What is Bonds & Government Securities?
Bonds are debt instuments issued by corporates or public sector entities,like municipalities,State or Central government entities.an investor can invest his money in bonds for a fixd tenure and at a fixed rate of intrrest, you can either buy the bonds at the time of their issue or from the Secondary Market where they are traded after the issue.
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What are Infrastructure Bonds?
Governments and companies need to borrow money for projects or expansion. Infrastructure bonds are borrowings to be invested in government funded infrastructure projects within a country. They are issued by governments or government authorised Infrastructure companies or Non- Banking Financial Companies.
How do Infrastructure bonds work?
Any Indian resident (not a minor) or a Hindu undivided family or can invest. Infrastructure bonds are good for people who need a fixed income. They offer a decent rate of interest and tax benefits. The maturity of these bonds is often between 10 to 15 years with an option to buy-back after a lock-in of 5 years. These bonds are listed either on or both National Stock Exchange or Bombay Stock Exchange that provides you with an option to exit after the lock-in period. A Lock-in period is when you cannot sell a particular instrument.
What are the tax benefits?
– Investments up to Rs. 20000 are eligible for income tax deduction under Section 80 CCF of the Income Tax Act
– This is over and above the Rs. 1 lakh deduction available under Section 80 C.
– But interest income on the Bonds is applicable. (But no tax is deducted at source, if the annual interest is less than Rs. 5000).
Why should you invest in bonds?
- – Bonds bear ﬁxed interest rates like FD 3% average rate of return of a
bond is around 10-11% while Fixed Deposits bear an interest rate of 7-8%
on an average.
- – Bonds can be redeemed before maturity as they are traded in the
- – You can do a bond transaction online through your Demat account.
- – No TDS on interest payouts.
- – In case of long term capital gains, the investor gets the beneﬁt of indexation.
- – A bond transaction is quick. Payment is via RTGS and the bond will be cradited into your Demat A/c by the end of day.
What are Capital Gains Bonds
A stock market investment deals with buying shares of various companies. Returns are earned from the increase in value of these shares as well as the annual dividends received. The profit you earn from selling your assets like bonds, shares, mutual fund units, property etc., is called capital gains.
So how do you measure your capital gains, especially when you have an expansive portfolio with multiple stocks? The capital gains report will come to your help here.
What to read in capital gains report
– Financial Period
– Gain / Loss
– Short-term capital gain
– Long-term capital gain
– Speculation income
What Is a Government Security?
A government security is a bond or other type of debt obligation that is issued by a government with a promise of repayment upon the security’s maturity date. Government securities are usually considered low-risk investments because they are backed by the taxing power of a government. In fact, investment in U.S. treasury securities is probably the safest investment that can be made.
Why Are They Issued?
Government securities are usually issued for two different reasons. The primary reason that most government securities are issued is to raise funds for government expenditures. The federal government issues treasury securities to cover shortfalls (deficits) in its annual budget. Additionally, cities will often issue bonds for construction of schools, libraries, stadiums, and other public infrastructure programs.
Types of Government Securities
– There are many types of government securities. Let’s take a look at them and see how they differ.
– Treasury bills are short-term securities issued by the federal government. Their maturity periods range from days to 52 weeks. These securities are sold at a discount rate and will be paid at face value, which is how the investors make their money.
– Treasury notes are government securities with maturity periods longer than treasury bills. Their maturity periods can be two, three, four, five, seven, and ten years. Interest is paid every six months.
– Treasury bonds are long-term investments with a maturity period of 30 years. Interest is paid every six months.
There is no clear cut difference between the two terms and they tend to be used interchangeably. At a very broad level, governments and central banks issue bonds and companies issue debentures.
Face value is the value of a single bond as determined by the issuer of the bond. The face value of a bond can be as low as Rs.100 or as high as Rs.10 lakhs. Bonds with higher face values can also be issued but may be open to select investors only.
There will be no bond certificates issued by the company. The bonds and debentures are available in demat form only. The bonds will be transferred from the seller’s demat a/c to the buyer’s demat a/c on receipt of payment by the buyer. Therefore, it is compulsory for the buyer to have a demat a/c if he wants to buy secondary market bonds through us.
