.
- Treasury Bills (T-Bills):
- T-Bills are short-term debt instruments issued by the government with maturities ranging from a few days to one year. T-Bills in India are issued for a period of 91-days, 182-days or 364-days. They are considered low-risk investments and are typically sold at a discount to their face value, and achieve their full value on maturity
W
- Working Capital:
- Working capital refers to the funds used to manage day-to-day operations and meet short-term financial obligations of a company or organization.
Y
- Yield to Maturity (YTM):
- YTM refers to the overall return that an investor receives by investing in bonds. It takes into account the coupon payments received,the change in the bond’s market price over time and the principal amount repaid if the bond is held till maturity
Z
- Zero Coupon Bonds:
- Zero coupon bonds do not make any periodic interest or coupon payments. They are sold at a discount to their face value and reach their full value upon maturity. The difference between the purchase price and the face value on maturity represents the investor’s profit.