Bonds.

derivatives, commodity market

A Bond is a loan given by the buyer to the issuer of the instrument. Bonds can b
e issued bycompanies, financial institutions, or even the government. Over and a
bove the scheduled interest payments as and when applicable, the holder of a bon
d is entitled to receive the par value of theinstrument at the specified maturit
y date.Bonds can be broadly classified into
a.Tax-Saving Bonds
b.Regular Income Bonds
Tax-Saving Bonds offer tax exemption up to a specified amount of investment. Exa
mples are:
a.ICICI Infrastructure Bonds under Section 88 of the Income Tax Act, 1961
b.NABARD/ NHAI/REC Bonds under Section 54EC of the Income Tax Act, 1961
c.RBI Tax Relief Bonds
Regular-Income Bonds, as the name suggests, are meant to provide a stable source
of income atregular, pre-determined intervals. Examples are:
a.Double Your Money Bond
b.Step-Up Interest Bond
c.Retirement Bond
d.Encash Bond
e.Education Bonds
f.Money Multiplier Bonds/Deep Discount BondSimilar instruments issued by compani
es are called debentures.
Features:
Bonds are usually not suitable for an increase in your investment. However, in t
he raresituation where an investor buys bonds at a lower price just before a dec
line in interestrates, the resultant drop in rates leads to an increase in the p
rice of the bond, therebyfacilitating an increase in your investment.
his is called capital appreciation.
Bonds are suitable for regular income purposes. Depending on the type of bond, a
ninvestor may receive interest semi-annually or even monthly, as is the case wit
h monthly-income bonds. Depending on one's capacity to bear risk, one can opt fo
r bonds issued bytop-ranking corporates, or that of companies with lower credit
ratings. Usually, bonds of top-rated corporates provide lower yield as compared
to those issued by companies that are lower in the ratings.
In times of falling inflation, the real rate of return remains high, but bonds d
o not offer any protection if prices are rising.
This is because they offer a pre-determined rate of interest
One can borrow against bonds by pledging the same with a bank. However, borrowin
gsdepend on the credit rating of the instrument. For instance, it is easier to b
orrow againstgovernment bonds than against bonds issued by a company with a low
credit rating
DERIVATIVE.
1.A financial derivative is a contract between two (or more)parties where paymen
t is based on (i.e., "derived" from)some agreed-upon benchmark.
2.Since a financial derivative can be created by means of amutual agreement, the
types of derivative products arelimited only by imagination and so there is no
definitivelist of derivative products.
3.Some common financial derivatives, however, aredescribed later.

4.More generic is the concept of hedge funds which use

financial derivatives as their most important tool for riskmanagement.
Basically derivative contracts can be classified into two general categories:
Forward commitments: A forward commitment is legally binding promise to perform
some action in the future. forward commitments includes Fowrward contract,future
contract and swaps
Forward Contracts:
A forward contract is an agreement to buy or sell an asset on a specified date f
or a specified price.
One of the parties to the contract assumes a long position and agrees to buy the
underlying asset on
a certain specified future date for a certain specified price. The other party a
ssumes a short position
and agrees to sell the asset on the same date for the same price. Other contract
details like delivery
date, price and quantity are negotiated bilaterally by the parties to the contra
ct. The forward
contracts are normally traded outside the exchanges.
Futures Contract:
A futures contract is an agreement between two parties to buy or sell an asset a
t a certain time in
the future at a certain price. But unlike forward contracts, the futures contrac
ts are standardized
and exchange traded. To facilitate liquidity in the futures contracts, the excha
nge specifies certain
standard features of the contract. It is a standardized contract with standard u
nderlying instrument,
a standard quantity and quality of the underlying instrument that can be deliver
ed, (or which can be
used for reference purposes in settlement) and a standard timing of such settlem
ent.
SWAP:
Swaps are agreements to exchange a series of cash flows on, periodic settlement
dates over certain
time period (e.g. quarterly payments over two years). In the simplest type of sw
ap, one party makes
fixed-rate interest payments on the notional principal specified in the swap in
return for floating-rate
payments from the other party. At each settlement date, the two payments are net
ted so that only
one (net) payment is made. The party with the greater liability makes a payment
to the other party.
The length of the swap is termed the tenor of the swap and the contract ends on
the termination
date. A swap can be decomposed into a series of forward contracts (FRAs) that ex
pire on the
settlement dates.
Commodity market:
Commodity market is a place where trading in commodities takes place. It is simi
lar to an equity market, but insteadof buying or selling shares one buys or sell
s commodities.How old are the commodities market?The commodities markets are one
of the oldest prevailing markets in the human history. In fact, derivatives tra

ding
started off in commodities with the earliest records being traced back to the 17
th century when rice futures weretraded in Japan