Fixed income security
Also written Fixed income securities · Fixed income instrument · Bond
A debt instrument under which the issuer promises a fixed coupon at regular intervals and repayment of the face value at maturity — government bonds, corporate bonds, debentures and T-bills.
In plain language
A bond is a loan you can buy and sell. The issuer borrows; the investor lends; and the terms are fixed in advance.
The workbook says bonds are called fixed income securities because they create fixed financial obligations on the issuer: to pay a fixed amount, the coupon, periodically, and to repay a fixed principal, the face value, on the maturity date. Those fixed obligations are "the most defining characteristic" of a bond.
Chapter 1 adds why investors want them: a predictable income stream, typically lower volatility than equities, and capital preservation when held to maturity — provided the issuer does not default.
How it works
Features (Chapter 4, section 4.2).
- Coupon — a fixed percentage of face value. Mostly paid semi-annually, though some bonds pay annually, quarterly or monthly.
- Zero coupon bonds pay no coupon; they are issued below face value and repay face value at maturity.
- Perpetual bonds have no maturity date.
- Money market securities have maturity of one year or less; capital market securities have maturity above one year. A long bond becomes a money market security as it approaches maturity.
- G-Secs are normally coupon-bearing, with semi-annual interest and a tenor of 5 to 30 years.
Bonds versus debentures in India. Long-term debt issued by the Government of India, State Governments, their undertakings or development financial institutions is called a bond; instruments issued by other entities are debentures.
Who regulates what. RBI regulates government securities and securities issued by banks and NBFCs; SEBI regulates non-government, mainly corporate, debt issues. G-Secs are the largest segment; corporate bonds are next, and their primary market is basically a private placement market with very small retail participation.
Price behaviour. Price and market interest rates move inversely. If the market rate is above the coupon, the bond trades at a discount; below the coupon, at a premium. Lower-coupon and longer-maturity bonds are more volatile.
Tax in PMS (Chapter 11). Debt LTCG if held more than 24 months, taxed at 12.5% under Section 112 with indexation removed since July 2024; STCG and interest at slab rates.
A worked example
A PMS client holds a corporate bond with face value ₹1,000, 12% coupon, semi-annual payments, five years to maturity — the bond used in Chapter 4's illustrations.
Cash flows promised.
- Coupon every six months: ₹1,000 × 12% ÷ 2 = ₹60
- Ten coupons over five years = ₹600
- Face value at maturity = ₹1,000
What the market says about it. Chapter 4 prices it at ₹975 — below face value — with a YTM of 12.69%. Because the price is below par, the market rate for such a bond is above the 12% coupon, exactly the discount rule in section 4.2.
What can go wrong.
| Risk | How it shows up |
|---|---|
| Interest rate risk | Rates rise → the ₹975 price falls if sold before maturity |
| Reinvestment risk | Rates fall → the ₹60 coupons earn less when reinvested |
| Credit risk | Issuer delays or defaults → coupons and principal at risk |
| Inflation risk | Fixed ₹60 buys less each year |
Held to maturity with no default, the client gets exactly what was promised — which is the capital preservation benefit Chapter 1 describes.
Why NISM asks about it
Chapter 4 (Investing in Fixed Income Securities, 5% weightage) is built around this term, and Chapter 1, section 1.6.2, introduces it among investment types. Chapter 4's sample questions test default risk on Central Government securities (gilt-edged), reinvestment risk, and call and put features. Chapter 11 tests debt taxation in PMS; Chapter 10 requires debt and money market securities in PMS portfolios to be valued using APMI-empanelled valuation agencies.
Common exam traps
- Coupon is a percentage of face value, not of market price.
- Market rate above coupon → discount; below coupon → premium. Reversing these is the classic error.
- "Bond" and "debenture" are different in Indian usage. Government, their undertakings and DFIs issue bonds; other entities issue debentures.
- Money market = one year or less. Exactly one year is still money market.
- G-Sec coupons are semi-annual, tenor 5 to 30 years.
- The corporate bond primary market is mainly private placement, not public issues.
- Holding periods for debt in PMS. The workbook teaches more than 24 months for LTCG. The Income Tax Act applies a 12-month period to listed securities, so check the security type in practice; for the paper, use the workbook's rule.
Where this is taught
- Series IV · Chapter 1: Introduction to Interest Rate, Interest Rate Instruments and Fixed Income Marketsintroduced here
- Series XXI-B · Chapter 4: Investing in Fixed Income Securitiesintroduced here
- Series V-D · Chapter 18: Introduction to Interest Rate, Interest Rate Instruments and Fixed Income Marketsintroduced here
- Series XXI-A · Chapter 4: Investing in Fixed Income Securitiesintroduced here
Related terms
- Credit ratingAn opinion on how likely a borrower is to service an instrument on time, reduced to a symbol by a SEBI-registered rating agency — and reviewed continuously, not fixed for the life of the bond.
- Interest rate riskThe risk that an investor in a debt instrument loses return because rates rise — existing instruments carrying the old, lower coupon fall in value until their yield matches the new market rate.
- Reinvestment riskThe risk that the coupons or other intermediate cash flows from an investment have to be put back to work at a lower rate than the original investment earned, pulling the total return below the promised yield.
- Yield to MaturityThe single discount rate at which a bond's future coupons and redemption amount add up to exactly its market price today — the return you actually earn if you hold it to maturity.
- Coupon rateThe rate of interest a bond pays, applied to its face value and never to its market price — which is why the coupon tells you the cash flow but not the return.
- Day count conventionThe rule for counting days in a holding period to calculate accrued interest. Indian bonds use 30/360; the Indian money market, including T-bills, uses actual/365.
- Money Market InstrumentsDebt instruments with maturity of one year or less. Under the PM Regulations they include commercial paper, trade bills, treasury bills, certificates of deposit and usance bills.
- Amortising bondsBonds in which the borrower repays principal over the life of the bond along with interest, rather than all at maturity — so the stated maturity is only the date of the last instalment.
- Tax-free bondsBonds issued in the past by infrastructure public sector enterprises such as HUDCO, NHAI, PFC, REC and IRFC whose interest is not taxed, so they carry a lower coupon than comparable taxable bonds.
- Capital PreservationAn investment objective of minimising or avoiding any erosion of the principal. Pursued by highly risk-averse investors and by anyone who needs the money in the immediate short term.
- IndentureThe legal agreement between a bond issuer and its bondholders setting out every term of the debt — par value, coupon, maturity, collateral, seniority, options and covenants.
- CovenantsClauses in a bond's indenture specifying the rights of bondholders and restrictions on the issuer. Positive covenants say what the issuer must do; negative covenants say what it must not do.
- DebentureIn Indian usage, a long-term debt instrument issued by a company, bank or financial institution — as opposed to a bond, the term reserved for debt issued by a government or its undertakings.