List of Short Term Bonds

Short Term Bonds can be issued by the government, corporations, fund houses or any other entity. These entities raise capital and finance their ongoing projects by issuing the bonds. The issuance of bonds also ensures a balance in the capital structure. The debt carries a lower risk and does not dilute the existing ownership. They also provide tax benefits to the issuer, unlike equity. Government bonds are sold online and deposit payments electronically.

Short-term bonds mean lower risk for the investors, and therefore, they earn lesser returns than long-term bonds and equity since the money will not be invested for a longer period. Longer periods involve the risk of higher inflation which could reduce the overall return from the bond. The greater risk that overall interest rates could cause the bond’s price to fall.
Hence the returns on the bond depend on the duration of the time until maturity and the current interest rates. When interest rates are increasing, short-term bonds offer higher liquidity.

Short Term bonds have the following features:-

• They offer fixed rates of return. 
• The tenor of the bond ranges between one to three years. 
• The coupon payment can be periodic during the bond's tenure or at the time of maturity.
• They offer higher liquidity since the maturity of these bonds is in the near future. 
• Short Term bonds are less sensitive to interest rate changes. Although they are less sensitive to interest rate changes yet they can have credit risk. 
• The bonds have a credit rating assigned to them, enabling the investor to make an informed decision. 
• Investors can earn income from bonds through capital gains and interest.
  • The Capital gains are the difference in the Sale price and Purchase price of the bond (other than zero coupon bonds), and if these are held for less than 36 months are taxable as Short Term Capital Gains; these will be taxed at the rates applicable to the assessee.
  • The Interest received on the bonds will be taxed as Interest Income under the head “Income from other Sources.”

• Short-term bonds minimise the systematic risk attributable to inflation and interest rate fluctuations. A shorter duration reduces the probability of an unpredictable event. 
• These bonds are highly liquid since they are less volatile, and the investors can get their money back on the redemption from the issuer on maturity. These bonds can also be sold before maturity. 
• They are graded based on the credit rating and therefore carry lower default risk from the issuer's perspective making it more reliable and credit-worthy for investors to invest. 
• These funds can be used as emergency funds as they have shorter maturity periods.

• Short-term bonds offer lesser returns as compared to long-term bonds and equity. 
• Credit Ratings can change during the tenure of the bond. Credit ratings do not immune bonds from default risk altogether.

The yield  the bond is different from the coupon rate. The yield assumes the interest payments received will be reinvested at the coupon rate if the bond is held up to maturity.
For example: If the bond is priced at ₹920 and the face value of the bond is ₹1000. The annual coupon rate is 10%. Hence interest is paid ₹100 annually, and there are 2 years left until maturity. The Yield to maturity will be equal to 14.92%.

Since short-term bonds generate limited returns they should be incorporated in order to diversify the portfolio. They are ideal for investors who have low-risk tolerance and are afraid of capital erosion. Since they are highly liquid they are more lucrative for the investors who prioritise liquidity over returns. They are ideal for investors who want steady income along with capital preservation.