When you are purchasing a bond you are lending money to the government or a company. You will lend money to the issuer or the borrower. The bond issuer agrees to pay interest on a regular basis to whoever holds the bond. The borrower would have to return the principal on the loan when the bond matures. Bonds can be useful to people who are looking for a way to invest their money. While opting to invest in stocks, you are not exactly sure of the future cash flows of respective companies. But with bonds, you know exactly what you are going to get.
But there is potential risk that comes with bonds. The borrower might default and may not pay you the debt. And bonds have low potential of returns when compared to stocks. The interest rates connected to bonds depends on the prevalent date on the rate of issue. For example, in 2011, the interest rates fixed by RBI at that time were very high. Therefore new bonds that were issued got high rates of returns. Whereas in 2017, when the interest rates were relatively lower, the returns were low. Higher the maturity date for a bond, the higher is the interest rate. Different bonds available for investment in India: Central government bond, state government bond, corporate bonds, etc.