Plain-English answers to the questions investors ask about Indian bonds and NCDs: what the terms in an offer document mean, how ratings work, and how coupon, price and yield fit together. Each term links to real issuers on Bond Interpretation.
Types of bonds
- NCD (non-convertible debenture)
- An NCD, or non-convertible debenture, is a loan to a company in the form of a tradable security: the company pays a fixed rate of interest (the coupon) and repays the face value on the maturity date. Unlike a convertible debenture, it can never be converted into shares.
- Secured NCD
- A secured NCD is backed by a charge on specific assets of the issuer, such as loans receivable or property. If the issuer defaults, the debenture trustee can enforce that charge for the bondholders.
- Unsecured NCD
- An unsecured NCD has no charge on any specific asset of the issuer. If the issuer cannot pay, holders rank with its other unsecured creditors and are paid after secured lenders.
- Subordinated debt
- Subordinated debt is debt that is repaid only after the issuer's senior debt if the issuer is wound up. Subordinated bonds pay more because holders accept a later place in the queue.
- Tier 2 bond
- A Tier 2 bond is a subordinated bond that a bank or NBFC issues to count as Tier II capital under RBI rules. It has a fixed maturity, ranks below depositors and senior creditors, and may carry loss-absorption clauses.
- Perpetual bond (AT1)
- A perpetual bond has no maturity date: the issuer pays interest indefinitely and may redeem it only through a call option, usually after five or ten years. Banks issue them as Additional Tier 1 (AT1) capital.
- Cumulative NCD
- A cumulative NCD pays no interest during its life. Interest is compounded and paid with the principal on the maturity date, so the investor receives one larger amount at the end.
- Zero coupon bond
- A zero coupon bond pays no periodic interest. It is issued at a discount to its face value, or redeemed at a premium, and the difference is the investor's return.
- Floating rate bond
- A floating rate bond pays a coupon that changes with a benchmark rate, such as the RBI repo rate, a Treasury bill yield or MIBOR, plus a fixed spread.
- Market-linked debenture (MLD)
- A market-linked debenture is an NCD whose return depends on a market variable, usually a share index such as the Nifty 50, instead of a fixed coupon. Principal may or may not be protected.
- Tax-free bond
- A tax-free bond pays interest that is exempt from income tax. In India they were issued by government-owned companies such as NHAI, PFC, REC, IRFC and HUDCO, mostly between 2011 and 2016.
- 54EC bond (capital gains bond)
- 54EC bonds let you save tax on long-term capital gains from selling land or a building by investing the gain in bonds of specified government-owned issuers, such as REC, PFC and IRFC, within six months of the sale.
- Green bond
- A green bond is a bond whose money must be used for environmental projects such as renewable energy, clean transport or water management. In India, listed green bonds follow SEBI's framework for green debt securities.
- Municipal bond
- A municipal bond is issued by a city's municipal corporation or another urban local body to raise money for projects such as water supply, sewerage or roads.
Credit ratings
- Credit rating
- A credit rating is a rating agency's opinion of how likely an issuer is to pay a bond's interest and principal in full and on time, on a scale from AAA (highest safety) to D (in default).
- AAA rating
- An AAA rating means the rating agency sees the highest degree of safety regarding timely payment of interest and principal, and the lowest credit risk. It is the agency's opinion on the chance of default, not a guarantee.
- AA rating
- An AA rating means the rating agency sees a high degree of safety regarding timely payment of interest and principal, and very low credit risk. It is the agency's opinion on the chance of default, not a guarantee.
- A rating
- An A rating means the rating agency sees an adequate degree of safety regarding timely payment of interest and principal, and low credit risk. It is the agency's opinion on the chance of default, not a guarantee.
- BBB rating
- A BBB rating means the rating agency sees a moderate degree of safety regarding timely payment of interest and principal, and moderate credit risk. It is the agency's opinion on the chance of default, not a guarantee.
- BB rating
- A BB rating means the rating agency sees a moderate risk of default regarding timely payment of interest and principal; it is below investment grade. It is the agency's opinion on the chance of default, not a guarantee.
- B rating
- A B rating means the rating agency sees a high risk of default regarding timely payment of interest and principal. It is the agency's opinion on the chance of default, not a guarantee.
- C rating
- A C rating means the rating agency sees a very high risk of default regarding timely payment of interest and principal. It is the agency's opinion on the chance of default, not a guarantee.
- D rating
- A D rating means the bond is in default, or the rating agency expects it to be in default soon. It is the agency's opinion on the chance of default, not a guarantee.
