GOI Bonds

A government bond is referred to a debt instrument which is issued by Central and State Governments of India. More often not, issuance of these bonds take place when issuing body (Central or State governments) sees liquidity crisis and needs funds for infrastructure development or any other purpose focused towards economic development.

According to Securities and Exchange Board of India (SEBI), AIFs can be divided into 3 categories:

Government bond in India is a contract between issuer and investor. Under this, issuer guarantees interest earnings on face value of the bonds which are held by investors. Apart from these interest payments, repayment of the principal value is also guaranteed on a stipulated date. Government Bonds in India fall under a category of government securities (G-Sec). Such debt instruments are principally long-term investment tools issued for periods that range from 5-40 years. Government bonds can be issued by both Central and State governments of India.

Government bonds which are issued by State Governments are called State Development Loans (SDLs). Earlier, most G-Secs were issued to large and renowned investors, including companies and commercial banks. Nowadays, GOI has made government securities available to smaller investors including individual investors, co-operative banks, etc

government of india bonds
Different types of Government bonds
  • Fixed-rate bonds

As the name dictates, fixed rate government bonds come with fixed rate of interest. This means the rate of interest will remain constant throughout the tenure of investment irrespective of fluctuations which might occur.

  • Floating rate bonds (FRBs)

These bonds are subject to changes in rate of returns periodically. This change in rates is undertaken at intervals which are declared at the time of issuance of these bonds. For example, a floating rate bond can have a pre-announced interval of 6 months. Therefore, this will mean that interest rates on this bons will be re-set after every 6 months throughout its tenure.

  • Sovereign gold bonds (SGBs)

Central government issues sovereign gold bonds, and entities can invest in gold for an extended period through these bonds. As a result, they don’t have to worry about investing in physical gold and the risks associated with it. Interest earned on these bonds qualifies for tax exemption.

Prices of these bonds are closely linked with the prices of gold. Nominal value of these bonds is reached by the calculation of simple average of closing prices of 99.99% purity gold. Such calculation takes place three days preceding the issuance of such bonds. SGBs can also be denominated in terms of 1 gram of gold.

  • Inflation-Indexed Bonds

These bonds are quite unique. In such bonds, the principal and interest earned on such bonds are accorded with inflation. These bonds are principally for retail investors and are indexed as per Consumer Price Index (CPI) or Wholesale Price Index (WPI).

Focus of such bonds is to ensure that real returns accrued with these investments remain constant. Therefore, investors can hedge their portfolio against inflation rates.

  • 7.75% GOI Savings Bond

This government security was introduced as a replacement to 8% savings bond in 2018. Interest rate of such bonds has been set at 7.75%. According to RBI regulations, these bonds can be held by individual or individuals who are/are not NRI(s) in any capacity, a minor with the support of legal guardian representative and a HUF.

  • Bonds with Call or Put Option

The principal distinguishing feature of such bonds is that its issuer enjoys the right to buy-back these bonds (call option) or the investor can exercise the right to sell (put option) them to the issuer. However, these transactions should happen on a date of interest disbursal. Participating entities, i.e. government and investor are allowed to exercise their respective rights after 5 years from the date of issuance.

  • Zero-Coupon Bonds

As the name depicts, Zero-coupon bonds don’t earn any interest. All the earnings from such bonds take place from difference in issuance price (at a discount) and redemption value (at par).

Reach out to us now!!

All rights reserves © 2022 VSRK Capital

x
Need Help ?