Bonds from scratch · Chapter 12
A perpetual bond that ends in 2029. A 12% bond that pays like 7%. A bond that follows the Nifty, and a bond that arrives in your demat for free. They look strange, but every one of them is a plain bond with one thing changed. This chapter shows the 4 things that can change, what each does to your money, and the one number to ask for before you buy.
Written 18th Oct 2026 · Figures from SEBI, RBI, the Union Budget, rating agencies and company filings, dated where used
On 29th Apr 2024 a reader found a bond on a bond app that seemed to argue with itself:
How can a perpetual bond have a call date? Doesn't perpetual mean that the company will keep paying you interest forever?
tallerballer, TradingQnA, 29th Apr 2024
The bond was real, and both labels were right. To see how, start with the plainest bond there is.
Most of this module has used one kind of bond: it pays a fixed coupon on fixed dates, and it returns all your money on one last day. Bond traders call it a bullet, because the whole principal comes back in one shot at the end. A government bond is a bullet. So is most of what you see on an exchange.
Every other bond is a bullet with one thing changed. There are only 4 things to change, so think of them as 4 dials:
A bullet has every dial at its default setting: nobody can end it early, all your money comes back at the end, the coupon is tied to nothing, and you stand at the front of the queue.
Plate 12.1
One default bond, 4 dials
Every weird bond is the default bond with one or more dials turned
Weird does not mean bad. A masala dosa is still a dosa; you just want to know what is inside before you bite. The bond tallerballer found had 2 dials turned: the company may end it early, and it ranks behind ordinary lenders. Sections 2 to 6 take the dials one at a time. Sections 7 to 10 cover bonds that look weird for a different reason: who really pays them, or where they are sold. Section 11 is a checklist.
A plain bond pays a fixed coupon and returns all your money on one day. Every weird bond turns one of 4 dials: who can end it early, how your money comes back, what the coupon is tied to, and where you stand in the queue.
The first dial is the one on tallerballer's screen.
A callable bond lets the company repay you before maturity, on dates and at a price written into the bond. The date is the call date. The company must tell holders in advance, usually 21 to 30 days, and the bond then stops on that day with your principal and the interest up to that day.
Why would a company want this? For the same reason you prepay a home loan when rates fall: if it can borrow more cheaply, it repays the expensive loan and takes a new one. So a call is most likely exactly when you would least like it, when rates have fallen and you would have to reinvest your money at a lower rate.
A puttable bond is the mirror image: you may hand it back early and ask for your money. Some company bonds have a put that switches on only if the rating falls below a set level. That is a useful door to have, and it sits in the offer document (chapter 10).
The yield changes with the ending. The yield on a screen (chapter 3) assumes the bond runs to its last day. A callable bond might not. Take a bond with:
If it runs all 5 years, you collect ₹450 of coupons plus ₹1,000, and the yield is 8.00%. That is the yield to maturity. If the company calls it after 2 years, you collect only ₹180 of coupons plus ₹1,000, and the yield is 6.79%. That is the yield to call. The ₹40 you paid above face value had 5 years to wear off, and now it has 2.
Plate 12.2
Yield to maturity or yield to call?
₹1,000 face value, 9% coupon paid once a year, 5 years left, callable at ₹1,000 after 2 years, bought at ₹1,040
The lower of the 2 is the yield to worst, and it is the honest number for any bond the company can end early. If you pay above face value, the yield to call is usually the lower one. If you pay below face value, a call actually helps you, because you get ₹1,000 back sooner for a bond you bought cheaper.
Perpetual bonds. A perpetual bond has no maturity date at all. In India almost every one has a call date instead, and the market prices it as if the call will happen. That is how a perpetual bond can show "2029". If the company does not call it, the bond simply carries on paying its coupon, and the company can usually call it on a later date instead.
RememberA call date is the company's choice, not a promise. When a bank skipped the first call on its Tier 2 bonds because rates had risen, holders who had counted on getting their money back that year waited 3 more years for it.
A callable bond can end when the company chooses. Ask for the yield to worst, the lower of the yield to maturity and the yield to every call date, and expect calls when rates fall.
The second dial changes how the money comes back, and it fooled one reader into calling a bond app a scam.
