You must have heard about this term “Electoral Bond”. Before we demystify the term Electoral Bond, let’s understand what is a Bond?
What is a Bond & how it is different from a share?
A Bond is simply a debt instrument. When an enterprise is to be started, there are two options available to raise money. The first one is issuing bond and the second one is to issue shares. These two are quite different from the investment prospective.
A bond is a debt instrument. Someone who raises money by issuing bond, have to pay some interest on the amount raised by issuing bonds. Issuing a bond to someone is like taking a
Let’s assume government securities are issued by the government with the interest rate of 8 per cent per annum. Government securities are issued by the government through the Reserve Bank of India to raise money from the market. But government pay interest on it. Let’a assume I have purchased government securities of worth 1,00,000 rupees at the interest rate of 8 per cent. This means, now I have paid 1 lakh rupees to the government but the government is liable to pay back 1,08,000 rupees back to me after the end of the year. The government securities and bonds are basically the same.
A share is somewhat different from that of bond. When we purchase shares of a company, it is not necessary that it will earn some money after the end of the year. Let, I have purchased shares of SBI of worth 1 lakh rupees. So, if the value of the shares of SBI increases throughout a year, then definitely, I will make some profit on my investment. But if SBI performs worse and the value of its share falls in the share market, then my investment will result in a loss. I will not be able to get back even my principal amount that I have invested to purchase the shares.
Simply concluding, investing in a bond is a safe investment with less returns but investment in shares is a investment that carries risk. It may result in huge profit, loss or it may remain the same.
Then, what is a bond yield?
Bond yield? What it is?
It is a simple term, so let’s understand it. The government issues government securities to raise money from the market to meet its short term needs. This selling and purchasing of securities are done by RBI on behalf of the government.
Let’s assume I have purchased a government security of 100 rupee. This means I will give 100 rupees to the RBI and the RBI in return will give me a slip that I have purchased a security of worth 100 rupees which carries interest rate of let 8 per cent. This means government will pay me 108 rupees after the end of the year.
Now, let’s assume I want to sell this government security before the end of the year. So, I will try to sell it in the secondary market. Let’s assume, I have sold that government security in 95 rupees which I have purchased in 100 rupees. Then, the person who had purchased it will get (108-95)=13 rupees as earning from that bond or government security. But, if I had to sell it, I would have got just 8 rupees as earning form that government security. This means if someone sells the government security in the secondary market at a price less than of face value than bond yield increases.
Bond yield = 1/price of government security in the secondary marketbond yield and price of bond moves in opposite direction i.e. if one increases, other will decrease.
What you should know about an Electoral Bond?
The Electoral Bonds are issued in multiples of ₹1,000, ₹10,000, ₹1 lakh, ₹10 lakh and ₹1 crore and are available at specified branches of State Bank of India. They can be bought by the donor with a KYC-compliant account. Donors can donate the bonds to their bonds to any political party which must have secured at least 1 per cent votes in the recent Lok Sabha election or State Legislative election.
The Election Commission of India allocated a verified account to the political party in which they can en cash the electoral bonds donated to them. But the electoral bond is valid for a period of just 15 days, after which it expires.
The bonds are available for purchase for a period of 10 days each