
<p><em>From interest rate risk to credit risk, here are the risks that can stand between your bond&#8217;s promised return and your actual payout.&nbsp;&nbsp;</em>&nbsp;</p>



<p>In the last chapter,&nbsp;Mr.&nbsp;Financewala&nbsp;learnt how a&nbsp;bond’s yield&nbsp;helps in reflecting the true return he can receive from a bond. But&nbsp;in the process of learning&nbsp;this, he had overlooked one of the most fundamental aspects of investing: assessing the risks associated with the investment&nbsp;</p>



<p>As he revisited&nbsp;his&nbsp;shortlisted bond options, he questioned,&nbsp;&#8220;Bonds seem stable, but are they really risk-free?&#8221;&nbsp;&nbsp;</p>



<p>Curious, he opened&nbsp;his laptop once again, this time&nbsp;to&nbsp;uncover the risks that could&nbsp;potentially&nbsp;impact&nbsp;him.&nbsp;&nbsp;&nbsp;</p>



<p>In this chapter, we break down the key risks involved in bonds, such as interest rate risk, credit risk, reinvestment risk, and more, so you can evaluate bonds with a complete picture.&nbsp;</p>



<h2 class="wp-block-heading"><span class="ez-toc-section" id="What_Are_the_Risks_in_Bonds"></span>What Are the Risks in Bonds?&nbsp;&nbsp;<span class="ez-toc-section-end"></span></h2>



<p><a href="https://www.jiraaf.com/blogs/bond-insights/what-is-a-bond" target="_blank" rel="noreferrer noopener">Bonds</a>&nbsp;are seen as a&nbsp;relatively stable&nbsp;investment option when compared to more volatile asset classes like equities, as they provide&nbsp;regular&nbsp;payouts with&nbsp;a defined repayment structure.&nbsp;&nbsp;&nbsp;</p>



<p>However, like any investment, bonds are not completely free of risk. The nature and extent of these risks may vary depending on the issuer, tenure, and market conditions, but they do exist.&nbsp;</p>



<h3 class="wp-block-heading"><span class="ez-toc-section" id="Interest_Rate_Risk_in_Bonds"></span>Interest Rate Risk&nbsp;in Bonds&nbsp;<span class="ez-toc-section-end"></span></h3>



<p>As discussed in chapter&nbsp;4,&nbsp;bond prices and interest rates are inversely related. When interest rates rise, bond prices fall, and when rates fall, bond prices rise.&nbsp;&nbsp;</p>



<p>For instance, suppose Mr.&nbsp;Financewala&nbsp;invests in a bond offering a 9% return. A year later, interest rates rise, and new bonds&nbsp;in the markets are now offering&nbsp;11%. His bond, which now offers a lower return than the market, becomes less attractive.&nbsp;And if he chooses to sell it before maturity, he may have to do so at a lower price.&nbsp;</p>



<h3 class="wp-block-heading"><span class="ez-toc-section" id="Duration_and_Modified_Duration_in_Bonds"></span>Duration and Modified Duration in Bonds&nbsp;&nbsp;<span class="ez-toc-section-end"></span></h3>



<p><a href="https://www.jiraaf.com/blogs/bond-insights/how-duration-risk-impacts-bonds" target="_blank" rel="noreferrer noopener">Duration risk</a>&nbsp;is a type of interest rate risk.&nbsp;It measures the extent of how much bond prices move&nbsp;in the event of&nbsp;interest rate change.&nbsp;Interest rate risk also involves how much bond prices move when the rate changes.&nbsp;</p>



<p>Modified Duration&nbsp;is a metric that&nbsp;measures how sensitive a&nbsp;bond&#8217;s&nbsp;price is to changes in interest rates, expressed as a percentage change in price for a 1% change in yield.&nbsp;For example, if a bond has a modified duration of 5, a 1% increase in interest rates could lead to an approximate 5% decline in its price.&nbsp;</p>



<p>This is why&nbsp;<a href="https://this%20is%20why%20long-term%20bonds,%20which%20typically%20have%20higher%20duration,%20tend%20to%20react%20more%20sharply%20to%20interest%20rate%20changes%20compared%20to%20short-term%20bonds.%20%20for%20mr.%20financewala,%20this%20means%20that%20two%20bonds%20may%20face%20the%20same%20interest%20rate%20movement,%20but%20the%20impact%20on%20their%20prices%20can%20be%20very%20different%20depending%20on%20their%20duration./" target="_blank" rel="noreferrer noopener">long-term bonds</a>, which typically have higher duration, tend to react more sharply to interest rate changes compared to&nbsp;<a href="https://www.jiraaf.com/blogs/bond-insights/what-are-short-term-bonds" target="_blank" rel="noreferrer noopener">short-term bonds</a>.&nbsp;</p>



<p>For Mr.&nbsp;Financewala, this means that two bonds may face the same interest rate movement, but the impact on their prices can be&nbsp;very different&nbsp;depending on their duration.&nbsp;</p>



<p>This makes duration an important concept, especially when investing across different tenures. It helps you understand not just if prices will move, but&nbsp;approximately&nbsp;how&nbsp;much they can move&nbsp;for every 1% shift in market rates.&nbsp;</p>



<h3 class="wp-block-heading"><span class="ez-toc-section" id="Credit_Risk_in_Bonds"></span>Credit Risk in Bonds&nbsp;&nbsp;<span class="ez-toc-section-end"></span></h3>



<p>Credit risk is one of the most widely discussed risks in bond investing. It refers to the possibility that the issuer may&nbsp;fail to&nbsp;make interest payments or repay the principal amount on time.&nbsp;&nbsp;</p>



