Start earning 9-11% fixed returns with bonds that are carefully curated.
Short-term bonds mature in one to three years. They carry pre-determined coupon rates and are less risky than stocks and equity. These bonds can be in the form of certificates of deposits, commercial papers etc. On maturity, the bond issuer will pay the principal investment, which is the face value of the bond and interest earned during the bond's tenor. Also, since the maturity is within a short-term time horizon, there is a lesser probability of unpredictable events, which may translate into default risk by the issuer.
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Short Term Bonds can be issued by the government, corporations, fund houses or any other entity. These entities raise capital and finance their ongoing projects by issuing the bonds. The issuance of bonds also ensures a balance in the capital structure. The debt carries a lower risk and does not dilute the existing ownership. They also provide tax benefits to the issuer, unlike equity. Government bonds are sold online and deposit payments electronically.
Short-term bonds mean lower risk for the investors, and therefore, they earn lesser returns than long-term bonds and equity since the money will not be invested for a longer period. Longer periods involve the risk of higher inflation which could reduce the overall return from the bond. The greater risk that overall interest rates could cause the bond’s price to fall.
Hence the returns on the bond depend on the duration of the time until maturity and the current interest rates. When interest rates are increasing, short-term bonds offer higher liquidity.
Short Term bonds have the following features:-
The yield the bond is different from the coupon rate. The yield assumes the interest payments received will be reinvested at the coupon rate if the bond is held up to maturity.
For example: If the bond is priced at ₹920 and the face value of the bond is ₹1000. The annual coupon rate is 10%. Hence interest is paid ₹100 annually, and there are 2 years left until maturity. The Yield to maturity will be equal to 14.92%.
Since short-term bonds generate limited returns they should be incorporated in order to diversify the portfolio. They are ideal for investors who have low-risk tolerance and are afraid of capital erosion. Since they are highly liquid they are more lucrative for the investors who prioritise liquidity over returns. They are ideal for investors who want steady income along with capital preservation.