Clean price is the prevailing price of a bond or debenture in the market. It is quoted by the seller to the buyer. Clean prices in India are quoted in Rs.100 and multiples of 1 paise. This is irrespective of the face value of the bond.
To explain this, let us take the example of a Tax free bond:
8.66% IIFCL 2034 with interest payment date of January 22nd every year.
A customer would like to buy this bond in the secondary market and date of payment/settlement by the client is fixed as Dec 30th, 2014.
Let us calculate no. of days between last interest payment date and date of settlement:
December 30th, 2014 and January 22nd, 2014 = 342 days.
Interest payable on January 22nd, 2015 will be paid to the new owner of the bond whose holding period will be only 23 days (365 – 342 days). The interest payable by the company will be for 365 days.
Therefore, interest for the intervening period of 342 days will need to be paid by the buyer to the seller.
Calculation of accrued interest for 342 days = Rs.8.66 / 365 * 342 = Rs.8.11.
The accrued interest is added to the price of the bond and is part of the total amount paid to the seller by the buyer.
The date on which the buyer agrees to make the payment to the seller and the seller in turns agrees to transfer the bonds to the buyer.
The date on which the buyer and the seller agree on a particular price for a bond transaction and the seller issues a deal confirmation slip to the buyer to confirm all the particulars of the bond sale.
DCS is a confirmation issued by the seller of the bond to the buyer confirming the following particulars of the bond sale:
- Name and issuer of bond
- Maturity Date
- Interest rate and dates of payment
- Deal and settlement dates
- Face Value of the bonds and no. of bonds being purchased
- Accrued Interest
- Total amount to be paid by buyer
- Mode and beneficiary of payment
It is issued by the seller and has to be accepted by the buyer of bonds.
A detailed process document has been prepared giving all the steps to be followed for procuring bonds and debentures for clients. Please refer to that.
The payment is to be made on the date of settlement via RTGS favouring Indian Clearing Corporation Ltd. (ICCL). ICCL is the clearing house for the Bombay Stock Exchange. The RTGS details will be mentioned on the DCS which will be emailed by NJ to the partner and his RM.
RTGS stands for Real Time Gross Settlement and is defined as the continuous (real-time) settlement of funds transfers individually on an order by order basis without any delay. The minimum amount that can be transferred via RTGS is Rs.2 Lacs. There is no upper limit.
The cutoff time for the RTGS payments for bonds and debentures is 3.00 p.m. on any working day. RTGS can be done either through online banking or by visiting the bank branch:
- For Online Banking, the customer will have to register the payee details for third party transfer and the bank may take between 12 – 24 hours to activate the payee. Only after the payee has been registered by the bank, will the customer be able to make a RTGS payment.
- If the customer approaches his bank branch, he will have to fill up an RTGS application form and give a cheque favouring “Yourself” for the total consideration amount plus bank charges, if any.
Once RTGS is done, the bank will provide a UTR no. which is a unique number for identifying any RTGS transaction done anywhere in India on any day.
On the date of settlement, the seller will register the demat and bank details of the buyer with BSE and transfer the bonds to ICCL. Once ICCL confirms receipt of payment from the buyer, the bonds will be credited to the buyer’s demat a/c by end of day.
If the payment is not done by buyer on the date of settlement, the bonds will be returned back to the seller on the same day. Similarly, if the seller does not transfer the bonds, the payment will be returned back to the buyer on the same day. Therefore, there is no counter party risk. The buyer and seller may approach each other and agree on new terms and conditions to execute the transaction.
No, these bonds are not open to NRIs.
A bond inventory sheet giving details of bonds available for sale along with YTMs and cash flow calculations will be emailed at the beginning of every week to all sales employees of NJ. We will also be sending secondary bond details by WhatsApp to sales employees and select partners at the start of every week.
YTM stands for Yield to Maturity and is defined as the annual return that an investor earns on a bond if it is purchased today, receives all interest payments, holds it until maturity and receives the face value of the bond. An example is provided on the next page.