<p>This risk becomes more relevant in&nbsp;<a href="https://www.jiraaf.com/blogs/bond-insights/what-are-junk-bonds" target="_blank" rel="noreferrer noopener">junk bonds</a>&nbsp;(bonds rated below&nbsp;BBB-&nbsp;or Baa3 depending on the rating agency),&nbsp;where yields are higher than those of&nbsp;<a href="https://www.jiraaf.com/blogs/bond-insights/investment-grade-bonds" target="_blank" rel="noreferrer noopener">investment-grade bonds</a>.&nbsp;&nbsp;</p>



<p>For example, a lower-rated bond may offer returns of 14% or higher&nbsp;to attract investors like Mr.&nbsp;Financewala. However, these higher returns come with a higher probability of delayed payments or default.&nbsp;If the issuer faces financial difficulty, there could be delays in coupon or principal payments, or, in extreme cases, the issuer may default on the payments.&nbsp;In contrast, investment-grade bonds may offer returns in the range of 8&nbsp;to&nbsp;14%, but with significantly&nbsp;<a href="https://www.crisil.com/content/dam/crisil/our-analysis/publications/default-study/crisil-ratings-annual-default-and-ratings-transition-study-fy-2025.pdf" target="_blank" rel="noreferrer noopener">lower default risk</a>.&nbsp;</p>



<p>This is why credit ratings exist. They provide a benchmark for assessing an issuer&#8217;s likelihood of meeting its obligations.&nbsp;</p>



<h3 class="wp-block-heading"><span class="ez-toc-section" id="Rating_Downgrade_Risk_in_Bonds"></span>Rating Downgrade Risk&nbsp;in Bonds&nbsp;<span class="ez-toc-section-end"></span></h3>



<p>A rating downgrade occurs when a&nbsp;<a href="https://www.jiraaf.com/blogs/general/credit-rating-agencies-india" target="_blank" rel="noreferrer noopener">credit rating agency</a>&nbsp;lowers the issuer’s rating due to weakening financial health. This can reduce investor confidence, leading to a fall in bond prices and an increase in yields, even if there is no immediate default.&nbsp;</p>



<h3 class="wp-block-heading"><span class="ez-toc-section" id="Reinvestment_Risk_in_Bonds"></span>Reinvestment Risk&nbsp;in Bonds&nbsp;<span class="ez-toc-section-end"></span></h3>



<p>Reinvestment risk refers to an investor reinvesting the proceeds from a bond, either through a coupon payout or principal repayment, at a lower rate of return.&nbsp;&nbsp;&nbsp;</p>



<p>This primarily happens when interest rates fall.&nbsp;&nbsp;</p>



<p>For instance, if Mr.&nbsp;Financewala&nbsp;is earning 10% annually from a bond and interest rates drop to 7%, any future reinvestment, whether from coupon payments or maturity, may only fetch 7%. Over time, this can reduce his overall returns.&nbsp;&nbsp;</p>



<p>One way to manage this is through better planning, such as&nbsp;<a href="https://www.jiraaf.com/blogs/bond-insights/what-is-a-bond-ladder" target="_blank" rel="noreferrer noopener">laddering</a>&nbsp;bonds&nbsp;across with&nbsp;different maturities. This ensures that not all funds are exposed to the same reinvestment conditions at once.&nbsp;</p>



<h3 class="wp-block-heading"><span class="ez-toc-section" id="Liquidity_Risk_in_Bonds"></span>Liquidity Risk&nbsp;in Bonds&nbsp;<span class="ez-toc-section-end"></span></h3>



<p>Liquidity risk is the ability to sell a bond without significantly affecting its price.&nbsp;&nbsp;</p>



<p>While&nbsp;<a href="https://www.jiraaf.com/blogs/bond-insights/what-are-government-securities" target="_blank" rel="noreferrer noopener">government securities</a>&nbsp;and investment-grade bonds tend to have better liquidity in the secondary markets, some bonds, especially junk bonds, may not have enough buyers and sellers.&nbsp;&nbsp;&nbsp;</p>



<p>To put it simply, if Mr. Financewala holds a junk bond or a less-traded bond and wishes to sell before maturity, he may struggle to sell it quickly or may have to sell it at a discounted price to exit.</p>



<h2 class="wp-block-heading"><span class="ez-toc-section" id="Other_Risks_You_Should_Know_About"></span>Other Risks You Should Know About&nbsp;&nbsp;<span class="ez-toc-section-end"></span></h2>



<p>While the major risks form the core of bond investing, there are a few&nbsp;additional&nbsp;factors that can also influence outcomes over time.&nbsp;</p>



<h3 class="wp-block-heading"><span class="ez-toc-section" id="Sovereign_Risk"></span>Sovereign Risk&nbsp;<span class="ez-toc-section-end"></span></h3>



<p>Sovereign risk refers to the possibility of a government&nbsp;failing to meet&nbsp;its debt obligations. While government bonds are&nbsp;generally considered&nbsp;stable due to sovereign backing, this risk still exists, especially in weaker economies or extreme fiscal situations.&nbsp;</p>



<h3 class="wp-block-heading"><span class="ez-toc-section" id="Inflation_Risk_in_Bonds"></span>Inflation Risk in Bonds&nbsp;<span class="ez-toc-section-end"></span></h3>



<p>Inflation risk arises when rising prices erode the purchasing power of fixed interest income. If inflation exceeds the&nbsp;bond’s&nbsp;return, the real return (after inflation) effectively declines,&nbsp;impacting&nbsp;long-term wealth preservation.&nbsp;</p>



<h3 class="wp-block-heading"><span class="ez-toc-section" id="Regulatory_Risk_in_Bonds"></span>Regulatory Risk in Bonds&nbsp;<span class="ez-toc-section-end"></span></h3>



<p>Regulatory risk refers to changes in laws, taxation policies, or market regulations that can affect bond returns or liquidity. These changes are external and can influence how bonds are issued, traded, or taxed.&nbsp;</p>



