In today’s volatile market, if you are looking for an investment that will give you both regular income and capital protection over a fixed period of time, then a straight bond can be an excellent option. This traditional bond type is beneficial for long-term investors, retired people and those who want stable returns while being risk averse.
In this blog, we will tell you how a straight bond works, what are its special features, what are the benefits, and what risks need to be kept in mind – that too in simple language and from a practical perspective.
What is a Straight Bond?
Straight Bond is a simple fixed income security in which the investor gets a fixed coupon payment (interest) at fixed intervals and the entire principal is returned on maturity.Unlike convertible bonds, it does not offer the option to convert into equity, and the issuer cannot redeem it before maturity (non-callable). It is also called “Plain Vanilla Bond” because it does not have any complications.
How Does It Work ?
When you invest in a straight bond, you basically give a loan to the company or government issuing the bond for a fixed period of time. In return, you get a fixed interest every 6 months or annually. When the bond matures, your entire principal is returned to you.
For example, if you invest ₹1 lakh in a 5-year bond at 8% coupon rate, you will earn ₹8,000 interest every year and get back ₹1 lakh after 5 years.
Straight Bond vs Other Bonds
| Features | Straight Bond | Callable Bond | Convertible Bond |
|---|---|---|---|
| Coupon Rate | Fixed | Fixed/Floating | Fixed/Reduced |
| Maturity | Fixed | The issuer may call the issuer before time | Fixed, but conversion option |
| Risk Level | Less | A little more | More (Link to Equity) |
| Conversion/Call Option | No | Yes | Yes |
Key Features of a Straight Bond
Straight Bond is considered a stable and transparent investment option, especially for investors who prefer regular income and capital protection. Below we explain some of its important features in a simple and professional manner:
1. Fixed Coupon Payments
In Straight Bond, you get a fixed interest (coupon) every year or every 6 months. These returns are pre-determined, which keeps your income stable.
Example: If the coupon rate is 7% and you have bought a bond of ₹1 lakh, then you will get ₹7,000 interest every year.
2. Fixed Maturity Date
Every Straight Bond has a fixed period – like 3, 5 or 10 years. On this date your entire principal is returned. This makes it easier for the investor to plan his funds.
3. Non-Callable Nature
The special thing about Straight Bond is that the institution issuing it cannot withdraw it before maturity. That is, you get the guarantee of both the fixed interest and the period, due to which there is no sudden change in the return.
4. Credit Rating Dependency
The safety of such bonds depends largely on the credit rating of the issuer. Bonds with better ratings (such as AAA) are considered more secure. Before investing, definitely check the ratings of agencies like CRISIL, ICRA or S&P.
5. Secondary Market Liquidity
Although straight bonds are usually bought for hold-to-maturity, they can also be sold in NSE/BSE or over-the-counter (OTC) markets. Some bonds have good liquidity, while others have limited liquidity-so consider this aspect as well before buying.
Read Also: What Is Foreign Currency Convertible Bonds (FCCB)?
Benefits of Investing in Straight Bonds
It is ideal for investors who want to add a low-volatility and tax-efficient option to their portfolio.
- Predictable Income Stream : A straight bond pays you fixed interest at fixed times, say, a 7% coupon every year. It is ideal for those looking for passive income after retirement or while working.
- Capital Preservation : The very nature of bonds is such that the principal amount of your investment is protected unless the issuer defaults. Hence, it is much safer than high-risk options like equities.
- Simplicity & Transparency : A straight bond is free from any kind of complexity (such as conversion, call or derivative link). This gives the investor complete transparency about when and how much return they will get.
- Portfolio Diversification : If you have invested all your money in the stock market or real estate, then bonds provide stability to your portfolio. This reduces your overall risk.
- Low Correlation with Stocks : The performance of bonds is quite different from the stock market. So even when the stock market falls, bonds continue to give you a fixed return it becomes a kind of hedge.
Real-Life Case Study:
Sandeep is a 55-year-old retiring employee of a private company. He invested ₹10 lakh in a 5-year AAA rated straight bond with a coupon rate of 7.5%. This started giving him a steady income of ₹75,000 every year, and after 5 years he got his entire principal back safely. This became an important part of his retirement plan.