On 3rd Feb 2026 a reader on Reddit did the arithmetic on a bond app's offer and did not like the answer:
Are they scamming?? Like examine this one , 12% ytm for a period of 24 months. It should yield 12544rs right? 11466rs is way too low , it's only 7% actually!!
u/booolian_gawd, r/MutualfundsIndia, 3rd Feb 2026
Nobody was scamming. Another user in the thread replied within 2 hours: the bond was amortising. It paid back part of the principal every month or so, along with the interest. Once you have some of your money back, the company pays interest only on what it still owes you. The rate stays 12%; the amount it applies to shrinks.
₹10,000 lent at 12% for 24 months makes the difference clear:
| How the principal comes back | Interest you receive | Yield |
|---|---|---|
| All at the end (a bullet) | ₹2,400 | 12% |
| Half after 12 months, half at the end | ₹1,800 | 12% |
| A little every month, like a loan EMI | ₹1,298 | 12% |
Plate 12.3
Same 12%, fewer rupees
₹10,000 lent at 12% for 24 months: the principal still owed to you, month by month, repaid 3 ways
All 3 are honest 12% bonds. The last one just keeps your money for less time, so it earns fewer rupees. And the money that comes back early is yours to spend or reinvest. If it sits idle in a savings account, your own return falls towards the 7% the reader worked out. The reader saw this in a follow up post: the yield assumes you reinvest every repayment at 12%, which few people do.
Amortising bonds are common among small company bonds on bond apps, and among long infrastructure bonds, which repay as a road or power line earns its tolls or fees. Section 8 has one that repays a fifth of its bonds every year.
Zero coupon bonds turn the dial the other way. They pay no coupon at all. You buy below face value, say ₹800, and receive ₹1,000 at the end; the gap is your interest. There is nothing to reinvest along the way, but the bond's price moves more with interest rates than a coupon bond of the same length (chapter 5).
An amortising bond repays you in pieces, so a 12% bond pays fewer rupees than a 12% bullet. Ask for the repayment schedule and the total rupees you will receive, and plan where the early money will go.
The third dial lets the coupon itself move.
A fixed coupon is tied to nothing; it is written once and never changes. The other choices tie it to something outside the bond.
An interest rate. A floating rate bond resets its coupon every few months to a benchmark, such as a Treasury bill yield, plus a fixed extra called the spread. Chapter 6 showed the government's own floaters: when rates fall, the coupon falls with them. A floater protects the bond's price, not your income.
A rating. A step up bond raises its coupon if its rating falls, often by 0.25% for each notch. It sounds like a reward, but it is paid only after something has gone wrong (chapter 10). Count the coupon you are sure of, not the one you hope a downgrade will bring.
A market index. A bond can also tie what it pays to the Nifty or another index. This one has its own name, its own rules, and more than its share of confusion, so it gets the next section to itself.
A floater's coupon follows a benchmark rate plus a fixed spread; a step up pays more only after a downgrade. Ask what the coupon is tied to, and how often it resets.
In May 2024 a reader on TradingQnA was puzzled by an offer on a bond app:
How is InCred promising 1.5x Nifty returns that too with no loss of principle. It is also giving a guarantee of minimum returns
tallerballer, TradingQnA, 27th May 2024
A market linked debenture, or MLD, is a bond with a twist at the end. It has a face value and a maturity date like any bond, but it usually pays nothing along the way. What you get on the last day depends on how a market index, most often the Nifty 50, has moved since the start. The promise has 2 halves: if the index rises, you get a share of the rise; if it falls, you still get your money back.
How a company can promise both. It is less magic than it sounds. On day one the company splits your money into 2 parts. Take ₹1 lakh for 3 years:
Plate 12.4
How ₹1 lakh becomes an MLD
A made up example: 3 years, the company earns 8% a year on its own lending
On the last day, the safe part returns your ₹1 lakh and the ticket adds whatever it has won. That is the whole trick. It is close to putting most of your money in a deposit and a small amount on the Nifty's rise; the MLD packs the 2 into one bond.
