What Is a Corporate Bond

What Is A Corporate Bond?

A Corporate Bond is a type of debt security issued by a corporation to raise capital for various purposes, such as operational expansion, research, or debt refinancing. Investors who purchase these bonds lend money to the issuer in return for periodic interest payments and the return on the bond’s face value when it matures. 

The terms, including the interest rate and the maturity date, are set in advance, providing a predictable income stream for investors.

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Corporate Bonds Meaning

Corporate Bonds signify a contract between the corporation (issuer) and the investor (bondholder). When a corporation issues such a bond, it promises to pay the bondholder a specified amount of interest periodically until the bond reaches its maturity date, at which point the principal amount is returned to the bondholder. 

This form of borrowing is advantageous for corporations as it often carries a lower interest rate compared to bank loans, and it allows them to access a broader pool of capital.

Corporate Bonds Examples

Consider the case of XYZ Ltd., a well-established company in India, which decides to issue corporate bonds to fund a new manufacturing facility. They issue bonds with a face value of INR 1,000 each, carrying an annual interest rate of 7% with a maturity period of 10 years. Investors buying these bonds will receive INR 70 annually as interest, and after ten years, they will get back the principal amount of INR 1,000.

Types Of Corporate Bonds

Corporate Bonds are categorized based on their features and terms of issuance. The types include:

  • Fixed-Rate Bonds: These bonds have a fixed interest rate over their entire tenure, which provides certainty of income to the investors. However, they may lose value if market interest rates rise.
  • Floating-Rate Bonds: The interest rate on these bonds is adjustable and is tied to a benchmark rate, providing some protection against rising interest rates but may yield less income if rates fall.
  • Convertible Bonds: These bonds can be converted into a specified number of shares of the issuing company, offering the potential for capital appreciation if the company performs well, while also providing some income.
  • Callable Bonds: The issuer can redeem these bonds before the maturity date, usually at a premium. This provides the company flexibility but may result in reinvestment risk for bondholders.
  • Puttable Bonds: These bonds allow bondholders to sell the bond back to the issuer at a predetermined price before maturity, offering an exit option for investors but at the cost of potentially lower yields.

How To Invest In Corporate Bonds?

You can invest in corporate bonds via Alice Blue at zero cost. Before investing, research market options and the issuer’s financial health. Choose bonds that match your risk appetite and investment period. Purchase directly at issuance or from the secondary market. Continuously monitor the company’s status and market conditions.

  • Research: Look into various corporate bonds available in the market, assessing the issuing company’s financial stability.
  • Choose the Type of Bond: Based on your risk tolerance and investment horizon, select the appropriate type of bond.
  • Purchase: Buy the bonds directly from the issuing company during the initial offering or from other investors in the secondary market.
  • Monitor Your Investment: Keep track of the company’s performance, interest payments, and any market changes that might affect your investment.

Note- Consult a financial advisor. Seek professional advice to understand the risks and benefits.

Corporate Bonds Advantages And Disadvantages

The primary advantage of corporate bonds is their potential to provide higher returns than government bonds, while their main disadvantage is the higher risk of default by the issuing company, which results in losses.

Other advantages include:

  • Regular Income: They provide a steady income stream through periodic interest payments.
  • Diversification: Investing in corporate bonds helps diversify an investment portfolio, spreading risk.
  • Capital Preservation: If held to maturity, the initial capital is returned to the investor, preserving capital.

On the other hand, the risk of default is a primary disadvantage of corporate bonds. Companies can default on their debt payments, which is a risk to investors.

  • Interest Rate Risk: Bond prices are inversely related to interest rates; when interest rates rise, bond prices fall, and vice versa.
  • Lack of Liquidity: Compared to stocks, corporate bonds may have less liquidity making them harder to sell at market price.

Corporate Bond Returns

In India, corporate bonds have been performing steadily with attractive returns, especially compared to traditional saving instruments. For example, as per data from the Reserve Bank of India, the average return on corporate bonds was around 7.49% p.a. in 2021, considerably higher than the average return on savings accounts and fixed deposits during the same period.

The return on corporate bonds is primarily derived from the interest income they generate. The rate of return is often depicted as the annual percentage yield (APY) or the effective annual rate (EAR), which considers the compounding effect. The actual returns can be influenced by various factors, including the issuing company’s creditworthiness, prevailing market conditions, and the bond’s tenure.

Corporate Bonds In India

Below is a table depicting the top schemes of Corporate Bond Mutual Funds:

SL NoBond NameYield to Maturity (YTM)
1ICICI Prudential Corporate Bond Fund7.9%
2SBI Corporate Bond Fund Direct Growth7.78%
3Aditya Birla Sun Life Corporate Bond Fund7.78%
4Kotak Corporate Bond Fund Standard7.87%
5Nippon India Prime Debt Fund7.77%
6HDFC Corporate Bond Fund7.66%
7Sundaram Corporate Bond Fund7.29%

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Corporate Bonds Meaning – Quick Summary

  • Corporate Bonds are a way for companies to raise capital by offering a fixed or variable interest rate to investors.
  • Various types include fixed-rate, floating-rate, convertible, callable, and puttable bonds.
  • They offer advantages like higher interest rates and regular income but carry risks such as default and interest rate fluctuations.
  • Some of the best corporate bonds include ICICI Prudential Corporate, SBI Corporate Bond Fund Direct Growth, Kotak Corporate Bond Fund Standard.
  • Begin your investment journey for free with Alice Blue. Most importantly, with our 15 Rs brokerage plan, you can save up to ₹ 1100 brokerage monthly. We also don’t levy clearing charges. 

What Is A Corporate Bond – FAQs  

What Is a Corporate Bond?

 A corporate bond is a debt security a corporation acquires to raise capital. Investors lend money in exchange for periodic interest payments and the return of the bond’s face value when it matures.

Is corporate bonds better than FDs?

Corporate bonds may offer higher interest rates than Fixed Deposits (FDs), but they come with higher risks. The choice depends on an individual’s risk tolerance and financial goals.

Are corporate bonds safe?

The safety of corporate bonds depends on the issuing company’s financial stability. Bonds from reputable corporations with high credit ratings are generally considered safe.

Who issues corporate bonds?

Corporate bonds are issued by corporations, including publicly held and private companies, to raise capital for operations or specific projects.

What is the benefit of corporate bonds?

One main benefit of corporate bond is the potential for higher interest returns compared to government bonds or FDs, providing an income source for investors.

What is the duration of corporate bonds?

The duration of corporate bonds varies, but typical corporate bonds have terms ranging from 1 to 30 years.

What is the return rate of corporate bonds?

The return rate, often expressed as Yield to Maturity (YTM), varies based on the bond’s terms and the issuing corporation’s credit rating. For example, a corporate bond with a YTM of 7% will provide a 7% annual return if held to maturity.

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