Who borrows

Chapter 1 said a bond is a promise. This chapter is about who is making it, which is the first thing to establish and the last thing most people check.

The central government

The largest borrower in the country, and the benchmark everything else is priced against.

A Government Security is, in the RBI's words, "a tradeable instrument issued by the Central Government or the State Governments" that "acknowledges the Government's debt obligation." It comes in two shapes.

Treasury bills are the short end. RBI: "short term debt instruments issued by the Government of India and are presently issued in three tenors, namely, 91 day, 182 day and 364 day."

They work differently from every other bond here, and it is worth understanding because the mechanism recurs. T-bills are zero coupon: "they are issued at a discount and redeemed at the face value at maturity." No interest is paid at all. You buy a ₹100 bill for, say, ₹98.30 and receive ₹100 at the end. The ₹1.70 is the return, and it arrives as the gap rather than as a payment.

Dated securities are the long end — the bonds of chapter 1, with a coupon paid half-yearly on the face value, running from about 5 years to 40.

Central government securities carry no meaningful credit risk in rupees, because the borrower issues the currency the debt is denominated in. That is a real distinction and a narrow one: it says the payment will be made, not that it will be worth what you hoped. Chapter 11.

The states

State governments issue State Development Loans. RBI describes them as dated securities "issued through normal auction similar to the auctions conducted for dated securities issued by the Central Government."

SDLs typically yield slightly more than central government securities of the same maturity. The extra is not mainly a judgement that a state will default; it is thinner trading and a smaller buyer base. It is the first appearance of a theme that runs through the whole subject: part of every yield is payment for not being easy to sell.

Public sector undertakings

Companies owned wholly or largely by government — power, finance, infrastructure. Their bonds yield more than government securities and usually less than comparable private companies.

The reason is a judgement rather than a guarantee, and it is worth being precise about. Most PSU bonds carry no explicit government guarantee; the market prices in a belief that the owner would not let them fail. Sometimes that belief has been right. It is an assumption, not a term of the contract, and the offer document will say which you have.

Companies

Corporate bonds and debentures, from the largest and most creditworthy down to issuers who are paying double digits because nobody will lend to them cheaply.

Here the credit question is the whole question, and chapter 7 is about how it is assessed. Two structural features to know now.

Secured or unsecured. A secured bond has specific assets pledged against it; an unsecured one ranks behind. Both are ahead of equity, and the difference between them matters enormously when something goes wrong.

Liquidity is poor. India's corporate bond market trades far less than its equity market. A bond you can buy is not necessarily a bond you can sell at a sensible price on a Tuesday, and chapter 7 of the markets subject is what that spread costs.

The ladder, and what the rungs mean

Roughly, from lowest yield to highest:

Borrower	Why the yield is where it is
Central government T-bills and dated securities	No rupee credit risk; the deepest market
State Development Loans	Same sovereign family, thinner trading
Large PSUs	An assumption about the owner, not a guarantee
Highly rated companies	Real credit risk, assessed as small
Lower rated companies	Real credit risk, assessed as material

The gap between any issuer and the government of the same maturity is called the spread, and it is the market's price for two things at once: the chance of not being paid, and the difficulty of selling.

The rule this subject keeps returning to

A higher yield is not a better deal. It is a description of what somebody is worried about.

If one bond yields 7% and another yields 11%, the difference is not generosity. It is the market saying the second borrower is less certain, or the paper is harder to sell, or both. You may well conclude the worry is overdone and the extra is worth taking — that is a legitimate investment view, and it is the only way the extra is ever earned.

What is not legitimate is treating the higher number as free. Every unusually high yield in Indian fixed income has a reason, and the reason is discoverable before you buy rather than after.

The point

Treasury bills are zero coupon and issued at a discount; dated securities pay a half-yearly coupon. States issue SDLs, PSUs borrow on an assumption about their owner, and companies borrow on their own credit. The spread over the government of the same maturity is the price of credit risk and illiquidity — so a higher yield names a worry rather than offering a gift.