Reading the term sheet. 4 terms decide what the ticket pays:
Put together, a typical design, with made up numbers: ₹1 lakh for 3 years, 1.5 times the Nifty's rise, the gain capped at 40%, and no minimum return.
| Nifty over 3 years | You receive | Yearly return |
|---|---|---|
| Falls 20% | ₹1,00,000 | 0% |
| Rises 10% | ₹1,15,000 | 4.8% |
| Rises 20% | ₹1,30,000 | 9.1% |
| Rises 40% | ₹1,40,000, the cap | 11.9% |
| The company cannot pay | Whatever is recovered | Unknown |
Plate 12.5
What a market linked debenture pays
A made up example: ₹1 lakh for 3 years, paying 1.5 times the Nifty’s rise, with the gain capped at 40%
The bottom 2 rows are the ones a brochure skips. If the Nifty ends lower, you get ₹1 lakh back after 3 years, and nothing more. The same ₹1 lakh in a 7% deposit would have grown to about ₹1,22,500, so "protected" still cost you 3 years of interest. And if the company fails, both parts fail with it. "Principal protected" means protected from the index, not from the company. So an MLD is judged like any company bond first, by the strength of the company behind it. Its rating carries a PP-MLD prefix, and it rates the company's ability to pay, not the index.
The other kind: a bond dressed as an MLD. Not every MLD bets on a rise. Many sold before 2023 worked the other way round, as one reader sketched:
This debenture will give 8% pa return but if nifty falls by 50% then it will give 0 return.
Akash_Shah, TradingQnA, 27th May 2024
The Nifty rarely halves, so a design like this is a fixed return bond in all but name. Tying it to the Nifty changed one thing: the return arrived as a gain at the end instead of as interest, and that changed the tax.
Why the tax change mattered. Interest on a bond is taxed at your slab rate, which can be 30% or more. A listed MLD held for more than 12 months was taxed as a long term capital gain, at 10%. So a wealthy investor kept far more of an 8% MLD than of an 8% bond from the same company. The Finance Act 2023 closed that gap: from 1st Apr 2023, any gain on an MLD is taxed at your slab rate, however long you hold it, and that includes MLDs bought before then. The amount of MLDs outstanding roughly halved over the next 2 years, and new issues almost stopped. Akash_Shah, in the same post:
this all changed when one of the recent budget closed this loophole and now they get taxed as it should be so popularity has reduced.
Akash_Shah, TradingQnA, 27th May 2024
The rules. SEBI first set rules for MLDs in a circular of 28th Sep 2011. Only bonds that promise your full principal back may be called MLDs. The company must have a net worth of at least ₹100 crore, show in the offer document what you would receive if the market rises, stays flat or falls, and have an independent valuation agency publish the MLD's value every week. The smallest ticket was ₹10 lakh, which kept MLDs among wealthy investors. From 1st Jan 2023 SEBI cut the face value of all privately placed bonds, MLDs included, to ₹1 lakh. The later ₹10,000 face value is only for plain bonds that pay regular coupons, so MLDs stay at ₹1 lakh.
Selling early. MLDs are listed but rarely trade. If you need your money before the end, the price is whatever a buyer offers, often the issuer or its broker, and it can be below the published valuation (chapter 8). Buy one only if you can hold it to the last day.
TrapThe headline shows the best case. Ask for the payout if the Nifty falls, stays flat and rises, and compare each with what a plain deposit would pay over the same years.
An MLD is a safe part that returns your principal plus a ticket that pays only if the index rises. Read the participation, the cap and how the end level is set, and remember the protection is only as good as the company.
The last dial decides who gets paid first when money runs short.
When a company cannot pay everyone, its lenders are paid in a fixed order. Your place in that order is called seniority, and it is set the day the bond is issued. From the front of the line to the back:
Plate 12.6
Who gets paid first
The order in which a company pays when it cannot pay everyone, front of the line to the back
The further back you stand, the higher the coupon, because you are being paid to carry more of the risk. Banks issue Tier 2 and AT1 bonds to count as part of their own capital, the cushion that absorbs losses. RBI's rules make that literal. A bank may call these bonds only after at least 5 years and only with RBI's approval. And if a bank is about to fail, RBI can order them to be written off, wiped out, or turned into shares, before the bank is rescued. An AT1 bond can also skip a coupon, and the skipped coupon is never paid.
