The size of the Indian bond market is huge, running into a few trillion dollars. Within this huge market, the government, corporates, and other entities issue various types of bonds.
For a retail investor, it can be overwhelming to understand the various types of bonds and which one to choose for investment. In this article, we will look at the categorisation of bonds based on various parameters.
Categorisation of bonds
The categorisation of bonds, based on various parameters, can be done as follows.
1. Issuer: Various entities issue bonds in the debt market. Some of these include:
- The central government that issues treasury bills and dated bonds (government securities or g-secs)
- The state governments that issue state development loans (SDLs)
- The municipal corporations that issue municipal bonds
- The public sector undertakings (PSUs) that issue PSU bonds
- Public sector banks, private banks, NBFCs, etc., that issue corporate bonds
- Private companies that issue corporate bonds, etc.
Bonds issued by the central government, state governments, and municipal corporations are considered less risky. Central government bonds carry a sovereign guarantee of repayment. Hence, usually, the interest rate paid on central government bonds is the lowest. Based on the issuer’s credibility, as the risk increases, the interest rate payable increases.
2. Tenure: Based on the tenure for which the bonds are issued, they can be categorised as follows.
- Short-term bonds: They are issued with a tenure of up to three years. For example, the Central Government issues Treasury Bills with various tenures, including 91, 182, or 364 days.
- Medium-term bonds: These are issued with a tenure ranging between three and 10 years. For example, the RBI used to issue the sovereign gold bonds (SGBs) with a tenure of eight years.
- Long-term bonds: These are issued with a tenure of more than 10 years. For example, the central government issues dated government securities (G-Secs) with tenures 10-40 years. Within long-term bonds, we have perpetual bonds that don’t have any maturity date. They keep paying interest indefinitely.
Specifically based on tenure, usually, the longer the tenure for which a bond is issued, the higher the interest rate paid.
3. Credit rating: The credit rating of a bond reflects how safe it is for an investor to invest in it. In India, credit ratings for bonds are assigned by SEBI-registered credit rating agencies, including CRISIL, ICRA, CARE, etc. For example, the CRISIL rating scale is as follows.
Bonds with a credit rating of BBB- and above are considered to be investment grade. Bonds with these ratings carry a low to moderate risk of default. Investors with a conservative risk profile can consider them.
Bonds with a credit rating of BB+ and below are considered non-investment grade. These bonds are also known as high-yield bonds, speculative bonds, or junk bonds. They carry a higher risk of default. These bonds offer a higher interest rate compared to investment-grade bonds to compensate investors for the higher risk. They are suitable for investors with an aggressive risk profile.
4. Interest type: The interest rate paid on a bond is either fixed or floating. For a fixed-rate bond, the coupon rate remains fixed for the entire tenure, i.e. till maturity. Let us understand with the example of a G-Sec: 7.17% GS 2028.
The above is a 10-year G-Sec issued on 8 January 2018. The bond has been issued with a coupon rate of 7.17%. It will pay a fixed interest rate of 7.17% p.a. throughout the bond tenure till 2028. The interest is paid half-yearly on 8 January and 8 July every year.
For a floating-rate bond, there is no fixed coupon rate. It has a variable coupon rate, which is reset at specified intervals. The reset can be every six months or annually. Let us understand with the example of Floating Rate Savings Bonds (FRSB) issued by the RBI under the Floating Rate Savings Bond 2020 (Taxable) Scheme.
The FRSB coupon rate is linked or pegged with the prevailing National Savings Certificate (NSC) rate with a spread of (+) 35 basis points over the NSC rate. The coupon rate is reset half-yearly on 1 January and 1 July every year.
The current NSC interest rate is 7.70% (as of January 2026). So, the FRSB interest rate is 8.05% (spread of (+) 35 basis points over the NSC rate).
Interest payment frequency
The interest payment frequency on a bond varies. It can be monthly, quarterly, half-yearly, yearly, or on maturity. The interest payment frequency is specified at the time of issuance and remains fixed throughout the bond tenure. Some bond issuers offer variants of the same bond, providing subscribers with the option to choose the interest payment frequency. G-Secs usually pay interest at half-yearly intervals.
Some bonds don’t offer any interest, but are issued at a discount to their face value. They are known as zero-coupon bonds. On maturity, they are redeemed at face value. An investor’s profit is the difference between the price at which they redeemed the bond and the price at which they bought the bond. For example, Government Treasury Bills don’t pay any interest, and are issued at a discount to the face value. On maturity, the Government redeems them at face value.
Security
Based on security offered, bonds can be categorised as secured or unsecured bonds. Secured bonds, as the name suggests, are secured by specified assets. If the bond issuer defaults, these assets can be sold to repay the bondholders. The assets are also known as collateral.
On the other hand, unsecured bonds don’t have any security. The investors have to rely on the bond issuer’s credibility to repay. Secured bonds, due to their collateral, are less risky compared to unsecured bonds. Unsecured bonds pay a higher interest rate to compensate investors for the additional risk they take by investing in them.
Early redemption
Some bonds have clauses that allow for their early redemption. Based on these clauses, the bonds can be categorised as callable or puttable bonds. A callable bond can be redeemed early (called back) by the bond issuer. The bond issuer exercises this option when the market interest rates have fallen. By calling back the bonds, the issuer will avoid paying interest rates higher than the market rate. The issuer can issue new bonds at a lower interest rate, thereby saving on interest costs.
A puttable bond can be sold back (early redemption) by the investor to the bond issuer. The investor exercises this option when market interest rates have increased. By redeeming the bonds, the investor can reinvest the redemption proceeds in new bonds at higher interest rates, thereby earning more.
Callable bonds pay a higher interest rate to compensate the investor for bearing the call risk. Puttable bonds pay a lower interest rate as they give the investor the flexibility to redeem them before maturity in case market interest rates rise.
How does bond categorisation help an investor?
An investor needs to understand bond categorisation as it enables bond selection based on the investor’s needs. Knowing about the issuer, security, and credit rating helps an investor select bonds aligned with their risk profile. Conservative investors can go for government bonds or other those backed by security (collateral). Usually, government bonds and secured bonds have a higher credit rating.
Understanding bond tenures helps the investor map them to their financial goal timeline. Understanding the interest payment frequency helps align bonds with cash flow requirements. Having a put option enables early redemption during times of financial emergency. Thus, understanding bond categorisation empowers the investor to select bonds based on risk profile, financial goal timeline, cash flow requirement, and being prepared for financial emergencies.