Bonds/Debt funds concentrate their investments in debt securities and the principal source of their income is the interest earned on the fixed income securities in the portfolio. The NAV of such funds is directly influenced by the change in the interest rates. With a decline in interest rates, the prices of bonds generally go up, causing an upward movement in the NAV of the fund and vice versa. The bond market is a financial market where the issuance and trading of bonds take place.
Money Market is a market for dealing in monetary assets of short-term nature, generally less than one year. It enables the raising up of short-term funds for meeting temporary shortage of cash and obligations and temporary deployment of excessive funds for earning returns.
Corporate Bond Funds
These funds invest in bonds issued by companies, so as to earn a high income. These are categorized in High Grade Bond Funds (also known as AAA Bond Funds) and High Yield Bond Funds.
A government security (G-Sec) is a debt obligation of the Indian government to fund their fiscal deficit. These instruments are tradable and are issued either by the central or the state government. These securities are offered for short-term as well as for long term.
Floating Rate Funds
These funds provide a hedge to the investors against volatile interest rates. They invest primarily in floating rate debt instruments (aka Floaters) whose interest rates are reset at periodic intervals.
Bond Index Funds
A bond index fund invests in instruments comprising of the underlying bond index in the same proportion, to replicate the return on the same.
Bond valuation is a technique to determine the theoretical fair value of a particular bond. It includes calculating the present value of the bond’s future interest payments and the bond’s value upon maturity. Talking about duration, it is a way of measuring how much bond prices are likely to change if and when interest rates move. Generally the higher the duration of a bond or a bond fund (the longer you need to wait for the payment of coupons and the return of principal), the more its price will drop as interest rates rise.
Some quick facts about the Bond Market:
- Unlike the stock market, the bond market doesn’t have a central place or exchange where stocks are bought and sold. Bonds are generally sold OTC (over the counter).
- Bonds prices can change depending upon the demand & supply factors, change in interest rate or interest rate perception, fiscal deficit etc.
- The yield of a bond is generally given more importance than its actual price.
Hope you found this article useful! Please let us know in the comments section below if you want any specific topic to be covered.
Hope the above study material help you in your preparation. Wait for the next article in this series of Insurance & Financial Market Awareness. Also, consider taking a Free Mock Test of LIC AAO to get a frank assessment of your performance.
LIC AAO Study Material
Topics of Insurance Market Awareness
|1||History of the Insurance sector in India|
|2||Opening Up of the Insurance Sector|
|3||Current Scenario of the Life Insurance Industry|
|4||What is Insurance?|
|5||Principles of Insurance|
|6||An Overview of Life Insurance|
|7||An Overview of General Insurance|
|8||Insurance and Industries/ Business|
|9||All about IRDA|
|10||Roles and Functions of IRDA|
|11||Insurance Regulatory Framework|
|12||An Overview of LIC|
|13||Other institutions in Indian Insurance Market like Insurance Ombudsman|
|14||An Overview of Bancassurance|
|15||An Overview of ULIPs|
|16||Various Government Insurance Schemes|
|17||Ayushman Bharat Pradhan Mantri Jan Arogya Yojana (AB – PM-JAY)|
|18||Pradhan Mantri Suraksha Bima Yojana (PM – SBY)|
|19||PM Jeevan Jyoti Bima Yojana (PMJJBY)|
|20||PM Fasal Bima Yojana (PM-FBY)|
|21||Other Important Government schemes|
|22||Insurance and Financial Market Awareness Definitions- PDF- Part 1|
Topics of Financial Market Awareness
|1||Indian Financial System- An Introduction|
|2||An Overview of Capital Market|
|3||An Overview of Money Market|
|4||Definitions of Different Types of Money Market Instruments|
|5||Primary and Secondary Market|
|6||Financial Institutions- Banking and Non-Banking|
|7||All about RBI|
|8||Roles and Functions of RBI|
|9||Other Market Regulators like SEBI|
|10||Payments Banks and Small Banks|
|11||Secondary Market and its Instruments|
|12||Mergers, Amalgamations and Takeovers|
|13||Important World Financial Bodies – World Bank, IMF etc.|
|14||An Overview of Bond Market|
|15||Insurance and Financial Market Awareness Definitions- PDF- Part 2|
Wishing you all the best for your preparation!