<h3 class="wp-block-heading"><span class="ez-toc-section" id="Call_Risk_in_Callable_Bonds"></span>Call Risk in Callable Bonds&nbsp;<span class="ez-toc-section-end"></span></h3>



<p>Call risk exists in&nbsp;<a href="https://www.jiraaf.com/blogs/bond-insights/callable-bonds" target="_blank" rel="noreferrer noopener">callable&nbsp;bonds</a>,&nbsp;where the issuer has the option to repay the bond before maturity. This typically happens when interest rates fall, forcing investors to reinvest their funds at lower rates,&nbsp;impacting&nbsp;overall returns.&nbsp;</p>



<h2 class="wp-block-heading"><span class="ez-toc-section" id="Conclusion"></span>Conclusion&nbsp;&nbsp;<span class="ez-toc-section-end"></span></h2>



<p>With every layer he uncovers, Mr.&nbsp;Financewala’s&nbsp;understanding of bonds becomes sharper. He pulls out a notebook and scribbles down a rough checklist.&nbsp;</p>



<p>Coupon rate (check), YTM (check), Duration (check), Credit rating (check), Liquidity (check),&nbsp;Risk (check).&nbsp;</p>



<p>He caps his pen, looks at the list one more time. He then notices that he&nbsp;hasn’t&nbsp;accounted for the silent partner who has a word to say in every investment he&nbsp;does:&nbsp;tax.&nbsp;&nbsp;</p>



<p>In&nbsp;Chapter 6, we break down how bond returns are taxed in India, because what you earn and what you keep&nbsp;might be&nbsp;two&nbsp;(very)&nbsp;different&nbsp;numbers.&nbsp;</p>



<h2 class="wp-block-heading"><span class="ez-toc-section" id="FAQs_About_Bond_Risks"></span>FAQs About Bond Risks<span class="ez-toc-section-end"></span></h2>



<div class="schema-faq wp-block-yoast-faq-block"><div class="schema-faq-section" id="faq-question-1776961647295"><strong class="schema-faq-question">What is Interest Rate Risk in Bonds?</strong> <p class="schema-faq-answer">Interest rate risk is the possibility that a change in market interest rates will reduce the value of your bond if you need to sell it before maturity.</p> </div> <div class="schema-faq-section" id="faq-question-1776961657511"><strong class="schema-faq-question">How does Interest Rate Risk Affect Bond Prices?</strong> <p class="schema-faq-answer">When interest rates rise, existing bond prices fall, and when rates drop, bond prices rise; the two always move in opposite directions.</p> </div> <div class="schema-faq-section" id="faq-question-1776961667578"><strong class="schema-faq-question">What is Credit Risk in Bond Investing?</strong> <p class="schema-faq-answer">Credit risk is the chance that the bond issuer may delay or default on its coupon payments or principal repayment.</p> </div> <div class="schema-faq-section" id="faq-question-1776961676128"><strong class="schema-faq-question">What is Liquidity Risk in Bond Investing?</strong> <p class="schema-faq-answer">Liquidity risk refers to the inability to buy or sell a bond at the desired price due to a lack of demand and supply.</p> </div> </div>
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<nav><ul class='ez-toc-list ez-toc-list-level-1 ' ><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class="ez-toc-link ez-toc-heading-1" href="#What_Are_the_Risks_in_Bonds" >What Are the Risks in Bonds?&nbsp;&nbsp;</a><ul class='ez-toc-list-level-3' ><li class='ez-toc-heading-level-3'><a class="ez-toc-link ez-toc-heading-2" href="#Interest_Rate_Risk_in_Bonds" >Interest Rate Risk&nbsp;in Bonds&nbsp;</a></li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class="ez-toc-link ez-toc-heading-3" href="#Duration_and_Modified_Duration_in_Bonds" >Duration and Modified Duration in Bonds&nbsp;&nbsp;</a></li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class="ez-toc-link ez-toc-heading-4" href="#Credit_Risk_in_Bonds" >Credit Risk in Bonds&nbsp;&nbsp;</a></li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class="ez-toc-link ez-toc-heading-5" href="#Rating_Downgrade_Risk_in_Bonds" >Rating Downgrade Risk&nbsp;in Bonds&nbsp;</a></li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class="ez-toc-link ez-toc-heading-6" href="#Reinvestment_Risk_in_Bonds" >Reinvestment Risk&nbsp;in Bonds&nbsp;</a></li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class="ez-toc-link ez-toc-heading-7" href="#Liquidity_Risk_in_Bonds" >Liquidity Risk&nbsp;in Bonds&nbsp;</a></li></ul></li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class="ez-toc-link ez-toc-heading-8" href="#Other_Risks_You_Should_Know_About" >Other Risks You Should Know About&nbsp;&nbsp;</a><ul class='ez-toc-list-level-3' ><li class='ez-toc-heading-level-3'><a class="ez-toc-link ez-toc-heading-9" href="#Sovereign_Risk" >Sovereign Risk&nbsp;</a></li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class="ez-toc-link ez-toc-heading-10" href="#Inflation_Risk_in_Bonds" >Inflation Risk in Bonds&nbsp;</a></li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class="ez-toc-link ez-toc-heading-11" href="#Regulatory_Risk_in_Bonds" >Regulatory Risk in Bonds&nbsp;</a></li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class="ez-toc-link ez-toc-heading-12" href="#Call_Risk_in_Callable_Bonds" >Call Risk in Callable Bonds&nbsp;</a></li></ul></li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class="ez-toc-link ez-toc-heading-13" href="#Conclusion" >Conclusion&nbsp;&nbsp;</a></li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class="ez-toc-link ez-toc-heading-14" href="#FAQs_About_Bond_Risks" >FAQs About Bond Risks</a></li></ul></nav></div>


