Introduction

A fixed-rate bond is a type of debt security where the interest rate (or coupon rate) remains constant throughout the life of the bond. Investors who purchase fixed-rate bonds receive regular interest payments at predetermined intervals (monthly, quarterly, semi-annually, or annually), and the principal amount is returned at maturity. These bonds are especially popular among conservative investors who seek predictable and stable returns regardless of market interest rate movements.

In India, fixed-rate bonds are commonly issued by the Government of India (G-Secs), Public Sector Undertakings (PSUs), corporates, and financial institutions.

Key Features of Fixed-Rate Bonds

• Constant Coupon Rate: The interest rate remains unchanged for the entire term.
• Stable Cash Flow: Investors receive fixed interest payments, making it easy to plan finances.
• Maturity Period: Can range from short-term (1–3 years) to long-term (10–40 years), depending on the issuer.
• Face Value: Typically issued in denominations like ₹1,000 or ₹10,000.
• Tradable: Most fixed-rate bonds can be traded in the secondary market, such as on NSE, BSE, or OTC platforms.

How Fixed-Rate Bonds Work

Let’s say you invest ₹1,00,000 in a fixed-rate bond with:

• Coupon Rate: 7% per annum
• Tenure: 5 years
• Interest Payment: Annually
• You will receive ₹7,000 in interest every year for 5 years, and at the end of the tenure, your ₹1,00,000 principal is returned. Regardless of how interest rates in the market fluctuate during these 5 years, your returns remain fixed.

Types of Fixed-Rate Bonds in India

• Government Bonds (G-Secs)
• Issued by the Reserve Bank of India (RBI) on behalf of the Government of India.
• Considered virtually risk-free.
• Examples: 10-Year G-Sec, State Development Loans (SDLs)

Corporate Bonds

• Issued by private or public sector companies.
• Slightly higher risk, but offer better yields than G-Secs.
• Tax-Free Bonds
• Issued by PSUs like NHAI, PFC, REC, etc.
• Interest income is exempt from income tax under Section 10(15)(iv)(h).
• RBI Floating Rate Savings Bonds (Non-Fixed) (for contrast)
• Not fixed-rate, but included here as an alternative government product.

Advantages of Fixed-Rate Bonds

• Predictable Income: Helps plan future cash flows with certainty.
• Capital Preservation: Especially in sovereign or high-rated corporate bonds.
• Low Risk: Ideal for conservative investors who want to avoid market volatility.
• Portfolio Diversification: Adds stability to equity-heavy portfolios.

Risks and Limitations

• Interest Rate Risk: If market rates rise, fixed-rate bonds lose value in the secondary market.
• Reinvestment Risk: Coupons received during falling interest rate cycles may be reinvested at lower yields.
• Inflation Risk: Real returns may diminish if inflation outpaces the fixed coupon.
• Credit Risk: In corporate bonds, there's a risk of issuer default, depending on credit rating.

Fixed-Rate Bonds vs Floating-Rate Bonds

Taxation of Fixed-Rate Bonds in India

Interest Income: Taxable as per the investor’s income tax slab.

Capital Gains:

• Short-Term (held < 36 months): Taxed as per slab.
• Long-Term (held ≥ 36 months): Taxed at 20% with indexation.
• Tax-Free Bonds, however, offer exemption on interest income, making them attractive to high-income investors.

Who Should Invest in Fixed-Rate Bonds?

• Retirees and pensioners seeking steady income
• Risk-averse investors focused on capital protection
• Investors in higher tax brackets, especially if tax-free options are available
• Long-term savers aligning maturity with future financial goals (e.g., child’s education)

Conclusion

Fixed-rate bonds offer certainty and stability in a world of market unpredictability. While they may not offer the highest returns, their reliability and predictable cash flows make them a valuable component of any well-balanced investment portfolio. In India, with a growing market of government and corporate issuances, fixed-rate bonds continue to be a trusted choice for conservative investors. Before investing, assess the issuer’s credibility, tenure, tax implications, and your financial objectives. For those seeking guaranteed income and safety, fixed-rate bonds are a reliable avenue.