If you aren't satisfied with your bank savings and wish to get better returns without taking high risks, bonds are a good option at the moment. You can invest your money in government and corporate bonds. Government bonds are considered safe while corporate bonds carry risk. However, the latter promises a better return.
What is a Bond?
It is important for you to understand that a bond is a type of loan. Governments or corporations issue bonds to raise debt. Suppose a company needs a loan for business and does not want to borrow from the bank, it can do so via bonds. Before issuing the bond, it decides the validity and annual interest coupon.
Bonds can be bought in two ways. Primary market and secondary market. In the secondary market, you will find several broker-type websites, but in terms of security, only government bonds and PSUs are convenient.
What is the Yield?
The return on bond yield is the amount determined on the basis of the face value of the bond (the initial fixed price). This is the amount at which the bonds are issued and returned to the holder at the time of maturity.
The interest earned on the bond is called the coupon rate. An increase in the bond yield means a higher return from the bond. The price and the bond yield are exactly opposite things.
If an investor buys one bond at a face value of Rs. 100 and sells it to someone at Rs. 90, the new investor will also get a pre-determined interest rate of 8% per annum. This interest rate is applicable on the face value (Rs. 100 in this case) and not on the purchased rate (Rs. 90).