Bonds 105: Risks Involved in Bonds: Interest Rate, Credit & More Explained  


<p><em>Bond yield shows the actual return you earn based on the price you pay, not just the coupon printed on the bond. This guide explains current yield, YTM, and more, so you can evaluate bonds based on real returns, not just headline numbers.</em>&nbsp;</p>



<p>Mr.&nbsp;Financewala&nbsp;is out for lunch with his close friend, Mr.&nbsp;Budgetbhai, who has just received two job offers. Both offer&nbsp;him&nbsp;a CTC of ₹12 LPA.&nbsp;While the first job offer has a higher base salary with fewer allowances, the second job offer has&nbsp;a&nbsp;lower base but more performance bonuses and&nbsp;perks.&nbsp;Explaining this to Mr.&nbsp;Financewala, Mr.&nbsp;Budgetbhai&nbsp;points out, “Both jobs offer the same CTC, but the first one actually puts more money in my pocket every month”.&nbsp;</p>



<p>And somewhere in the middle of that conversation, something clicks for Mr.&nbsp;Financewala.&nbsp;</p>



<p>He realizes that &#8220;Bonds work the same way”.&nbsp;&nbsp;</p>



<p>Two bonds can offer the same coupon rate,&nbsp;similar to&nbsp;how two job offers can show the same CTC. But just as your real income depends on how that CTC translates into in-hand salary, your actual return from a bond depends on the price you pay.&nbsp;That’s&nbsp;what a bond’s yield reflects.&nbsp;</p>



<p>In the last chapter, we discussed various market factors that influences&nbsp;bond prices. However, in chapter 4 of this series, we break down&nbsp;what a bond’s yield is, how it differs from the coupon,&nbsp;and why it is the only number that tells you what you are truly earning from a bond.&nbsp;</p>



<h2 class="wp-block-heading"><span class="ez-toc-section" id="What_is_Bond_Yield"></span>What is Bond Yield?&nbsp;&nbsp;&nbsp;<span class="ez-toc-section-end"></span></h2>



<p>Bond yield&nbsp;tells you the actual return you earn based on the price you pay for a&nbsp;<a href="https://www.jiraaf.com/blogs/bond-insights/what-is-a-bond" target="_blank" rel="noreferrer noopener">bond</a>, not just the coupon written on it.&nbsp;&nbsp;</p>



<p>As we discussed in the last chapter,&nbsp;a bond’s&nbsp;<a href="https://www.jiraaf.com/blogs/bond-insights/coupon-rate" target="_blank" rel="noreferrer noopener">coupon</a>&nbsp;is fixed. But once the bond starts trading in the market, its price changes. And when the price changes, your return changes too. That adjusted return is called yield.&nbsp;</p>



<p>However,&nbsp;there&nbsp;isn’t&nbsp;just&nbsp;<a href="https://www.jiraaf.com/blogs/bond-insights/how-to-calculate-bond-yield" target="_blank" rel="noreferrer noopener">one way to measure yield</a>.&nbsp;Depending on how long you plan to hold the bond and its features, different yield measures are used.&nbsp;</p>



<p>Here are the common yield measures you should know about.&nbsp;&nbsp;</p>



<h2 class="wp-block-heading"><span class="ez-toc-section" id="What_is_Current_Yield_in_Bonds"></span>What is Current Yield in Bonds?&nbsp;&nbsp;<span class="ez-toc-section-end"></span></h2>



<p>Current yield is the simplest form of yield. It tells you the return you earn over the next year based on the bond’s current market price.&nbsp;</p>



<p><strong>Formula:</strong>&nbsp;<br>Current Yield = (Annual Coupon ÷&nbsp;Current&nbsp;Market Price) × 100&nbsp;&nbsp;</p>



<p><strong>Example:</strong>&nbsp;<br>If a bond pays ₹70 annually and is trading at ₹950:&nbsp;<br>Current Yield = 70 ÷ 950 = 7.37%&nbsp;&nbsp;</p>



<h2 class="wp-block-heading"><span class="ez-toc-section" id="What_is_Yield_to_Maturity_YTM"></span>What is Yield to Maturity (YTM)?&nbsp;<span class="ez-toc-section-end"></span></h2>



<p>If current yield captures a moment in time,&nbsp;<a href="https://www.jiraaf.com/blogs/bond-insights/yield-to-maturity-ytm" target="_blank" rel="noreferrer noopener">Yield to Maturity (YTM</a>)&nbsp;reflects the entire journey of the bond.&nbsp;It tells you what you will&nbsp;actually earn&nbsp;over the entire life of the bond, right up to maturity.&nbsp;</p>



<p>YTM accounts for everything:&nbsp;</p>



<ul class="wp-block-list">
<li>Every coupon payment you will receive over the bond&#8217;s tenure </li>
</ul>



<ul class="wp-block-list">
<li>The gain you make if you bought the bond at a discount to its face value </li>
</ul>



<ul class="wp-block-list">
<li>The loss you absorb if you bought it at a premium </li>
</ul>



<ul class="wp-block-list">
<li>The time value of money, because ₹1,000 received three years from now is not worth the same as ₹1,000 in your hands today </li>
</ul>



<p><strong>Formula:</strong>&nbsp;<br>YTM ≈ [C + (F − P) ÷ n] ÷ [(F + P) ÷ 2]&nbsp;&nbsp;</p>



<p>Where:&nbsp;</p>



<ul class="wp-block-list">
<li><strong>C</strong> = Annual coupon payment (in ₹) </li>
</ul>



<ul class="wp-block-list">
<li><strong>F</strong> = Face value of the bond </li>
</ul>



<ul class="wp-block-list">
<li><strong>P</strong> = Current market price of the bond </li>
</ul>



<ul class="wp-block-list">
<li><strong>n</strong> = Number of years to maturity </li>
</ul>



