From UPSC perspective, the following things are important :
Prelims level : Floating Rate Bonds
Mains level : Not Much
The Government of India has announced the Sale (Re-issue) of Floating Rate Bonds, 2028’.
What are Bonds?
- Bonds are investment securities where an investor lends money to a company or a government for a set period of time, in exchange for regular interest payments.
- Generally, bonds come with a fixed coupon or interest rate. For example, you can buy a bond of Rs 10,000 with a coupon rate of 5%.
- Once the bond reaches maturity, the bond issuer returns the investor’s money.
- Fixed income is a term often used to describe bonds, since your investment earns fixed payments over the life of the bond.
Why are bonds launched?
- Companies sell bonds to finance ongoing operations, new projects or acquisitions.
- Governments sell bonds for funding purposes, and also to supplement revenue from taxes.
What are Floating Rate Bonds?
- A floating rate bond is a debt instrument that does not have a fixed coupon rate, but its interest rate fluctuates based on the benchmark the bond is drawn.
- Benchmarks are market instruments that influence the overall economy.
- For example, repo rate or reverse repo rate can be set as benchmarks for a floating rate bond.
How do floating rate bonds work?
- Floating rate bonds make up a significant part of the Indian bond market and are majorly issued by the government.
- For example, the RBI issued a floating rate bond in 2020 with interest payable every six months. After six months, the interest rate is re-fixed by the RBI.