Question

How do you think of this paragraph?

We know that bonds are basically when companies or governments agencies need money to complete their projects, they will issue bonds to investors. The investor may recover the funds and receive the interest at the interest rate set at that time on the bond repayment date. In this world, in order to consider the needs of investors, companies or governments may develop different types of bonds in the market. So, it causes that the type of bonds is various, and they are including corporation bonds, government bonds, zero-coupon bonds, Coupon bonds, long and short-term bonds, and so on. Although it exists so many various types of bonds, their purposes are similar. In addition, we also know that bonds with high-interest rates are risker than bonds with lower interest rates. Therefore, due to the diversity of bonds, investors can consider their own needs to purchase appropriate bonds. For a simple example, the level of the United States government bond is “AAA”, so it means that these bonds are risk-free. In contrast to corporate bonds, investors need not worry about the risk of bankruptcy. Therefore, if investors want to purchase corporate bonds, they should evaluate the firms’ receivables and credit to reduce risk. For another simple instance, if we want to purchase bonds for one year, we can choose to purchase short-term bonds and vice versa. This is the reason why we need these heterogeneous bonds because we can select the most appropriate bonds by our own needs.

Answer 1

Answer : From the above paragraph it is understood that types of bonds to be issued by various governments/ corporates should cater as per needs of an investors.

1) We can divide the investors in bond market on the basis of period of investment as follows :

1) Long term Investors

2) Medium term Investors

3) Short term Investors

1) Long term investors usually invest in bonds having maturity period over 12 years. These investors will invest in infrastructure bonds issued by government example National Highway Authority of India(NHAI). They need only long term yeld on their investments. They are not bother about any short term gains.

2) Medium Term Investors usually invest in bonds having maturity period between 5 Years to 12 Years.

3) Short term Investors : They invest in bods having maturity period between 1 year to 5 years. usually they invest in corporate deposit. these investors will get very lesser returns.

2) On the basis of risk we can divide the investors in bond market as below :

1) Risk Takers

2) Risk Averse

1) Risk Takers : These investors will invest in BB and B Rated Bonds having more risk securities. These investors are ready to take risk in order to maximize their overall returns But risk element is involved while repayment of principal and interest to investors.These issuers of bonds (corporate)  having very poor receivable management and credit quality and repayment track.

2) Risk Averse : These Investors will invest in AAA and AA rated bonds having highest safety in repayment of interest and principal by issuer. These investors are not ready to take risk hence they expect less returns than risk takers. These issuers of bonds (corporate)  having very good receivable management and credit quality and repayment track.

From the above explanations it is concluded that in bond market has various types of investors are exist in the market hence it is the need of the hour the corporate / government must issue bond instruments which must cater needs of an bond investors. They can come out with various innovative products like hybrid bonds, Green Bonds extra... which fulfill needs of an investors at large in the bond market.

There is inverse relationship exist between Rate of interest and Risk Rating. If Rate of interest high usually corporate having lesser credit rating like BB or B and bad credit quality. Hence in order to attract the investors to invest in their corporate bonds hence they will offer higher interest to bond investors.

If Rate of interest is low usually corporate having higher credit rating like AAA, A and their having high credit quality and liquidity. Hence they need not attract the investor due to it provides already very good safety cushion to investors by way of higher credit rating .

Therefore cooperates must issue bonds to investors as per their needs and their investment objective.