Question

Explain the features of bonds.

Answer 1

Meaning: -
According to Webster’s Dictionary, a bond is an interest bearing certificate issued by a government or business, promising to pay to the holder specified sum at a specified date. In fact, there is no difference between bonds and debentures. 

Definition: -
Section 2 (12) of the Indian Companies At, 1956 states “a Debenture includes debenture stock, bonds and any other securities of a company, whether constituting a charge on the assets of the company or not.”

Normally, the difference between bonds and debentures is due to the usage of the two terms. The term ‘bond’ is normally used when debt funds are raised by the government, or public corporations, including banks and financial institutions. The term ‘Debenture’ is used when debt funds are raised by private companies.

Features of Bonds are as follows: -

1. Long Term Finance: -
   The bonds provide long term finance. The period of bonds can be 5 years. However, government bonds can be issued for a longer period, even for 10 years or more.

2. Status: -
   The bonds represent borrowed capital. Therefore, bondholders are creditors of the company.

3. Interest as income: -
   The bondholders get a fixed rate of interest as income. The interest may be paid every year or on the maturity of the bond.

4. Redemption: - 
   The bonds are redeemed after a certain period of time. The period of redemption is stated in the bond certificate.
5. Guarantee by the government: -
   The bonds issued by government corporations are guaranteed by the State/central government. Therefore, there are less risks of default in repayment. 
6. Tax Benefit: -
   Certain bonds get a tax benefit. For instance, there is an exemption from the capital gains tax, if the taxable amount is invested in certain government bonds.