Corporate bonds are a financial industry powerhouse because they provide corporations with a stable source of finance. These fixed-income assets can help investors diversify their portfolios while providing a consistent income stream. They enable enterprises to raise funds for expansion and growth while also allowing investors to share in the benefits of successful businesses.
What are Corporate Bonds?
Companies issue a corporate bond to obtain funds for a variety of purposes, including the construction of a new factory, the purchase of equipment, or the development of their operations. Corporate bonds are medium- to long-term financial instruments with maturities of longer than one year. Debt instruments issued by corporations with a maturity of less than one year are referred to as commercial paper.
Types of Corporate Bonds
1. Mortgage Bonds
A variety of assets can be used as collateral to secure bonds. Bonds backed by mortgages are called mortgage-backed securities. With a mortgage bond, bondholders can sell the mortgaged properties to satisfy any outstanding debts.
2. Collateral Trust Bonds
Collateral trust bonds and mortgage bonds are similar, except that collateral trust bonds do not employ residential homes as collateral. Collateral trust bonds are used by businesses without permanent assets or real estate to hold securities from other firms. When issuing bonds, these companies pledge the stocks, bonds, and other investments they have in other companies.
3. Debenture Bonds
Debenture bonds, which include treasury bills under the Corporate Bonds category, are unsecured bonds with no specific property or asset backing. Companies frequently issue debenture bonds with high credit ratings, resulting in modest interest rates.
4. Guaranteed Bonds
Guaranteed bonds, as the name implies, are bonds that have a guarantee. Another company offers a guarantee, lowering the risk of default because it has agreed to meet the bond’s obligations if necessary.
Value of an Indian Corporate Bond
Corporate bonds are inversely proportionate to interest rates; their value rises when interest rates decrease and declines when interest rates rise. Typically, the longer the maturity, the higher the percentage of price volatility. Corporate bond funds have their value. Investors can make a judgment based on key risk variables.
Holding the bond until maturity reduces the concern about price changes, often known as market risk or interest-rate risk because the bond will be returned at face value, or par value, at maturity. The inverse link between bonds and interest rates indicates that the bonds are less valuable. When interest rates rise, and vice versa, as described below:
1. Increase in interest rates
New market issues offer larger yields than older assets, rendering the latter undesirable. Consequently, prices will fall.
2. Decline in interest rates
New bond issues come onto the market with lower yields than older securities, making the older, higher-yielding ones more valuable. Consequently, the prices will rise.
3. Selling a bond before maturity
If a person sells a bond before it matures, it is worthwhile if the current price is high, or selling at a lower rate is unworthy of what was paid for.
Features of Corporate Bonds in India
- Taxable: In general, corporate bond interest is subject to taxes.
- Credit Rating Criterion: Investment Grade and Non-investment Grade (Junk Bonds) are the two categories into which corporate bonds can be divided. Investment grade bonds are those with a AAA to BBB credit rating; non-investment grade bonds are those with a lower rating.
- Coupon Rate: Compared to G-secs, corporate bonds have greater coupon rates. In 2021, corporate bonds typically offer coupons ranging from 7% (AAA rated) to 12% (A-rated). Conversely, G-secs offer a coupon rate of 6%. Investors frequently favour making decisions based on the interest rates on corporate bonds.
- Tenor: Compared to G-secs, corporate bonds have shorter tenures. The investor receives the principal amount when the corporate bond matures. The investor owes the issuer money until it matures, at which point the contract is concluded and the principle is paid back plus any unpaid interest.
- Moderate Liquidity: Depending on the particular bond, the corporate bond market’s over-the-counter liquidity ranges from moderate to high. Liquidity in this context refers to the bonds’ ease of sale with minimal price haggling.
Why Invest in Corporate Bonds in India?
A greater grasp of corporate bonds and appropriate information on high-yielding investment options will help you achieve both long-term and short-term goals. Corporate bonds are a solid, high-yielding investment option that is also safe. The revenue is predictable. Investors earn interest twice, which is a dependable strategy to safeguard capital.
Benefits of Investing in a Corporate Bond
Before investing, every investor should assess the risk associated with the investment option chosen. Corporate bonds are a good financial choice.
1. Higher Yields
A corporate bond is an excellent choice for investors seeking consistent and strong returns. In comparison to government bonds, business bonds offer a high return. Corporate bonds’ interest rates are also a big draw for investors.
2. Low Risk
Corporate bonds are low-risk and unaffected by inflation. It is safe to invest in corporate bonds with an AA+ rating or above. Furthermore, if the issuing company is declared bankrupt, bondholders take precedence over stockholders.
Who should Invest in Corporate Bonds?
- Corporate bonds are available for investment by individuals, corporations, and governments. Interested investors can purchase corporate bonds from a bank, a broker, a broking firm, or a bond trader.
- Retail investors seeking a safe investment with capital preservation can consider investing in Corporate Bonds.
- Your inclination to invest in corporate bonds in India may also help you retire wealthy.
- Indian corporate bond is a reliable source of supplementary revenue.
- Indian corporate bond provide relatively superior returns.
- They help you diversify and balance your investment portfolio.
Corporate Bonds Interest Rates
Let me assure you that you do not need to be concerned about corporate bond interest rates, as they are known to give coupon rates ranging from 7 to 14% every year. Corporate bond funds might also be a useful alternative for diversification. You must exercise caution while making investment decisions, as every investment has risks.
Today, investors have a variety of options online, and it is preferable to use an online platform that provides greater protection.
Conclusion
Compared to stocks, investing in any corporate bond in India can deliver steady returns with lower risk. Evaluating the economic condition, interest rate environment and creditworthiness of the issuer is crucial. Understanding market dynamics and diversity is critical for making sound investing decisions.
FAQs
1. What is the definition of a corporation bond?
A corporate bond is a type of debt security that a company obtains to raise cash. Investors provide money to the company in exchange for monthly interest payments and principal repayment at maturity.
2. What is the average corporate bond return?
The average return on corporate bonds in India can be influenced by the issuer’s credit rating, current interest rates, and economic conditions. It has a lower risk than equities and fixed income, often ranging from 7% to 9%.
3. Is a corporate bond secure in India?
Despite the risks, a corporate bond can be rather safe in India. Assess industry stability, the status of the economy, and the issuer’s creditworthiness. Two things are necessary: variety and knowledge. Credit agency ratings allow investors to analyse the risk associated with specific firm bonds.