Read Also: Benefits of Investing in Bonds
Risks Associated with Straight Bonds
Although straight bonds are considered a stable and safe investment option, there are some risks associated with it which must be assessed before investing. Below we are understanding these major risk factors in a simple and professional way:
1. Interest Rate Risk
The prices of bonds and interest rates have an inverse relationship. When interest rates rise in the market, the attractiveness of old straight bonds decreases because their coupon is fixed. This can reduce their market value.
Example : You invested in a bond with a 7% coupon, but the new rates in the market became 8%, then your bond will trade at a discount. Floating rate bonds perform better in this situation because their coupon keeps changing according to the market rate.
2. Credit Risk
If the financial position of the company issuing the bond weakens or it defaults, then you may have trouble getting interest or principal. That is why you should check the credit rating (like AAA, AA) before investing.
3. Inflation Risk
If the inflation rate becomes very high, then the fixed coupon you get from your bond actually reduces.
Example: Even a bond with 6% interest will seem ineffective if the inflation rate is above 7%.
4. Liquidity Risk
Not every straight bond can be sold easily. If you suddenly need money and the demand for the bond in the market is low, then you may have to sell it at a loss.
5. Reinvestment Risk
If you want to reinvest the interest you get from the coupon, and by then the market rate has decreased, then your total return may decrease. This is especially seen in long-term bonds.
Who Should Invest in Straight Bonds?
- Low-risk investors : For those who want to keep their capital safe and prefer to stay away from the volatility of the stock market, Straight Bond is an ideal option. It provides fixed income, which reduces uncertainty in returns.
- Retired and senior citizens : Retired people who need stable and reliable income every year can get regular coupon income from this bond. This helps them meet their monthly needs.
- Medium to long-term investors : If your investment period is between 3 to 10 years and you are planning without early exit, then straight bond proves to be a stable and planning-friendly option.
- Those seeking stability in portfolio : For investors whose portfolio is predominantly in equities, the bond acts as a balancing tool and provides protection from volatility.
- Fixed income planners : For those who want to plan their income in advance, this bond offers a reliable and easy structure.
Read Also: What Are Corporate Bonds?
Tips Before Investing in Straight Bonds
- Check the credit rating : It is very important to check the credit rating of any straight bond before investing in it. Agencies like CRISIL, ICRA, S&P and Moody’s rate the credit quality of the issuer. Bonds with AAA rating are considered the safest, while low-rated bonds have a higher risk of default.
- Understand the Yield to Maturity (YTM) : Investing just by looking at the coupon rate is not enough. YTM i.e. Yield to Maturity tells you how much total return you will get if you hold the bond till maturity. It is calculated keeping in mind both the buy price and the coupon.
- Keep diversity in issuers : Avoid investing all the money in a single company or sector. Always spread the risk by investing in different companies and government issues.
- Keep an eye on macroeconomic factors : Factors like repo rate, inflation rate, fiscal deficit directly affect the bond yield. Keeping an eye on these helps in making the right decision while investing.
- Choose the right investment platform : You can buy straight bonds through the RBI Retail Direct portal, NSE/BSE bond platform, or approved brokers. If you want to avoid direct investment, you can also invest through mutual funds.
Read Also: What are Social Bonds?
Conclusion
Straight bonds are a traditional investment option that offer fixed returns and capital protection. Due to their simplicity and stability, they are favored by investors who prefer low risk and long-term planning. Amid market uncertainties, these bonds serve as a source of secure income. However, investors should consider credit risk, as the issuer’s ability to meet interest and principal payments depends on their financial strength. Maximizing the benefits of straight bonds requires careful attention to factors such as maturity period, credit rating, and the credibility of the issuer.
Frequently Asked Questions (FAQs)
What is a straight bond?
A straight bond is a bond that pays fixed interest at a fixed time and returns the entire capital on maturity.
Is straight bond a safe investment?
Yes, if the issuer has a good credit rating, it is a safe and stable means of income.
How do straight bonds generate returns?
They provide returns through regular fixed coupon (interest) and return of principal on maturity.
Can straight bonds be traded in the market?
Yes, they can be bought or sold in the secondary market, but the prices depend on the market rate.
Who should consider investing in straight bonds?
This is a better option for investors who want stable income and capital protection.
