Corporate Bonds

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 are also known as debt securities that are issued by both private and public corporations. Investors get regular interest payouts at predefined time and get their principal amount at the time of the bonds maturity.

Features of Corporate Bonds

• Taxable : Interest on corporate bonds are generally taxable

• Credit Rating Criterion : Corporate Bonds can be classified into two type on 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 6% coupon rate.

• 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 on 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, the liquidity means the ease of selling the bonds without much price negotiations.

Valuation of 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. 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 as 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 to be 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.