Types of Bonds & Debentures - Hindi - YouTube

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Namaskar, my name is Mukul and you are welcome to Asset Yogi.

Friends this video is a part of a series in which we are discussing bonds and debentures.

I had already done 2 videos in this series before.

In the first video, we got to know about the differences between bonds and debentures.

Then in the second video, we have discussed shares Vs debentures.

What differences are there in the share market and bond market and which types of risks are involved?

So if you haven't watched these videos then I will suggest you

watch those videos before watching this video.

You will get the links in the description below.

In this video, we will go into a little more detail.

We will try to understand, what are the types of bonds and debentures?

Now see if I say about the bond market or debenture market

that they are not much developed in India as they are in other developed countries.

But it has evolved so much if I talked about the past 10-15 years, So in today,s date retail investor also

have too many avenues that they can invest in fixed income security.

Fixed income securities mean your bonds and debentures.

Now when you invest in the bond or debenture,

then the document you gets has too many terminologies written in it.

It basically defines what type of bond or debenture you have.

From that, you understand what type of risks are there? which type of returns you will get?

What are the terms and conditions?

That's why it is important for you to understand

how many types of bonds and debentures are there.

So in this video, we will be discussing this.

Stay tuned to this video.

In this, the first category comes of secured and unsecured bonds & debentures.

In secured bonds or debentures, the company's assets are kept as security near the bondholders.

That is if the company is in the midst of bankruptcy,

then the payments of bondholders can be done by selling the company's assets.

You can compare it with home loans.

Like if you don't do your payment of a home loan then the bank keeps your home as a mortgage.

And can make its recovery by housing the home.

In case of an unsecured bond or debenture, no security is kept.

In fact, I clear it here also,

bonds generally are not unsecured they are always secured.

But your debentures can be secured or unsecured.

If you want to do a comparison of unsecured debenture then you can do it with a personal loan.

In a personal loan for example you get a loan without collateral.

So if you don't do your loan payment then the bank has no option of its recovery.

Similarly, if you invest in unsecured debenture that means you are taking a high risk.

And if the company is in the midst of bankruptcy then maybe your recovery is not possible.

Now our next category comes our that on what basis you are getting interests?

Your debenture or bond certificate has clearly written

that you are getting cumulative or non-cumulative interest.

And you also have an option that how you want to take your interest.

In the cumulative interest your interest payment is done together, let's say your bond period is of 10 years.

And let's say in the starting if you invested 1 lac rupees.

So here after 10 years, according to 9% whatever your total interest is being made,

plus whatever the principal amount is made, you will get that amount together.

So here your 100 thousand that is 1 lac multiplied by 1.09 raised to power 10.

This will be compounded and you will get the interest.

In non-cumulative rather than together payment, payment is done every year.

If you let's say invested 1 lac rupees in the starting then payment of 9% will be done to you every year.

Till the tenth year.

And your amount of 1 lac, after 10 years you will get it together.

So you will principal payment after 10 years and interest payment will be done to you every year,

if you opt for a non-cumulative interest.

Other than this we also have redeemable and irredeemable bonds or debentures.

Redeemable means that the maturity date will be clearly mentioned.

Let's say the maturity date is of 10 years.

So after the maturity date whatever the face value is, you will get that value back.

We take our old example if you have invested Rs 1 lac + whatever your interest is being made.

You will get that after 10 years if you have opted for a cumulative interest.

If you opted for non-cumulative then every year interest payment will be done to you.

You will get your principal amount after 10 years.

In irredeemable bonds or debentures, the maturity date is not mentioned to you.

This means the company took your money forever.

The company will not return you the amount of Rs 1 lac.

Your payment of Rs 1 lac will be made only when the company is in the midst of bankruptcy.

So every year you will only get an interest of 9% per annum.

Now irredeemable or perpetual bonds or debentures are not allowed in India.

You can mainly invest in redeemable bonds or debentures in India.

After that, our next category comes convertible or non-convertible debentures.

Now see I have only written debentures here.

Because your bonds are not convertible.

So convertible debentures will be clearly written in your certificate if it is a convertible debenture.

And its meaning is that it can be converted to equity shares.

Whatever value is of your debenture, it will be mentioned, face value.

And with that, it is also clearly mentioned that after how many years it will be convertible.

And at what price it will convert, it is also mentioned in advance.

Now when all your investment is converted into equity share that means the fixed interest that you were getting,

you will not get it.

Whatever dividend the company will declare, you will get that,

plus you will also get the growth of share price in the form of returns.

In non-convertible, you will be getting a fixed interest rate, it will not be converted into equity share.

The next category comes of registered or bearer bonds.

In register bonds simply your name is written, the company maintain its register in which

has names, addresses and all the contact details.

The bond or debenture is particularly at the name of a guy.

If registered bond or debenture is transferred.

That means it is to change the name in it.

Unless the name is not changed in the company's register, till then the old owner, all the payment will go to him.

You should keep in mind that it is a registered or bearer bond.

In bearer bond, the name is not written in it, see here no name has been written here.

Whoever has the bond or debenture, whoever is the holder of that physical asset, he will get paid.

So you can understand that it works as one type of currency note.

Like whoever has the note, it will be of his, he can take his benefit.

Similarly whoever has that bond will get the payment.

The next category of our comes of fixed and floating interest rates.

If in the bond it is clearly written that you will get this interest throughout the period.