- Investment grade
- An investment grade bond is one rated BBB- or higher by a credit rating agency. Bonds rated BB+ or lower are below investment grade, also called speculative or high-yield.
- Rating outlook
- A rating outlook is the rating agency's view of which way a rating may move over the next one to two years: Stable (no change expected), Positive (may go up), Negative (may go down) or Developing (could go either way).
- Rating downgrade
- A rating downgrade is when a rating agency lowers a bond's rating, for example from AA to AA-, because it now sees a higher risk that interest or principal will not be paid in full and on time.
- Credit enhancement (CE)
- "(CE)" after a rating, as in "AA (CE)", means the rating depends on credit enhancement from a third party, such as a guarantee from a parent company or a bank. Without it, the bond would be rated lower.
- Bond default
- A bond default is when the issuer does not pay interest or principal in full on the due date. Even a one-day delay is a default, and rating agencies then rate the bond D.
Coupon, price and yield
- Coupon rate
- The coupon rate is the yearly interest a bond pays, as a percentage of its face value. A ₹1,000 NCD with a 9% coupon pays ₹90 a year, whatever price you paid for it.
- Yield to maturity (YTM)
- Yield to maturity is the yearly return you earn if you buy a bond at today's price, hold it to maturity, and every payment of interest and principal is made on time. It accounts for the price you pay, the coupons and the time to maturity.
- Current yield
- Current yield is a bond's yearly coupon divided by its market price. A 9% bond bought at ₹1,050 per ₹1,000 of face value has a current yield of 90 ÷ 1,050 = 8.57%.
- Face value
- Face value is the amount the issuer promises to repay for each bond at maturity, and the amount the coupon is calculated on. Publicly issued NCDs in India usually have a face value of ₹1,000.
- Accrued interest
- Accrued interest is the coupon earned since the last interest payment date. When you buy a bond between payment dates, you pay the seller this amount on top of the price, and you then receive the full next coupon.
- Clean price and dirty price
- The clean price is a bond's price without the interest earned since the last coupon; the dirty price is the clean price plus that accrued interest. The buyer pays the dirty price.
- Duration
- Duration measures how sensitive a bond's price is to interest rates. A modified duration of 4 means the price falls about 4% if yields rise by one percentage point, and rises about 4% if yields fall by one point.
- Credit spread
- A credit spread is the extra yield a corporate bond pays over a government security of the same maturity. It is the market's price for the risk that the company may not pay.
Issuing, trading and investor protection
- ISIN
- An ISIN (International Securities Identification Number) is a 12-character code that identifies one security. Every series of bonds or NCDs has its own ISIN, which is how you find it on BSE, NSE, NSDL and in your demat account.
- Private placement of bonds
- A private placement is a bond issue offered to a limited group of investors, mostly institutions, instead of the general public. Most corporate bonds in India are raised this way.
- Public issue of NCDs
- A public issue of NCDs is offered to everyone through a prospectus, much like a share IPO. You can apply through your bank (ASBA) or the UPI route, usually from ₹10,000, and the NCDs are listed on BSE or NSE after allotment.
- Listed and unlisted bonds
- Listed bonds are admitted to trading on BSE or NSE and must follow SEBI's disclosure rules; unlisted bonds are not traded on an exchange and carry fewer disclosure obligations.
- Debenture trustee
- A debenture trustee is a SEBI-registered entity, usually a bank's trustee company, appointed to protect the interests of NCD holders. It holds the security, monitors the issuer and acts for holders if the issuer defaults.
- Security cover (asset cover)
- Security cover, or asset cover, is the value of the assets charged to secured NCD holders divided by the amount owed to them. A cover of 1.10 times means ₹110 of assets for every ₹100 owed.
- Debenture redemption reserve (DRR)
- A debenture redemption reserve is an amount a company sets aside from its profits to help repay debentures, under section 71 of the Companies Act, 2013.
- Record date
- The record date is the date on which the issuer checks who holds the bond. Whoever holds it on that date receives the next interest or principal payment, even if they sell before the payment date.
- Call option and put option
- A call option lets the issuer repay a bond before maturity on set dates; a put option lets the investor ask for early repayment. Both are written into the offer document.
- Online bond platform (OBPP)
- An online bond platform provider is a website or app, run by a SEBI-registered stock broker, that sells listed bonds and NCDs to individual investors. SEBI has regulated these platforms since November 2022.
This page is for information only. It is not investment advice, a credit rating or a recommendation to buy, sell or hold any security. Facts are taken from the issuer's own documents and the sources linked on this page; check them with the source before investing.
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