Bond is a fixed income instrument that allows corporations and government to raise loan from the market. A bond is characterized by a principal amount, coupon rate and duration. The bond instrument pays a fixed amount to the investor at regular intervals. The coupon rate and the principal amount determine this amount. If the investor buys the bond directly from the corporation the purchase price goes as a loan amount to the corporate. Once the bond has been sold by the corporate, it can be traded on the stock exchange where the yield rate determines the buying price prevalent on the day of purchase. A bond comes with inherent risk, which is a measure of the health of the corporate. Bonds are rated by credit agencies such as Moody’s and Standard & Poors, and rating can be from AAA to junk rating. As the rating of the bond goes down, the coupon rate increases but the risk of default on the bond also increases. In addition to bonds, one can invest in peer to peer loans, a recently introduced asset class in India. Peer to peer investment is also a fixed income instrument similar in nature to bonds. The only difference is that in addition to interest, a part of the principal is also paid back in form of EMI. The EMI received each month is the same making peer to peer loans to be treated as fixed income instruments. Investing in loans provides a constant income and the return on Faircent platform can be as high as 25%. Like bonds, loans are also rated from minimal risk to very high risk and the interest rate is dependent on the risk category. The interest rates on the loans range from 12% to 36%. Due to inherent risks involved, both bonds and loans are subject to default. An investor is advised to assess his/her risk appetite before investing in these loans.
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