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NISM-Series-X-A: Investment Adviser (Level 1) · Investing in Fixed Income Securities

Fixed Income Securities Basics and Features of Bonds

Updated 11 October 2026 · Fact-checked

A fixed income security is a debt instrument where the issuer borrows money and promises to pay interest (coupon) at set intervals and return the face value on maturity. To solve questions, identify face value, coupon rate, maturity and issuer, then compute coupon as coupon rate × face value.

Understand Fixed Income Securities Basics and Features

A bond is a loan you give to an issuer. The issuer could be the government, a public sector undertaking, a bank or a company. In return, the issuer promises to pay you interest and to repay the principal on a fixed date. This is why bonds are called fixed income securities: the pattern of cash flows is set in advance.

Every bond has a few core features. Face value (also called par value or principal) is the amount repaid at maturity and the base on which interest is calculated. Coupon rate is the annual interest as a percentage of face value. Maturity is the date on which the principal is repaid. Issuer is the borrower. Other features include the frequency of interest payment (annual, half-yearly), whether the coupon is fixed or floating, and whether the bond is secured or unsecured.

The coupon is always calculated on face value, not on the price you paid. If you buy a bond at a price below or above face value, the coupon in rupees does not change. Only your effective return changes. Zero coupon bonds pay no periodic interest. They are issued at a discount and repaid at face value, so your return is the difference.

Issuers fall into broad groups. Central and state governments issue government securities, which carry sovereign backing and are treated as having no default risk in rupee terms. Public sector units, banks, financial institutions and corporates issue bonds and debentures. Corporate issuers carry credit risk, which is why they usually offer a higher yield than government securities of similar maturity.

In a portfolio, fixed income gives regular income, lower volatility than equity and a way to match known future needs. It also helps diversification. But it is not risk free. Bond prices fall when market interest rates rise, and issuers can default or be downgraded. As an adviser, you match the bond's maturity and risk to the client's goal and risk profile.

Key formulas to remember

Annual coupon
Annual coupon (₹) = Coupon rate × Face value
Always on face value, never on the market price or purchase price.
Periodic coupon
Coupon per period = Annual coupon ÷ Number of payments per year
For half-yearly payment, divide by 2.
Current yield
Current yield = Annual coupon ÷ Current market price
A simple measure. It ignores gain or loss at maturity.
Price-rate relationship
Market interest rates ↑ ⇒ Bond prices ↓ (and the reverse)
Holds for plain fixed coupon bonds.
Price vs face value
Coupon rate > market yield ⇒ price > face value (premium); coupon rate < market yield ⇒ price < face value (discount)
If equal, the bond trades at par.

How to solve Fixed Income Securities Basics and Features questions

Use this order for any question on bond basics, whether it is definition, feature or calculation.

  1. 1Read the question and note what is asked: a feature, an issuer type, a cash flow or a portfolio role.
  2. 2Identify the face value, coupon rate, payment frequency and maturity from the data given.
  3. 3Identify the issuer and ask if it is government (no default risk) or non-government (credit risk).
  4. 4If a rupee coupon is needed, multiply coupon rate by face value, then divide by payments per year.
  5. 5Check whether the data mentions price. Compare coupon rate with market yield to decide premium, par or discount.
  6. 6Eliminate options that tie coupon to market price, call a bond risk free without saying government, or mix up bond with equity features.
  7. 7Pick the option that fits all the stated conditions.

Quickest way: Coupon on face value, then check the issuer

When to use it: Use for calculation or feature MCQs when time is short.

  1. Underline face value and coupon rate.
  2. Multiply them for the annual coupon.
  3. Divide by 2 only if payments are half-yearly.
  4. Ignore the purchase price for the coupon amount.
  5. For price questions, remember: coupon above yield means premium.

Common mistakes in Fixed Income Securities Basics and Features

  • Calculating coupon on the market price instead of face value.

    Students link interest to the amount they paid.

    Fix: Coupon = coupon rate × face value. Price affects yield, not the coupon in rupees.

  • Calling all bonds risk free.

    Fixed payments feel guaranteed.

    Fix: Only sovereign securities are treated as free of default risk. All bonds carry interest rate risk, and non-government bonds carry credit risk.

  • Forgetting to halve the coupon for half-yearly payments.

    Students rush and use the annual figure.

    Fix: Check payment frequency every time and divide the annual coupon accordingly.

  • Believing bond prices rise when interest rates rise.

    Confusing higher rates with higher returns.

    Fix: New bonds pay more, so existing lower coupon bonds become less attractive and their prices fall.

  • Thinking a zero coupon bond pays nothing.

    The word zero is read as no return.

    Fix: It pays no periodic interest, but is issued at a discount and redeemed at face value. The gain is the discount.

  • Treating a bondholder as an owner of the issuer.

    Mixing up bonds with shares.

    Fix: A bondholder is a lender and a creditor. A shareholder is an owner.

Worked examples

Example 1

A bond has a face value of ₹1,000 and a coupon rate of 8% per annum, paid half-yearly. You buy it in the market at ₹950. How much coupon do you receive in each payment?

Show the solution
  1. Coupon is on face value, so annual coupon = 8% × ₹1,000 = ₹80.
  2. Payments are half-yearly, so 2 per year.
  3. Coupon per payment = ₹80 ÷ 2 = ₹40.
  4. The purchase price of ₹950 does not change the coupon.

Answer: ₹40 per half-year.

Example 2

A bond of face value ₹1,000 pays an annual coupon of ₹90 and trades at ₹1,125. What is its current yield, and does it trade at a premium or discount?

Show the solution
  1. Current yield = Annual coupon ÷ Market price = 90 ÷ 1,125.
  2. 90 ÷ 1,125 = 0.08, which is 8%.
  3. Market price ₹1,125 is above face value ₹1,000.
  4. So the bond trades at a premium.

Answer: Current yield is 8%, and the bond trades at a premium.

Exam tips

  • Expect direct questions on definitions: face value, coupon, maturity and what a zero coupon bond is.
  • In calculation questions, check the payment frequency before choosing an option.
  • Watch for trap options that calculate coupon on market price.
  • Questions on portfolio role usually test income, lower volatility and diversification, along with the caution that bonds carry interest rate and credit risk.
  • Read the issuer carefully. Government issuer points to no default risk. Corporate issuer points to credit risk.

Practice questions from Investing in Fixed Income Securities

Fixed Income Securities Basics and Features in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Fixed Income Securities Basics and Features: frequently asked questions

What is the difference between bonds and debentures?

Both are debt instruments. In common usage, a bond is often issued by government or public bodies, while debenture is the term used by companies and may be secured or unsecured. Check the question wording and the security offered.

What are the main features of a bond?

The main features are face value, coupon rate, payment frequency, maturity and issuer. Other features include whether the coupon is fixed or floating and whether the bond is secured.

Is the coupon the same as the yield?

No. Coupon is a fixed percentage of face value. Yield depends on the price you pay and so changes with the market.

Why do corporate bonds offer higher returns than government securities?

Corporate issuers can default, so investors ask for extra return to compensate for credit risk. Government securities are treated as having no default risk.