What a bond is
A loan you can sell. The borrower promises a fixed payment on fixed dates and your money back at the end — which makes the return knowable in advance, and makes everything that can go wrong a question about the borrower.
Chapter 1 · Beginner
Equity is ownership. A bond is the other side of the same building: you are not an owner, you are a lender, and the difference runs through everything in this subject.
The promise
A bond has three numbers and they define it completely.
Face value — the amount the borrower repays at the end. In India this is usually ₹100 or ₹1,000 for a government security, and ₹1,000 or ₹1,00,000 for corporate paper. It is also called par value, and it is what every other number is quoted against.
Coupon — the interest rate, stated as a percentage of face value. The RBI's description of a dated government security is exact: it carries "a fixed or floating coupon (interest rate) which is paid on the face value, on half-yearly basis."
Read that twice, because it is the mistake beginners make. The coupon is paid on the face value, not on what you paid. A 7% coupon on ₹1,000 face value pays ₹70 a year whether you bought the bond for ₹950 or ₹1,080.
Maturity — the date the face value comes back. RBI: "generally, the tenor of dated securities ranges from 5 years to 40 years."
The three cash flows
That is the whole instrument. Buy a ₹1,000 bond with a 7% coupon and five years to run, and you have bought a stream:
| When | What arrives |
|---|---|
| Every six months, ten times | ₹35 |
| At the end, additionally | ₹1,000 |
₹350 of coupons and ₹1,000 back. Everything else in this subject is about what that stream is worth today, and whether it arrives.
What makes it different from a share
Three differences, and they are the reasons to hold one.
The return is knowable in advance. Chapter 2 of the equity subject had to work hard to say where a share's return comes from, because it depends on earnings nobody knows and a multiple nobody controls. A bond tells you on the day you buy: hold it to maturity and you get the coupons and the face value. Chapter 5 puts a single number on that.
You rank ahead of shareholders. Chapter 1 of the equity subject put ordinary shareholders last in the queue if a company is wound up — after employees, after secured lenders, after unsecured lenders. A bondholder is one of those lenders. You get paid before the owners do, which is a real protection and the reason bonds are the less risky instrument of the same issuer.
The upside is capped. The mirror image, and it is not a footnote. A company can triple its profits and your coupon stays at 7%. Lending to a spectacular success pays exactly what lending to a dull survivor pays. All of the upside belongs to the equity, which is why the equity carries the risk of getting nothing.
So what can go wrong
If the payments are fixed and the date is fixed, where is the risk? Three places, and each gets its own chapter.
The borrower may not pay. A promise is only as good as whoever made it. That is credit risk, and chapter 7 is about how it is assessed and what the assessment is worth.
The price moves before maturity. You can sell a bond, and what someone will pay for a 7% stream depends on what else is available. If new bonds pay 9%, nobody pays full price for your 7%. Chapter 3 is this, and it is the thing most people find genuinely surprising.
The money may be worth less. ₹1,000 back in ten years is ₹1,000 — nominally. What it buys depends on inflation over those ten years, and a fixed coupon has no defence against it. Chapter 11, and chapter 7 of Finance 101 before it.
Notice what those three have in common: none of them is the borrower changing the deal. The deal is fixed. The risks are in whether it is honoured, what it is worth meanwhile, and what the rupees will buy.
"Fixed income" is the honest name
The income is fixed. Not the price, not the real value, and not the certainty.
A bond held to maturity by a borrower who pays delivers exactly what it promised. That is a genuinely useful property and it is why the asset class exists. It is not the same as safe, and the chapters that follow are mostly about the gap between those two words.
The point
A bond is a loan with three numbers: face value, coupon and maturity. The coupon is paid on the face value rather than on what you paid. You rank ahead of shareholders and your upside is capped, so what you are really buying is a promise — and the risks are whether it is kept, what it is worth before it matures, and what the rupees will buy when it does.
Check yourself
4 questions. Every answer is explained afterwards, including the ones you get right — guessing correctly is not the same as knowing. Score 70% or more and the chapter is marked done.
Question 1 of 4
0 of 4 answered. You can submit with questions unanswered — they simply score zero.
Now do it with your own numbers
Take a bond with a face value of ₹1,000, a coupon of 7.2% paid half-yearly and five years to run. Write out every payment you would receive, with its date, and add them up.
Half-yearly means the annual coupon arrives in two instalments. The face value comes back once, at the end, on top of the final coupon.