<p><strong>A Practical Example</strong>&nbsp;</p>



<p>Say Mr.&nbsp;Financewala&nbsp;is looking at a bond with the following details:&nbsp;</p>



<ul class="wp-block-list">
<li>Face Value (F): ₹1,000 </li>
</ul>



<ul class="wp-block-list">
<li>Annual Coupon (C): ₹90 (i.e., 9% coupon rate) </li>
</ul>



<ul class="wp-block-list">
<li>Current Market Price (P): ₹950 </li>
</ul>



<ul class="wp-block-list">
<li>Years to Maturity (n): 5 years </li>
</ul>



<p>Plugging into the formula:&nbsp;</p>



<p>YTM ≈ (90 + (1,000 − 950) ÷ 5) ÷ ((1,000 + 950) ÷ 2)&nbsp;</p>



<p>YTM ≈ (90 + 10) ÷ (975)&nbsp;</p>



<p>YTM ≈ 100 ÷ 975&nbsp;</p>



<p><strong>YTM ≈ 10.26%</strong>&nbsp;</p>



<p>Notice what happened here. The bond carries a 9% coupon. But because Mr.&nbsp;Financewala&nbsp;is buying it at ₹950, a discount of ₹50 to its face value,&nbsp;he will receive that ₹50 back at maturity when the issuer repays the full ₹1,000. That&nbsp;<a href="https://www.jiraaf.com/blogs/taxation/capital-gains-tax-india-stcg-vs-ltcg" target="_blank" rel="noreferrer noopener">capital gain</a>, spread across 5 years, pushes his actual return above the coupon rate to 10.26%.&nbsp;</p>



<h2 class="wp-block-heading"><span class="ez-toc-section" id="What_is_Yield_to_Call_YTC"></span>What is Yield to Call (YTC)?&nbsp;<span class="ez-toc-section-end"></span></h2>



<p>Yield to Call (YTC) applies to&nbsp;<a href="https://www.jiraaf.com/blogs/bond-insights/callable-bonds" target="_blank" rel="noreferrer noopener">callable bonds</a>, where the issuer may repay the bond before maturity. Unlike YTM, which assumes the bond runs full term, YTC calculates returns assuming early redemption at the call date.&nbsp;</p>



<p><strong>Formula:</strong>&nbsp;<br>YTC ≈ [C + (Call Price − P) ÷ n] ÷ [(Call Price + P) ÷ 2]&nbsp;</p>



<p><strong>Example:</strong>&nbsp;<br>Face Value = ₹1,000, Coupon = ₹90, Price = ₹950&nbsp;<br>Call Price = ₹1,010, Time = 3 years&nbsp;</p>



<p>YTC ≈ [90 + (1,010 − 950) ÷ 3] ÷ [(1,010 + 950) ÷ 2]&nbsp;</p>



<p>YTC ≈ [90 + 20] ÷ [980]&nbsp;</p>



<p>YTC ≈ 110 ÷ 980&nbsp;<br>YTC ≈ 11.22%&nbsp;</p>



<h2 class="wp-block-heading"><span class="ez-toc-section" id="What_is_Yield_to_Worst_YTW"></span>What is Yield to Worst (YTW)?&nbsp;<span class="ez-toc-section-end"></span></h2>



<p>Yield to Worst (YTW) is the most conservative return measure. It&nbsp;represents&nbsp;the lowest yield you can earn across all&nbsp;possible scenarios&nbsp;(maturity or early call).&nbsp;</p>



<p><strong>Formula:</strong>&nbsp;<br>YTW = Minimum (YTM, YTC, other yields)&nbsp;</p>



<p><strong>Example:</strong>&nbsp;<br>YTM = 10.26%, YTC = 11.22%&nbsp;<br>YTW = 10.26%&nbsp;</p>



<p>YTW acts as your return floor, helping you understand the minimum you can expect before investing.&nbsp;</p>



<h2 class="wp-block-heading"><span class="ez-toc-section" id="Coupon_vs_Yield_Understanding_the_Difference"></span>Coupon vs Yield: Understanding the Difference&nbsp;&nbsp;<span class="ez-toc-section-end"></span></h2>



<figure class="wp-block-table"><table class="has-fixed-layout"><tbody><tr><td><strong>Parameter</strong>&nbsp;</td><td><strong>Coupon Yield</strong>&nbsp;</td><td><strong>Yield</strong>&nbsp;</td></tr><tr><td><strong>Meaning</strong>&nbsp;</td><td>Fixed interest paid on face value&nbsp;</td><td>Actual return based on price paid&nbsp;</td></tr><tr><td><strong>Nature</strong>&nbsp;</td><td>Constant throughout tenure&nbsp;</td><td>Changes with market price&nbsp;</td></tr><tr><td><strong>Basis</strong>&nbsp;</td><td>Calculated on face value&nbsp;</td><td>Calculated on purchase price&nbsp;</td></tr><tr><td><strong>Investor Relevance</strong>&nbsp;</td><td>Indicates income promised&nbsp;</td><td>Indicates real earning&nbsp;</td></tr><tr><td><strong>Market Impact</strong>&nbsp;</td><td>Not affected by price changes&nbsp;</td><td>Moves inversely with price&nbsp;</td></tr></tbody></table></figure>



<h2 class="wp-block-heading"><span class="ez-toc-section" id="Conclusion"></span>Conclusion&nbsp;&nbsp;<span class="ez-toc-section-end"></span></h2>



<p>That evening, Mr.&nbsp;Financewala&nbsp;closed his laptop with a quiet sense of satisfaction. What&nbsp;he&#8217;s&nbsp;learning is no longer just&nbsp;surface-level;&nbsp;it&#8217;s&nbsp;beginning to make sense in depth.&nbsp;Just as he is about to&nbsp;finalize&nbsp;his shortlist, a notification pops up on his phone: &#8220;RBI signals possible rate hike in upcoming policy meeting”.&nbsp;&nbsp;&nbsp;</p>



