Corporate Bonds: Meaning, Features and Benefits

What are Corporate Bonds?

Corporate bonds are issued by companies for raising finance for a variety of reasons such as for building a new plant, buying equipment or for business expansion.

Corporate bonds are generally medium to long term debt instruments and have a maturity of more than one year. Whereas debt instruments issued by corporates with maturity shorter than one year are referred to as commercial paper.

Who issues these Bonds?

Corporate bonds, also known as debt securities, are issued by private and public corporations. Investors get regular interest pay-outs at predefined times and principal amount at the time of maturity.

Valuation of Indian Corporate Bonds

Corporate Bonds are inversely proportional to interest rates as they rise in value with the fall in interest rates, and their value falls with the rise in interest rates. Normally, the longer the maturity, the greater is the percentage of price volatility. Corporate bond fund has its own importance. Investors can take the decision considering essential risk factors.

Upon holding the bond till maturity, the concern for the price fluctuations will be less which is known as market risk or interest-rate risk, because one will get the bond at face, or par value at the maturity. The inverse relationship of the bonds and interest rates means that the bonds are less worthy.

When interest rates rise and vice versa that can be described below:

Rise in interest rates
new market issues come up with higher yields as compared to the older securities, making the older ones unworthy. Therefore, the prices will go down.

Decline in interest rates
new bond issues come up in the market with lower yields as compared to the older securities, which makes the older ones, higher-yielding ones, more useful. Hence, the prices will go up.

Selling of bond before maturity
if a person sells a bond before maturity, it makes worth if the prices are high presently or selling at lower rate is unworthy of what it was paid for.

Features of Corporate Bonds in India

Taxable: Interest on corporate bonds is generally taxable.
Credit Rating Criterion: Corporate Bonds can be classified into two types on the basis of Credit Rating: Investment Grade and Non-investment Grade (Junk Bonds). Bonds having a credit rating of AAA to BBB are considered as Investment Grade Bond, others are considered as Non-investment Grade Bond.
Coupon rate: Corporate bonds have higher coupon rates than G-secs. Normally, corporate bonds provide 7% (AAA rated) to 12% (A rated) coupons in the current year 2021. On the contrary, G-secs provide a 6% coupon rate. Many times, investors prefer investing considering corporate bonds interest rates.
Tenor: Corporate Bonds have shorter tenures as compared to G-secs. Upon maturity of corporate bond, the investor obtains the principal amount. Until maturity, the money is owed by the investor to the issuer and during the maturity period, the principal is repaid with any outstanding interest, and the contract gets settled.
Moderate liquidity: The liquidity of the corporate bond market via Over the counter is moderate to high subject to the specific bond. Here, liquidity means the ease of selling the bonds without much price negotiations.

Why Invest in Corporate Bonds in India?

Corporate Bonds are a good and high yielding investment choice from a safe option. The income is predictable. Investors get interest twice and it is a reliable way to preserve your capital.

Advantages of Investing in Corporate Bonds

Good Investment Option

Every investor should gauze the risk involved in the investment option chosen for investment prior to making an investment. Corporate Bonds are a good investment option.

Higher Yields

For the investors looking for regular and higher returns corporate bonds are a good choice. In comparison to government bonds, the return in corporate bonds is high. The corporate bonds interest rates are also a major attraction for investors.

Low Risk

Corporate Bonds have a low risk and are not affected by inflation. Investing in corporate bonds with AA+ or above is safe. Also, in case the issuing company is declared bankrupt, bond holders get priority over stock holders.

Who Should Invest in Corporate Bonds?

Individual investors, corporations, and government enterprises can invest in corporate bonds. Interested investors can buy corporate bonds through a bank, a broker, brokerage firm, or a bond trader.

The retail investors interested in safe investment with capital preservation can consider investing in Corporate Bonds.

Today, investors have varied sources online and it is better to choose the online platform facilitating higher security.

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Frequently Asked Questions

Why to buy corporate bonds?

Corporate bonds are a fixed source of income for investors in the form of interest. You get the interest paid annually or semi-annually. Also, you get the full repayment of your principal.

How secure are corporate bonds?

Corporate Bonds are more secure than other stocks. Corporate bondholders get the first priority in case a bond issuing company is declared bankrupt. Also, companies with AAA rating are considered more secure.

What is the maturity for corporate bonds?

The corporate bonds term can range from one to thirty years. The short-term ranges from 1 to 3 years, medium term 4 to 10 years, and long term more than 10 years.

What are the three major types of corporate bonds?

The three major types of corporate bonds include - Short-term notes, medium-term notes, and long-term bonds.

How Corporate Bonds differ from stocks?

Corporate Bonds are a loan from investors to the organisations issuing it while Stocks provides you partial ownership in a corporation.

What is the risk level for Corporate Bond holders?

The Corporate Bond holders have low risk level. The credit risk, market risk, and interest rate risk are the primary risk with Corporate Bonds.

Why prefer BondsIndia to buy bonds?

BondsIndia is a secure and user-friendly online platform for the potential investment in bonds.