Write offs have been tried twice in India, and both went to court. On 14th Mar 2020, during Yes Bank's rescue, about ₹8,415 crore of its AT1 bonds were written off, and many of the people holding them had been sold them as safe as a deposit (chapter 1 tells that story). The bondholders sued. The Bombay High Court quashed the write off on 20th Jan 2023, and the Supreme Court upheld that ruling on 15th Oct 2026: the power to write such bonds off belongs to RBI, and the final rescue scheme had dropped the write off clause, so the bank's administrator could not do it alone. In November 2020, just before Lakshmi Vilas Bank merged into DBS Bank India, RBI ordered its Tier 2 bonds written off, and that case also reached court.
The lesson cuts both ways. The power to write off is real and written into every such bond, but it must be used exactly as the rules and the bond's terms allow. Either way, holders waited years to learn what their bonds were worth. SEBI's answer came on 6th Oct 2020: new AT1 bonds may be sold only to large institutions, in lots of ₹1 crore. A retail investor is not banned from owning one, but ₹1 crore lots keep most of them out.
tallerballer's bond came from a lending company, not a bank, so it was not an AT1 bond. But a perpetual bond from a lending company is still subordinated and can be called, so it sits near the back of the line all the same.
Your place in the queue is fixed on day one: secured, unsecured, subordinated, perpetual and AT1, then preference shares. Ask where your bond ranks; a higher coupon near the back is pay for standing there.
Sometimes a bond arrives in your demat account without you buying anything.
A company with spare cash can hand it to shareholders as a dividend. Some hand them a bond instead. In 2019 Britannia gave its shareholders 1 debenture of ₹30 face value for every share they held, paying 8% a year. Nobody paid anything for them. They appeared in demat accounts like any other holding, were listed on NSE and BSE, paid their coupons, and were repaid 3 years later, on 28th Aug 2022. These are bonus debentures: ordinary bonds, given rather than sold.
More common lately are bonus preference shares, written NCRPS, for non convertible redeemable preference shares. In August 2026 one shareholder received an email about them and asked what to do:
Do i need to apply for it like in case of buybacks in order to redeem it. Do i need to pay anything like in case of rights issue.
raghav.95, TradingQnA, 22nd Aug 2026
No application and no payment: the company credits them to your demat account on its own. In that case the email said each share would bring 7 preference shares of ₹10 face value, paying 9% a year, repaid in 2 series after 3 and 5 years. In September 2026 TVS Holdings gave its shareholders 46 such preference shares for every share.
An NCRPS looks like a bond on your screen: a face value, a fixed rate, a repayment date. But it is a share, so it stands behind every lender in the queue. Its fixed payment is a dividend, which the company can pay only out of profits. "Cumulative" means a skipped payment is owed later, not that it cannot be skipped. And like any small listed instrument, it may trade rarely, so selling before repayment can be slow (chapter 8).
Bonus debentures and bonus preference shares arrive free, with nothing to apply for. A bonus debenture is a bond; an NCRPS is a share that pays like a bond, so it ranks behind every lender. Check its repayment date and whether it trades.
The next kind of bond looks safe because of who stands behind it. The question is who actually pays.
A big project, such as a highway, a power plant or a solar park, often gets a company of its own, set up for that one job. Bankers call it a special purpose vehicle, or SPV. The SPV borrows, builds and runs the project, and its bonds are repaid from that project's money: the tolls, the power sales, the payments due under its contract. The bigger name behind it, a business group or a state, pays only if it has signed a promise to.
Private SPVs. Most SPV bonds come from companies owned by business groups. The group's name is often on the brochure, but the borrower is the SPV, and the group is not liable unless it has signed a guarantee or a written promise to cover a shortfall. To keep the project's money safe, the SPV usually has to put every rupee it earns into an escrow account run by a bank, pay its bondholders from it in a fixed order, and keep a reserve of a few months' payments. Lawyers call this ring fencing: the project's cash is fenced off from the rest of the group.
An SPV can be stronger than its owner. Under the hybrid annuity model for highways, which NHAI began using in 2016, NHAI pays 40% of the project's cost during construction and the rest, with interest, in instalments over 15 years after the road opens. An SPV paid by NHAI, rather than by drivers at a toll gate, has a very reliable customer. It can also be weaker: it has one project, so a delay in building or a bad year for that one asset hits it directly.