<p>He pauses. He knows interest rate changes impact bond prices (he learned that in chapter 3). But now the question feels more personal. If rates move, what happens to the yield he just calculated? And what about the issuer? Will everything play out as expected?&nbsp;And just like that, his focus begins to shift to the&nbsp;risks involved in bond investing, which we discuss in the next chapter.&nbsp;&nbsp;&nbsp;</p>



<h2 class="wp-block-heading"><span class="ez-toc-section" id="FAQs_About_Yield_in_Bonds"></span>FAQs About Yield in Bonds<span class="ez-toc-section-end"></span></h2>



<div class="schema-faq wp-block-yoast-faq-block"><div class="schema-faq-section" id="faq-question-1776935734005"><strong class="schema-faq-question">What is bond yield?</strong> <p class="schema-faq-answer">Bond yield is the actual return you earn on a bond based on the price you pay for it.</p> </div> <div class="schema-faq-section" id="faq-question-1776935743193"><strong class="schema-faq-question">What is the difference between coupon and yield?</strong> <p class="schema-faq-answer">Coupon is the fixed interest paid on the bond’s face value, while yield reflects the return based on the bond’s market price.</p> </div> <div class="schema-faq-section" id="faq-question-1776935751510"><strong class="schema-faq-question">What is yield to maturity (YTM)?</strong> <p class="schema-faq-answer">Yield to Maturity (YTM) is the total expected return if you hold a bond until maturity, including both interest payments and any price difference.</p> </div> <div class="schema-faq-section" id="faq-question-1776935761193"><strong class="schema-faq-question">How is current yield calculated?</strong> <p class="schema-faq-answer">Current yield is calculated as (Annual Coupon ÷ Current Market Price) × 100.</p> </div> </div>
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Bonds 104: Yield (The Real Return Behind Bonds Explained)  


<p><em>Bond prices change even though their payouts&nbsp;remain&nbsp;fixed, and this directly&nbsp;impacts&nbsp;your actual returns. This guide explains how bond pricing works, why prices move, and what it means for you as an investor.</em>&nbsp;</p>



<p>As Mr.&nbsp;Financewala&nbsp;explores bonds on&nbsp;Jiraaf, he starts comparing a few options more closely. He starts noticing that the same bond, with the same issuer and coupon, is available at different prices in the secondary market.&nbsp;</p>



<p>When he got to know about&nbsp;different bond types&nbsp;in the last chapter,&nbsp;he&nbsp;thought he had the bonds figured&nbsp;out,&nbsp;but&nbsp;this detail&nbsp;stops&nbsp;him. He tracks the bond over the next couple of days and notices that its price keeps changing in the secondary market, while the coupon payout&nbsp;remains&nbsp;the same.&nbsp;&nbsp;</p>



<p>Puzzled, Mr.&nbsp;Financewala&nbsp;wonders, “If a bond pays a&nbsp;fixed return,&nbsp;why does its price keep moving? And what does that mean for the return an investor&nbsp;actually earns?”&nbsp;</p>



<p>In&nbsp;chapter&nbsp;3&nbsp;of this series, we break down how bond pricing works,&nbsp;so you can understand what&nbsp;works in the background to drive your&nbsp;returns.&nbsp;</p>



<h2 class="wp-block-heading"><span class="ez-toc-section" id="How_are_Bonds_Issued_in_the_Market"></span>How are Bonds Issued in the Market?&nbsp;<span class="ez-toc-section-end"></span></h2>



<p>As a beginner, the most important thing to understand about bond pricing is that every bond is issued at a face value&nbsp;(Par), their price in the secondary market&nbsp;can be categorized in 3 ways:&nbsp;</p>



<ul class="wp-block-list">
<li><strong>Par</strong> <br>When a bond is trading at its face value. For example, a ₹1,000 bond priced at ₹1,000 </li>
</ul>



<ul class="wp-block-list">
<li><strong>Discount</strong> <br>When a bond is trading at a price lower than its face value. For example, a ₹1,000 bond priced at ₹950 </li>
</ul>



<ul class="wp-block-list">
<li><strong>Premium</strong> <br>When a bond is trading at a price higher than its face value. For example, a ₹1,000 bond priced at ₹1,050  </li>
</ul>



<p>These terms describe how a bond is priced&nbsp;relative to its&nbsp;original&nbsp;value.&nbsp;at the time it is issued. But why would the same bond&nbsp;trade&nbsp;at different price levels?&nbsp;</p>



<p>It usually comes down to a combination of factors:&nbsp;</p>



<ul class="wp-block-list">
<li><strong>Prevailing interest rates</strong> <br>If market interest rates rise above the bond’s <a href="https://www.jiraaf.com/blogs/bond-insights/coupon-rate" target="_blank" rel="noreferrer noopener">coupon rate</a>, the bond price will drop to a discount. If they fall below the coupon rate, it will trade at a premium. </li>
</ul>



<ul class="wp-block-list">
<li><strong>Demand from investors</strong> <br>Strong demand in the secondary market can push the price higher, while lower demand may cause the bond to trade at a discount to attract buyers.  </li>
</ul>



<ul class="wp-block-list">
<li><strong>Issuer’s credit profile</strong> <br>If an issuer&#8217;s credit rating improves, the bond may trade at a premium. If their financials weaken, the bond price may drop to a discount to compensate for perceived risk. </li>
</ul>



<p><strong>Note:</strong>&nbsp;If you buy a bond and hold it until maturity, these price fluctuations do not&nbsp;impact&nbsp;your returns. You will continue to receive the&nbsp;regular payouts&nbsp;while you hold the bond,&nbsp;and your principal at maturity as promised.&nbsp;</p>



