1. I got the details about the bond. she got 6 bonds of 2 lakhs each indicating my father as taking money for an interest of 2 rupees. On that day obviously she did not give the money or he did not receive it. Can this mean she did something illegal? Also there are no witnesses to this agreements, except my father signing the documents.
The loan agreement without witness is not valid and it can be challenged properly.
2. If this go to the court of law, how can my statement or my father's statement (that she was threatening to die and thats why dad executed that bond and we never owed her money) can stand against her's. Im assuming she might lie to support her bonds.
First of all the execution of loan agreements itself are undercloud or suspicion hence let she make that statement, you with merits in you side may challenge all her moves.
3. is there an advantage or disadvantage by filing the case first in this situation? I do not prefer going first but if i have a disadvantage waiting, please let me know.
She wanted money and she is demanding the money as per the said loan agreement, it becomes her duty to prove all her allegations against your father. So dont try to approach court from your side, let she initiate first.
4. Will this case affect the money is going to receive from government for my brother in laws death? she did not receive it yet.
NO
5. Can this be my sister cheating my parents kind of a case? I want to know how to explain my sister that she has it all wrong so she will at least keep the respect and realize the risk of going to courts.
You can try to convince her, if she does not listens you may have to opt for legal actions only.