And the fence can fail when the owner does. Jharkhand Road Projects Implementation Company, a road SPV of the IL&FS group, was due to pay its bondholders on 21st Jan 2019. It had about ₹345 crore set aside, more than 4 times the payment. It did not pay, because the company used a tribunal's order freezing payments across the collapsed IL&FS group, of which it was a part. CRISIL cut its bonds to D, saying the default came "despite adequate funds" in its escrow account. A fence on paper is only as strong as the group's willingness, and the courts', to respect it.
Public SPVs with a state guarantee. States and cities borrow through SPVs too: development authorities, infrastructure boards, irrigation and power corporations. Here the state government often guarantees the bonds, promising to pay if the SPV cannot.
The bonds for Amaravati, the planned capital of Andhra Pradesh, show how this works. In August 2018 the Andhra Pradesh Capital Region Development Authority (APCRDA) raised ₹2,000 crore at a coupon of 10.32%, listed on BSE. The bonds amortise. They come in 5 equal parts of ₹400 crore, and after 5 years of interest only, the principal is repaid in instalments so that one part is fully repaid every August, from 2024 to 2028. And they carry 3 layers of protection, one behind the other:
Plate 12.7
3 layers in front of a state guarantee
Where the money for APCRDA’s Amaravati bondholders comes from, in order
The guarantee is the last layer, not the first, and in 2023 the layers in front of it were tested. Before a payment of about ₹152 crore due on 16th Nov 2023, the servicing account had not been filled as agreed, so the trustee paid the bondholders out of the reserve. Holders were paid on time. But the reserve was now partly empty and was not refilled, and the interest on a bank loan the state had also guaranteed was paid 20 days late. On 30th Nov 2023 Acuité cut its rating from BBB+ (CE) to C. Another agency, CRISIL, cut it in January 2024. The first 2 parts were fully repaid on time, in August 2024 and August 2025, and by May 2026 the ratings were back in the A and BBB range.
The letters CE after a rating mean credit enhanced: the rating counts the accounts and the guarantee, not just the body that borrowed. Agencies also publish an unsupported rating for the body on its own, and for APCRDA that was close to the bottom of the scale. The gap between the 2 tells you how much the guarantee is holding up.
RememberA state guarantee is a strong promise, but it is a state's promise, not the central government's, and it works on the state's timetable. It is not the same as a state government bond (chapter 6).
Some state bodies borrow abroad too. In 2019 the Kerala Infrastructure Investment Fund Board (KIIFB) sold ₹2,150 crore of 5 year bonds on the London Stock Exchange. They were priced and repaid in rupees, which is why bonds like these are called masala bonds, and KIIFB repaid them in 2024.
An SPV bond is repaid from one project's money, through an escrow account and a reserve. A business group or a state stands behind it only if it has signed a guarantee, and even then last. Ask who owns the SPV, who has guaranteed it, and for both ratings, with support and without.
Central public sector companies have their own version of the same idea.
Public sector companies such as NHAI, which builds national highways, and IRFC, which finances Indian Railways, borrow huge sums through bonds. Many investors treat these as government bonds. The government's own budget papers say they are not: their debt is "not part of Central Government debt" under India's fiscal law.
Not government debt does not mean no government support. NHAI's highway tolls go into the government's accounts and come back to NHAI, which uses them to repay its debt. IRFC leases trains and wagons to the Railways, and the Ministry of Railways has agreed to make good any shortfall if IRFC cannot repay its bonds. That is a written undertaking, not a sovereign guarantee, and the market prices these bonds a little above government bonds of the same length for that small difference.
A few public sector bonds go further. In September 2016 the Cabinet approved ₹16,300 crore of bonds, raised by companies such as PFC and NABARD, whose interest and principal the government itself would pay from the budget. These fully serviced bonds do count as government debt. The name of the issuer does not tell you which kind you hold; the offer document does.
The same family includes 3 bonds built around tax:
A public sector bond is not a government bond unless the government pays it. Ask who services it: the company from its own income, a ministry undertaking, or the budget itself.
The last weird bond is weird because of where it is sold.
A listed bond trades on NSE or BSE, files its results and notices there, and has a price anyone can see. An unlisted bond does none of this. It is usually sold by private placement, a direct sale to a small group of buyers: a company may offer it to at most 200 people in a year, leaving out large institutions. Offer it to more, and the law treats it as a public issue, with all the rules that come with one.
Retail investors meet unlisted bonds through wealth managers, small brokers and dealers who sell by phone or WhatsApp, often with a high coupon and a short story. The bond arrives in your demat account like any other, through an off market transfer, a move from the seller's demat to yours outside the exchange.