That means fixed interest is promised to you, let's say 9% per annum.

If the company wants to hedge its interest rate so it links it with any benchmark rate.

For example,

the company says that you how much interest rate you will get, whatever the current MCLR rate of the SBI,

on that, we will give you an additional 2 % per annum.

So if the MCLR rate of SBI goes up then the interest rate of your bond will also go up.

If the MCLR rate of SBI goes down then your interest rate will also be lowered.

So here the company is not taking the risk of interest rate, it has linked itself with the benchmark rate.

So an example of this I have already given in India it is the MCLR rate of SBI,

is considered as the standard benchmarks rate so can be linked with it.

Internationally LIBOR is a benchmark rate.

London Inter Bank Offer Rate, the company can offer anything above it.

So in this way, on the basis of fixed and floating interest rates your bond or debenture, can be defined.

Then is your callable bonds or debentures.

What is the meaning of callable bonds?

See one is your maturity date that after 10 years the company has to return your money, means has to buy back.

Callable means that after 5 years the company can buy back your shares.

Here it is clearly defined that after this date, we can buy back our shares.

And also price is defined as that at this price we will take our shares.

So here I explain to you graphically, let's say I am trying to draw a company here hopefully the lines comes a little straight.

So suppose if this company says to the investor that you are issued callable shares.

And if a company call its shares that means here they are using their call option.

And basically, it is buy backing after 5 years.

So here the company has the option of buying back.

Now, why does the company do this? The company do this because here let's say,

after 5 years, instead of 9%, at 7% that are getting money from elsewhere.

So here the company says that here we will pay them 9% and get money at 7% from elsewhere.

So if the company thinks that in future in they can raise funds at a lower rate so they give callable options in bonds.

Similarly, you can have a putable option, the putable option of bonds means

that here instead of the company the investors get this option.

So here if I represent graphically so suppose it is a company,

and here lets they are the investors.

And here the investors have an option that they can put, put means that at 9% they will sell their share.

Now here why will the investors sell the shares?

See here it will be clearly written that it is putable on and after 5 years,

and the price will also be defined.

So here why investors will sell?

Investors will also sell because maybe somewhere they are getting 10% instead of 9%.

So after 5years investors will put their bonds that is put means they will sell their bonds.

And invest money at 10% somewhere else.

So this was your callable and putable option.

After this comes, you get to hear many times that is a Zero-coupon bond.

Zero coupon bonds mean that the interest rate on it is 0%.

Now interest is 0% doesn't mean that you will not get returns.

Here how returns are got?

Whatever money you have to invest initially, is at a discounted price.

So I will explain to you this in a little graphical manner.

See here if your timeline is like this in 0 to 5 years, on 0 dates whatever money you will invest.

It will be according to RS 650.

Let's say here one debenture costs you Rs 650, and let's say you bought 100 debentures, so this is your investment.

But your recovery or the redemption will be at face value.

That's why here you get returns in a lump sum.

So here you will get Rs 1000 multiplied 100, you will get this much money.

Here you will get Rs 350 on every bond or debenture.

Here profit is of Rs 350.

Now you can calculate according to this how much returns you have made.

Similarly, you will also get to hear about the premium bonds or debentures, in it also your interest rate is 0%.

But in this case, you initially invest on face value, so here let's say you invested at Rs 1000.

And here let's say.

I rewrite a bit here.

According to Rs 1000 let's say you bought 100 bonds, after 5 years for the price of Rs 1500,

you will have your recovery, redemption will be done.

So here we say it premium.

This means the premium is charged over the amount you invested.

So your Rs 1000 becomes Rs 1500 and if you have bought 100 bonds then multiply it by 100.

And here zero-coupon means that you are buying at discounted rates.

So the Rs 1000 is already discounted here, and basically, your profit is Rs 350 per bond.

Now our next category comes of our is subordinated bond or debenture.

Subordinated, you can understand the meaning directly that they are second or third grade.

Second or third grade means if the company is in the midst of bankruptcy if the company winds up.

Then payment of subordinated bondholder will be paid after the payment of the senior bondholder.

So always payment is done on the basis of priority.

If the company winds up then firstly the loans of banks will be cleared, after that all the bonds of the first charge,

the first bond, their payment will be made.

After that, the payment of subordinated bonds or debenture holders will be paid.

After that, at the last, the number of the shareholders come.

TIll the shareholders, the money is finished generally when assets are auctioned.

Many times, money runs out as soon as it comes to the loan or the bondholders.

After this, you have your participating bonds or debentures.

Participating bonds or debentures are generally used in venture capital,

if any venture capitalist is giving you the money in business.

So initially he would say that you initially need more money, so you don't pay me money initially.

You don't give me any interest.

You, as the time increases let's say he says that initial for 2 years you don't pay any interest,

from 2 to 4 years you pay me the interest of 8% per annum.

And from 4 to 8 years you pay me the interest of 12%.

So this means that he had structures in such a way that initially the startup has no load.

As the business starts to pick then according to that interest rate is being increased.

So I think I have discussed all types of bonds and debentures with you.

I hope you have understood the types of bonds and debenture nicely.

So in the next video, we will discuss how you will invest in bonds and debentures.

What types of avenues do you have that you want to invest in corporate bonds or in government bonds,

or want to invest in tax saving bonds then how you can do that?

So that's all in this video.

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Till then keep learning, keep earning and stay happy as always.