What are Corporate Bonds?

Corporate bonds are basically debt securities issued by companies or corporations to raise capital through institutional investors or from the public. In return for purchasing the bond, the investors receive fixed interest payments on the principal amount invested. In most cases, when the bonds become due or mature, the company also returns the principal amount to the investors. The interest paid on the corporate bonds is predetermined and is called a coupon rate.

Read further to learn how corporate bonds actually work and what benefits they may offer to investors.

How do Corporate Bonds Work?

Suppose a company-  XYZ Ltd., issues corporate bonds at a face value of INR 1000 each and a coupon rate of 6%. The maturity period is, let’s say, 5 years.  Further, Mr X, an investor, purchases 100 corporate bonds of XYZ Ltd. 

In this case, as the coupon rate is 6%, Mr. X will earn an interest of INR 60 (1000 x 6%) per bond. 

So, if he buys 100 bonds, his annual interest income will be INR 6000 for the upcoming 5 years. Also, at the end of the 5 years, he will receive the face value of the bonds, i.e. INR 1,00,000 (INR1000 per bond x 100 bonds ) back.

Explore the Different Types of Corporate Bonds

When it comes to corporate bonds, you have diverse options to choose from:

• Investment-grade 

These bonds are usually issued by corporations that are financially stable and have a lower default risk in terms of interest and principal payments. Investment-grade corporate bonds offer lower yields but high security to investors.

• High-Yield

Also popular as ‘junk’ bonds, the high-yield corporate bonds are usually issued by companies with a low credit rating. It results in a high risk of default in interest and principal payments. Thus, the yields on such bonds are usually high to compensate the investors for elevated credit risk.

• Convertible

Convertible corporate bonds offer investors an option to convert their bonds into a specific number of shares at a predetermined conversion ratio. Thus, if the stock prices of the company go up, there is a potential for capital appreciation.

• Callable 

Certain corporate bonds are callable, meaning that the company issuing them may call or redeem them before their scheduled maturity date. Such a feature allows the company to benefit from a fall in interest rates after issuance.

• Zero-Coupon

Unlike regular or traditional bonds, zero-coupon bonds do not offer regular interest payments to the investors. Instead, they are issued at a discounted price to their face value and grow to reach their par value on maturity. Thus, investors may receive a lump sum payment on maturity.

Discover the Benefits of Investing in Corporate Bonds

The following are the various benefits associated with corporate bonds. Go through them and make informed investment decisions:

• Liquidity 

Whether bond value appreciates or declines, both can be beneficial to diligent bond traders. Thus, corporate bonds are easily sold and bought, offering good liquidity and an opportunity to adjust your portfolio.

• Enhanced Coupon Rates

When compared to government bonds, corporate bonds offer greater coupon rates and options like short-term maturity periods. With corporate bonds, one can earn around 7% to 12% coupon rate, while with government bonds, one might earn only upto 6%.

• Variety with Security

With corporate bonds, you enjoy the security of fixed interest as the issuer is obliged to make timely payments. Further, you can also determine the term of investment based on your current financial preference, like short, medium, or long-term investment. 

Wrapping Up!

Corporate bonds offer a fixed-income stream, benefits like diversification, and the potential for better yields compared to other fixed-income instruments. However, detailed research is required so you can select bonds that align with your financial goals. It also helps keep potential risks at bay.

So, start building a diversified portfolio with top corporate bonds in India with GoldenPi and enhance your earning potential.

FAQs About What are Corporate Bonds?

1. What are perpetual corporate bonds?

Perpetual corporate bonds do not have a maturity period. They offer regular or perpetual interest payments to the investors indefinitely and are a safe investment option.

2. How to invest in corporate bonds in India?

Primarily, open a demat account to invest in corporate bonds. Then, explore the different bond options available and invest in ones that align with your financial needs.

3. Can an investor invest in corporate bonds directly? 

Absolutely! An investor can invest in corporate bonds directly through a stock broker. Alternatively, one can also invest through specialised corporate bond funds or via an exchange-traded fund (ETF).