Government bonds are debt securities issued by a country’s government in its own currency. A government bond is a debt instrument that helps the government to raise capital when required. Both state and central government borrow funds from the market in order to feed their financial deficits. Government executes financial deficits by taking money from the markets to facilitate their deficits. The process of borrowing is what we know as government bond or security, which is operated by Reserve Bank of India presently. There is a certain percentage which a state can borrow from the market.

A substantial part of the debt market that we see is actually the govt. securities. A way of auction system issues these bonds and each of them comes with different terms and interest rates. It is a promise to repay money borrowed after a particular period of time with certain rate of interest. The issuer is equivalent to the borrower and the bond holder to the lender. Bonds enable the issuer to finance long-term investments with external funds. The money raised from the bonds maybe used to finance various activities like building roads, hospitals, infrastructure etc.

RBI bonds refer to the bonds issued by Reserve Bank of India. The money raised may be used to finance its various projects like long term lending, development of the economy etc.

Process: Investing in bonds is different from investing in shares. The bonds are traded more on over the counter basis than on the stock market. Usually the Govt. and RBI bonds are available in designated branches of banks and post offices. They may be procured to a broker too. You will have to fill in a form and apply for the bonds. Usually one bond is worth 1000 rupees and if you want to invest above 50,000.00 you will have to submit a PAN card. Once you fill the form and submit it you will receive a bond certificate in your name.

Returns: The returns depend on the type of the bond. Some have a fixed rate of interest, say 8%, and some are linked to the market or the inflation in the country. That means the interest maybe 4% plus the fluctuations to the parameter to which it is linked. The returns maybe paid out to you in the form of a demand draft or maybe a direct credit to your bank account.

Advantages of Government Bonds:

• These bonds regulate the nationwide circulation of cash.
• Investments in these bonds are safer than investing in the stock market.
• There is negligible credit risk since government typically has the highest credit ratings.

Disadvantages of Government Bonds:

• These bonds are prone to political upheavals, coups and power turmoil in the country. These are the only circumstances when a government can default on interest payments and debt repayment.
• In case an investor purchases a bond issued by the government of a foreign country, the returns can be impaired by fluctuations in the foreign currency market.
• Inflation can significantly lower or wipe off the returns from these bonds.
• Government bonds yield lower returns than corporate bonds or equities.

Secondary market

Bonds issued by corporates and the Government of India can be traded in the secondary market. Most of the secondary market trading in government bonds happens on the negotiated dealing system (an electronic platform provided by the RBI for facilitating trading in government securities) and the wholesale debt market (WDM) segment of the National Stock Exchange.

Of this, government securities accounted for 98.4 per cent of the total turnover. The number of retail trades in the year 2003-04 formed an insignificant 73 per cent of the total number of trades (189,518) in the secondary market.