DO YOU GET A LOAN AGAINST BONDS? 

Bonds are a predictable income source for borrowers. Typically, it represents a type of loan that investors lend to the borrower that could be any corporate or governmental entity. Companies, municipalities, states, and sovereigns use bonds to finance their projects and operations. 

With a fixed maturity date, bonds are issued to the investors to raise the funds. To this, the face value amount is repaid with or without interest depending on the terms and conditions of the borrower. Bond prices and interest rates are inversely proportional that vary depending on the market conditions. 

The investor can buy a variety of bonds, such as ECL finance bonds, Canara bank bonds, SBI bonds, Power Grid Corporation of India Limited bonds, and many more to diversify their investment portfolio and financial needs. If you hold the bonds till maturity, the bondholders get back the entire principal amount making it a safe option for investing. 

Types of Bonds

  1. Fixed-Rate Bonds

These bonds are independent of the market fluctuations and are issued at fixed interest rates throughout their tenure. One of the prime advantages that fixed-rate bonds offer is that the investors have the certainty of getting return rates for a defined period. 

  1. Floating Rate Bonds

With the fluctuating interest rates, the floating rate bonds are issued to the borrower. If the prevailing interest rates are high then the interest rates are largely mitigated due to higher returns. Floating-rate bonds are reset at regular intervals. However, the return rate of the investor is uncertain till the end of the tenure. 

  1. Zero Coupon Bonds

As the name suggests, the lenders don’t get any interest on the amount given to the borrower but get the whole of the principal amount. 

  1. Inflation-linked bonds

These bonds are linked to the cost of the goods that are measured by the inflation index. With considerable upside potential, these bonds also carry certain risks that may vary depending on the rise and fall of the interest rates in the market. 

  1. Perpetual bonds 

Perpetual bonds have no defined maturity date. These bonds don’t allow redeeming the amount though they pay back interest at the same rate throughout the tenure. 

Loan Against Bonds

Banks and Non-banking Financial Companies (NBFCs) offer loans against bonds. Depending on the value of the pledged amount of the bonds, the lenders avail you of a certain amount. The bonds are highly tradable in the market and the debt can be repaid in installments or at a time. Usually, the interest rate against any security varies from 12-15% for a defined tenure. 

Bonds vs Loan

Though both of these securities bring financial stability to the borrower based on the timely fashion of the market fluctuation of the interest rates. However, the key difference between these two securities is that the loan is a specific amount that is repaid at a defined interest rate. Contrarily, bonds are the debt security that companies issue and are easily traded in the market. 

The bondholders have the liberty to sell their bonds before their maturity while the loan is a specific amount that is issued after an agreement between the lender and the borrower. 

How to Avail Bonds at a Fair Interest Rate? 

If you want to invest in bonds, SMEST is a great platform to trade your bonds. With the availability of private and public bonds, you can secure your investments in bonds such as ECL finance limited bond, Aditya Birla Finance Limited, REC Limited, and other bonds. Transact valuable bonds through a seamless process with the expertise of SMEST’s professionals. 

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Author: priaanca_singh