<p>However, if bonds offer fixed returns, why do people keep buying and selling them?&nbsp;</p>



<h2 class="wp-block-heading"><span class="ez-toc-section" id="Why_Would_Anyone_Buy_or_Sell_Bonds_in_the_Secondary_Market"></span>Why Would Anyone Buy or Sell Bonds in the Secondary Market?&nbsp;<span class="ez-toc-section-end"></span></h2>



<p>The answer lies in how investors use bonds differently, depending on their needs and market expectations.&nbsp;</p>



<ul class="wp-block-list">
<li><strong>Liquidity needs</strong> <br>Not every investor holds a bond until <a href="https://www.jiraaf.com/blogs/bond-insights/maturity-period-in-bonds" target="_blank" rel="noreferrer noopener">maturity</a>. For example, if you need cash before your bond matures, you have the option to sell it in the secondary market. This allows you to access your money without waiting for the full tenure. </li>
</ul>



<ul class="wp-block-list">
<li><strong>Opportunity to earn capital gains</strong> <br>Bond prices move based on broader market forces, especially changes in interest rates. When market interest rates fall, existing bonds with higher coupons become more attractive, leading to higher demand and rising prices. Many investors benefit from this by selling their bonds at a higher price, earning <a href="https://www.jiraaf.com/blogs/taxation/capital-gains-tax-india-stcg-vs-ltcg" target="_blank" rel="noreferrer noopener">capital gains</a> in addition to coupon income. </li>
</ul>



<ul class="wp-block-list">
<li><strong>Portfolio rebalancing</strong> <br>Experienced investors often adjust their portfolios based on changing financial goals, risk appetite, or market conditions. This could mean selling certain bonds and buying others that better fit their current strategy. </li>
</ul>



<p>Apart from the above-mentioned metrics,&nbsp;one of the&nbsp;major&nbsp;factors&nbsp;that&nbsp;influence&nbsp;bond investing decisions&nbsp;are&nbsp;the prevailing interest rates&nbsp;in the market.&nbsp;</p>



<h2 class="wp-block-heading"><span class="ez-toc-section" id="Bond_Price_and_Interest_Rates_Relationship"></span>Bond Price and Interest Rates Relationship&nbsp;&nbsp;<span class="ez-toc-section-end"></span></h2>



<p>Bond prices and interest rates share an inverse&nbsp;relationship. They move in opposite directions.&nbsp;</p>



<ul class="wp-block-list">
<li>When interest rates rise, bond prices fall  </li>
</ul>



<ul class="wp-block-list">
<li>When interest rates fall, bond prices rise  </li>
</ul>



<p>To understand this, think of&nbsp;it&nbsp;from&nbsp;this&nbsp;perspective.&nbsp;</p>



<p>If you hold a bond that offers 8% returns, and new bonds in the market start offering 10%, your bond becomes less attractive. To sell it, you may have to lower its price.&nbsp;</p>



<p>On the other hand, if your bond offers 10% and new bonds offer only 8%, your bond becomes more valuable. Investors may be willing to pay a higher price for it.&nbsp;</p>



<p>At this point, you must understand that the return you earn from a bond is not just about its coupon, but also about the price at which you buy it. This is what we refer to as a&nbsp;bond’s&nbsp;<a href="https://www.jiraaf.com/blogs/bond-insights/bond-price-vs-yield" target="_blank" rel="noreferrer noopener">yield</a>.&nbsp;</p>



<h2 class="wp-block-heading"><span class="ez-toc-section" id="Bond_Price_vs_Yield"></span>Bond Price vs Yield&nbsp;<span class="ez-toc-section-end"></span></h2>



<p>While the coupon rate of a bond&nbsp;remains&nbsp;fixed, the actual return you earn is captured by its&nbsp;yield.&nbsp;</p>



<p>Yield adjusts based on the price you pay for the bond. In simple words:&nbsp;</p>



<ul class="wp-block-list">
<li>When bond prices fall, yields go up  </li>
</ul>



<ul class="wp-block-list">
<li>When bond prices rise, yields come down </li>
</ul>



<p>For example, if a bond pays a fixed ₹80 annually (8% on ₹1,000 face value):&nbsp;</p>



<ul class="wp-block-list">
<li>If you buy it at ₹1,000, your return is 8%  </li>
</ul>



<ul class="wp-block-list">
<li>If you buy it at ₹900, your return is higher than 8%  </li>
</ul>



<ul class="wp-block-list">
<li>If you buy it at ₹1,100, your return is lower than 8%  </li>
</ul>



<p>This changing return is what we refer to as yield.&nbsp;</p>



<p>One commonly used measure here is&nbsp;<a href="https://www.jiraaf.com/blogs/bond-insights/yield-to-maturity-ytm" target="_blank" rel="noreferrer noopener">Yield to Maturity (YTM)</a>. It&nbsp;represents&nbsp;the total return you can expect if you hold the bond until maturity, considering both the coupon payments and the price at which you&nbsp;purchased&nbsp;it.&nbsp;</p>



<h2 class="wp-block-heading"><span class="ez-toc-section" id="Conclusion"></span>Conclusion&nbsp;&nbsp;<span class="ez-toc-section-end"></span></h2>



<p>By now, Mr.&nbsp;Financewala&nbsp;understands one thing clearly: if he buys a bond and holds it until maturity, the income is predictable.&nbsp;</p>



<p>But most investors&nbsp;don’t&nbsp;always wait for new bond&nbsp;issuances. Most people invest in bonds that are already trading; bonds that have moved or have been&nbsp;repriced.&nbsp;</p>



<p>Which means investors&nbsp;don’t&nbsp;step in at the start, but&nbsp;midway.&nbsp;</p>