The trouble starts when you want out. With no exchange, there is no screen, no order book and no public price. The only buyer may be the dealer who sold it to you, at a price that dealer chooses. If the company stops paying, you learn of it late, because it files nothing on an exchange.
SEBI has been closing the door on them. Since November 2022, online bond platforms, which register as brokers with NSE or BSE under SEBI's rules, may sell only listed bonds or bonds being listed through a public issue. A company that already has listed bonds must list every new bond it issues from 1st Jan 2024. And on 5th Dec 2024 SEBI warned the public that "unregistered online platforms, inter alia, are offering unlisted debt securities to investors", with no regulator watching them and nowhere to complain. Since 23rd Jul 2024, any gain on selling or redeeming an unlisted bond is taxed at your slab rate, however long you held it.
TrapBefore you buy any bond, search its ISIN on NSE or BSE. If neither lists it, you are buying something with no screen to sell it on.
An unlisted bond has no exchange, no public price and no easy exit, and its gains are taxed at slab. Check that the ISIN is listed before you buy.
A few more names turn up on bond apps and in news. Each is one of the 4 dials, turned further:
| Name | What it is | Dial |
|---|---|---|
| Securitised debt (SDI, PTC) | A share in a pool of loans held by an SPV, usually a trust; you are repaid as the borrowers repay | How your money comes back |
| Covered bond | A company bond with a pool of loans set aside for its holders | Where you stand in the queue |
| Convertible debenture | A bond that becomes shares on a set date or at your choice | How your money comes back |
| STRIPS | A government bond cut into separate zero coupon pieces (chapter 6) | How your money comes back |
| Zero coupon zero principal | Listed on the Social Stock Exchange for charities; no coupon and no principal. It is a donation with an ISIN | All of them, turned to zero |
Whatever the name, the same 4 questions sort it out. Ask them of every bond before you buy:
| Dial | Ask | The number to ask for |
|---|---|---|
| Who can end it early | Is there a call, a put or a rating trigger, and on which dates? | Yield to worst |
| How your money comes back | All at the end, or in pieces? Any coupons at all? | The repayment schedule and total rupees |
| What the coupon is tied to | Fixed, a rate, a rating or an index? | The reset rule, or the payout in a falling market |
| Where you stand in the queue | Secured, unsecured, subordinated, perpetual or a share? | Your rank, and the rating with and without support |
| And who actually pays | The company itself, or an SPV living on one project? Has a parent or a state signed a guarantee? | The rating with support and without it |
| And where it trades | Is it listed on NSE or BSE? | The ISIN on the exchange |
To tallerballer: the bond was a perpetual bond issued on 29th Nov 2019, so it has no maturity date. It is also callable: with RBI's approval, the company may repay it after 10 years, on 29th Nov 2029 or on any day after that. The app showed the first call date where a maturity would go. If the company calls, you get your money back that day. If it does not, the coupons carry on until it does. Price it on the yield to call, and remember it ranks behind ordinary lenders.
To u/booolian_gawd: the 12% was real. The bond repaid your principal in pieces, so 12% applied to a shrinking amount, and the rupees came to less than a bullet would pay. Ask for the repayment schedule first, and decide where the early money will go.
Every weird bond is a plain bond with a dial turned. Ask the 4 questions and the number that goes with each, then 2 more: who actually pays, the company itself or an SPV living on one project, and whether the bond is listed.
Every figure in this chapter is dated. This is where to find the current one.
| Figure | How often it changes | Where to find it |
|---|---|---|
| A bond's call, put and repayment dates | Set at issue | The term sheet or offer document, and NSDL India Bond Info |
| A call or part repayment notice | Weeks before the date | The company's NSE or BSE filings |
| A floater's current coupon | At each reset | RBI press releases for government floaters; company filings for others |
| An MLD's value | Regularly, set by a valuation agency | The issuer's website and exchange filings |
| A rating with and without support | At least once a year | The rating agency's website (chapter 10) |
| Whether a bond is listed | Rarely | Search the ISIN on NSE or BSE |
| The rules for MLDs, AT1 and listing | When SEBI or RBI changes them | SEBI's master circular for debt securities; RBI's capital rules for banks |