Bond Basics in 10 Minutes
By the end of this article, you will know what a bond is, what the seven core terms mean, the one rule that explains bond price movements, a map of Indian bond types, what credit ratings actually tell you (and what they don’t), the three main risks, and how taxes work. That’s enough to read more advanced content without getting lost.
What is a bond?
A bond is a loan, with terms. When the Government of India needs ₹10,000 crore to fund road construction, it doesn’t just print money — it borrows by issuing a Government Security (G-Sec). Investors lend the money, receive periodic interest (called a coupon), and get their principal back at maturity.
The same logic applies to companies: when Tata Capital needs funds, it issues a Non-Convertible Debenture (NCD). The company borrows from the market, pays interest, and repays principal at the end.
The key difference from an FD: a bond can be traded in the secondary market before it matures. This creates a price, and prices move when interest rates change — which is where most of the complexity lives.
The vocabulary you need
Let’s work through each term with an example: a hypothetical “7% G-Sec 2033.”
Face value (₹100 for this example): The amount the issuer promises to repay at maturity. Government bonds in India typically have a face value of ₹100 for pricing purposes. The actual minimum investment amount is separate (₹10,000 for retail).
Coupon rate (7%): The annual interest rate, expressed as a percentage of face value. On our ₹100 bond, 7% means ₹7 per year in interest. G-Secs typically pay semi-annually, so you receive ₹3.50 every six months.
Maturity (2033): The date on which the issuer repays the face value. From today (2026), this bond matures in about 7 years.
Yield to Maturity (YTM): The annualised return you would earn if you bought the bond today, held it until maturity, and reinvested all coupons at the same rate. YTM is the most important number for comparing bonds because it accounts for the current market price, not just the coupon rate. If you buy the bond at ₹100 (face value), YTM = coupon rate = 7%. If you buy it at a discount (say ₹95), YTM > 7%. At a premium (₹105), YTM < 7%.
Accrued interest: When you buy a bond mid-coupon period, you owe the seller the interest that has accumulated since the last coupon payment. If you buy in month 4 of a 6-month coupon period, you pay 4 months of interest up front — then receive the full 6-month coupon when it falls due. The price you see quoted (called the clean price) excludes accrued interest; the price you actually pay (dirty price) includes it.
Day count convention: The formula used to calculate how many days of interest have accrued between coupon dates. Indian G-Secs use 30/360 per FIMMDA standards; many corporate bonds use Actual/365. This matters for calculating YTM and accrued interest correctly.
Coupon frequency: How often interest is paid. G-Secs are semi-annual. NCDs can be monthly, quarterly, annual, or at maturity (zero coupon). Affects the compounding calculation in YTM.
The one rule that ties it all together
Bond prices move opposite to yields (interest rates).
Here’s the intuition. You own a bond paying 7%. New bonds in the market are now offering 9% because interest rates have risen. Nobody wants your 7% bond at face value — they’d rather buy the new 9% bond. So the price of your bond falls until the yield (calculated on the new, lower price) matches the market rate of 9%.
The reverse is also true: when rates fall to 5%, your 7% bond looks attractive and its price rises.
This is why bond investors talk about “duration risk” — longer-dated bonds are more sensitive to rate changes because you’re locking in a fixed coupon for more years. A 30-year bond’s price swings more than a 1-year T-Bill’s price for the same change in rates.
A quick map of Indian bond types
| Type | Issuer | Credit risk | Typical yield (2026) |
|---|---|---|---|
| G-Sec (dated) | Government of India | Sovereign (none) | 6.8–7.5% |
| Treasury Bill | Government of India | Sovereign (none) | 6.4–6.7% |
| SDL | State governments | State sovereign | 7.0–7.8% |
| PSU bond | Government-owned companies (NTPC, PFC, etc.) | AAA typically | 7.2–7.8% |
| NCD (AAA corporate) | Large private companies | AAA (highest private) | 7.5–8.2% |
| NCD (AA corporate) | Creditworthy companies | AA rating | 8.0–9.5% |
| NCD (A/BBB) | Mid-tier companies | Higher credit risk | 9.5–12%+ |
The yield premium you earn over a G-Sec for taking corporate credit risk is called the “spread.” A AAA corporate bond might yield 50–80 basis points more than a comparable G-Sec. A BBB bond might yield 300+ basis points more. Whether that extra return justifies the extra risk depends on the issuer, the diversification of your portfolio, and your own risk tolerance — not on this article.
Credit ratings: what they mean (and don’t mean)
India has five SEBI-registered credit rating agencies: CRISIL, ICRA, CARE, India Ratings (a Fitch entity), and Brickwork Ratings. All rate the same scale, broadly:
- AAA: Highest safety. Issuer has exceptional capacity to meet obligations. Negligible credit risk.
- AA: Very high safety. Very low credit risk. A small notch below AAA.
- A: High safety. Low credit risk, but more susceptibility to adverse conditions than AA.
- BBB: Adequate safety. Moderate credit risk. Some vulnerability to adverse conditions.
- BB and below: Inadequate safety. Higher probability of default. Speculative grade.
- D: Default or expected default.
What ratings do NOT tell you: They are not buy/sell recommendations. A AAA rating does not mean zero probability of default — it means very low probability based on the agency’s analysis at that moment. Ratings are lagging indicators: they often change after the market has already moved. IL&FS was rated AA+ days before it defaulted in 2018. Use ratings as a starting filter, not as a substitute for reading the offer document.
The three risks every bond investor faces
Credit risk: The issuer fails to pay coupon or principal. Avoided entirely with sovereign bonds (G-Secs, SDLs, T-Bills); managed through ratings and diversification with corporate bonds. A single corporate default can wipe out several years of yield premium above the sovereign rate.
Interest rate risk: Rates rise, bond prices fall. This affects you only if you sell before maturity. If you hold to maturity, you receive exactly what was promised (assuming no default). The longer the maturity, the more your bond’s market price will swing with rate changes.
Liquidity risk: Indian bond secondary markets are thin, particularly for corporate bonds. You may not be able to sell a bond at a fair price before maturity. G-Secs have better secondary liquidity through NDS-OM; most corporate NCDs have very limited secondary trading.
How taxes work, briefly
Coupon income from all bonds is taxable as income at your applicable slab rate. Capital gains on bond sale depend on your holding period and the post-July-2024 capital gains framework — the rules changed in Budget 2024. Specific calculations depend on your slab, holding period, and bond type. This article is not a substitute for tax advice. Talk to a CA.
Where to go from here
- How RBI Retail Direct works →
- FD vs G-Sec vs Corporate Bond: A Comparison →
- Browse bonds in the screener →
- See recent rating actions →
- How we calculate YTM and other figures →
Disclaimer: This article explains general bond concepts. Individual bond decisions depend on your goals, tax situation, and risk tolerance, which are outside the scope of any single article. Tax rules reflect provisions as of June 2026; verify current rules with a CA. RetailBonds.in is not a SEBI-registered intermediary. See our full disclaimer.