<p>And that changes everything.&nbsp;</p>



<p>In the&nbsp;next chapter, we break down how bond yield&nbsp;works&nbsp;in detail, so you can understand what you&nbsp;earn when you buy a bond at any point in time.&nbsp;</p>



<h2 class="wp-block-heading"><span class="ez-toc-section" id="FAQs_About_Bond_Pricing"></span>FAQs About Bond Pricing<span class="ez-toc-section-end"></span></h2>



<div class="schema-faq wp-block-yoast-faq-block"><div class="schema-faq-section" id="faq-question-1776933920799"><strong class="schema-faq-question">What is bond pricing?</strong> <p class="schema-faq-answer">Bond pricing refers to the market value at which a bond is issued or traded in the market, based on factors like interest rates, demand, and issuer profile.</p> </div> <div class="schema-faq-section" id="faq-question-1776933934056"><strong class="schema-faq-question">How does bond price relate to interest rates?</strong> <p class="schema-faq-answer">Bond prices and interest rates move in opposite directions, when interest rates rise, bond prices fall, and vice versa.</p> </div> <div class="schema-faq-section" id="faq-question-1776933945089"><strong class="schema-faq-question">Why do bond prices change?</strong> <p class="schema-faq-answer">Bond prices change due to factors like interest rate movements, demand and supply, inflation expectations, and changes in the issuer’s credit profile.</p> </div> <div class="schema-faq-section" id="faq-question-1776933962272"><strong class="schema-faq-question">What is the difference between bond price and face value?</strong> <p class="schema-faq-answer">Face value is the original value of the bond at issuance, while bond price is the current market value at which it is traded.</p> </div> </div>
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<nav><ul class='ez-toc-list ez-toc-list-level-1 ' ><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class="ez-toc-link ez-toc-heading-1" href="#How_are_Bonds_Issued_in_the_Market" >How are Bonds Issued in the Market?&nbsp;</a></li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class="ez-toc-link ez-toc-heading-2" href="#Why_Would_Anyone_Buy_or_Sell_Bonds_in_the_Secondary_Market" >Why Would Anyone Buy or Sell Bonds in the Secondary Market?&nbsp;</a></li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class="ez-toc-link ez-toc-heading-3" href="#Bond_Price_and_Interest_Rates_Relationship" >Bond Price and Interest Rates Relationship&nbsp;&nbsp;</a></li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class="ez-toc-link ez-toc-heading-4" href="#Bond_Price_vs_Yield" >Bond Price vs Yield&nbsp;</a></li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class="ez-toc-link ez-toc-heading-5" href="#Conclusion" >Conclusion&nbsp;&nbsp;</a></li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class="ez-toc-link ez-toc-heading-6" href="#FAQs_About_Bond_Pricing" >FAQs About Bond Pricing</a></li></ul></nav></div>


Bonds 103: How Bond Pricing Works? 

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Mastering Portfolio Diversification

Explore Jiraaf, a pioneering platform offering a wide range of alternative fixed-income investment opportunities. Jiraaf’s Unique Offerings empower investors with access to a diverse selection of alternative fixed-income products, including listed and unlisted debt instruments. Its user-friendly platform provides seamless access to investment opportunities, along with robust risk management tools.

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Webinar hosted by Jiraaf's co-founders, Saurav Ghosh and Vineet Agrawal, to explore the benefits of fixed-income bonds and how they can diversify your investment portfolio. Whether you're a seasoned investor or just starting out, this webinar provides you with the insights and tools you need to make informed decisions and maximize your returns.

Strategic Financial Planning

In a bearish market, protecting your portfolio is crucial. Fixed-income investments offer stability, predictable returns, and a hedge against market volatility. But how do you choose the right fixed income options? In this exclusive webinar, Prateek Goyal (Chief Strategy Officer, Jiraaf) and Sheetal Jain (Deputy General Manager, Jiraaf) share expert insights on the role of bonds and debt instruments in turbulent times, how fixed income compares to other asset classes, and  how to protect and grow your portfolio.

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What is an OBPP? How does it make bond investing easier? And how can you use fixed-income securities to strengthen your portfolio?  <br/> Watch as Azhar Pathan (Deputy General Manager, Customer Relations) and Gautam Bagga (Assistant General Manager, New Initiatives) break down what OBPP platforms are, their benefits, the opportunities they offer investors, and other common queries. Learn the role OBPPs play in bond investing, how you can successfully diversify your portfolio with fixed income options, and gain insights about the bond market. Don’t miss out!

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Missed the Webinar on FD vs. Bonds? No worries, we've got you covered.<br/> Watch Sheetal Jain (Deputy General Manager, Jiraaf) and Gautam Bagga (Assistant General Manager, Jiraaf), as they break down the pros and cons of FDs and bonds and explain how a smart mix of both can maximize your portfolio’s potential.<br/> Learn which suits your goals better—FDs or bonds, understand the trade-offs between both their risk and returns, how to create a balanced portfolio, and how you can maximize your gains with Jiraaf!  

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In this insightful webinar, join TCA Arvind Rangarajan – Founder, Arth Padarth Finance & Factors Pvt. Ltd. And Saurav Ghosh – Co-founder, Jiraaf explore how Pool of Trade Receivables (PTCs) can be a powerful addition to your fixed income investment strategy. Learn from industry experts about the fundamentals of PTCs, their role in supply chain financing, and how they can offer portfolio diversification with steady returns.

How PTCs (Pool of Trade Receivables) Can Enhance Your Fixed Income Portfolio

An insightful session with Mr. Saurav Ghosh, Co-Founder of Jiraaf, and Mr. Parth Mehta, Founder's Office, Jiraaf. They delve into the world of corporate bonds, explaining how bonds can help you diversify your investment portfolio and mitigate risk. In this video, you'll learn the basics of corporate bonds, the benefits of diversification, choosing the right bonds, and a Q&A session.