Bonds

Bonds refer to debt instruments bearing interest on maturity.
In simple terms, organizations may borrow funds by issuing debt securities named bonds, having a fixed maturity period (more than one year) and pay a specified rate of interest (coupon rate) on the principal amount to the holders.
Bonds have a maturity period of more than one year which differentiates it from other debt securities like commercial papers, treasury bills and other money market instruments.

More technically, bonds are negotiable certificates that represent the indebtedness of the issuer to the holder. The negotiable element refers to the fact that the ownership of a bond can be transferred from one party to another in the secondary market.
Terminology
Types of Bonds
Investing in Bonds
Many people invest in bonds with an objective of earning certain amount of interest on their deposits and/or to save tax. Bonds are considered to be a less risky investment option and are generally preferred by risk-averse investors. Though investors should not get overtly confident of investing in bonds as bond prices are also subject to market risk. For example, bond prices have a negative correlation with interest rates due to which any increase in interest rates can lead to a fall in bond prices and vice-versa. Thus, it is recommended that investors should consider the risk-return factor (i.e. the expected return for the given level of risk) before investing.

Investments Eligible for Deductions

1. Holders of certain bonds are eligible to claim deduction from their taxable income. A list of such deposits is mentioned hereunder:
2. Interest on Government Securities, National Savings Certificate (issues VI, VII and VIII), Development Bonds, Development Bonds and 7 year National Rural Development Bonds
3. Interest on Post Office Term Deposits, Recurring Deposits Accounts and National Savings Schemes (as referred to in National Savings Scheme Rules, 1992)
4. Dividends received from a co-operative society
5. Income from investments in UTI (up to assessment year 1999-2000)
6. Interest on deposits with a banking company or a co-operative bank
7. Interest on deposits with a co-operative society made by a member of the society
8. Interest on deposits with housing boards
9. Interest from deposits made under A.E. (C, D.) Act & C.D.S. (I.T.P.) Act.
10. Interest on notified debentures of any co-operative society, any institution or any public sector company.
11. Interest on deposits with a financial corporation which is engaged in providing long-term finance for industrial development in India and which is eligible for deduction under Section 36(l)(viii) [up to assessment year 1999-2000, the corporation is approved by Central Government].
12. Interest on deposits with a public company formed and registered in India with the main object of carrying on the business of providing long-term finance for construction or purchase of houses in India for residential purposes and which is eligible for deduction under Section 36(l)(viii) [up to assessment year 1999-2000, the company is approved by the Central Government under Section 36(l)(viii)].
13. Interest on deposits with Industrial Development Bank of India.
14. Interest on deposits under National Deposit Scheme. Income in respect of units of mutual fund specified under Section 10(23D) [up to assess. year 1999-00].
15. Interest on deposits under Post Office (Monthly Income Account) Rules.

Abbreviations
YTM - Yield to maturity
NPV - Net present value
SPV - special purpose vehicle
FRN - Floating Rate Notes