A government bond is a debt instrument issued by the Central and State Governments of India. Issuance of such bonds occurs when the issuing body (Central or State governments) faces a liquidity crisis and requires funds for the purpose of infrastructure development.
A government bond in India is essentially a contract between the issuer and the investor, wherein the issuer guarantees interest earnings on the face value of bonds held by investors along with repayment of the principal value on a stipulated date.
Government Bonds India, fall under the broad category of government securities (G-Sec) and are primarily long-term investment tools issued for periods ranging from 5 to 40 years. It can be issued by both the Central and State governments of India. Government bonds issued by State Governments are also called State Development Loans (SDLs).
Initially, most G-Secs were issued for the purpose of large investors, such as companies and commercial banks. However, eventually, GOI made government securities available to smaller investors such as individual investors, cooperative banks, etc.
There are multiple variants of bonds issued by GOI and State Governments that cater to the various investment objectives of investors. The Government Bond interest rates, also called a coupon, can either be fixed or floating disbursed on a semi-annual basis. In most cases, GOI issues bonds at a fixed coupon rate in the market.