Investing today involves more than just stocks or fixed deposits. Corporate bonds are becoming increasingly popular in India as they offer higher returns than FDs and carry lower risk than stocks. They can be a smart option for investors who prefer a balance between growth and safety. In this article, we’ll walk you through corporate bond meaning, its different types, and its features.
What Are Corporate Bonds?
Corporate bonds are debt securities that a corporation issues to generate capital for various purposes, such as expansion, paying off existing debt, or investing in new projects. When a company issues a bond, it is borrowing money from investors. In return, the company promises to pay back the principal amount on a specific maturity date with periodic interest payments, known as coupon payments.
In short, when you buy a corporate bond, you are lending money to a company, and the company agrees to pay you interest and repay the principal amount on a fixed date.
Types of Corporate Bonds
There are different types of corporate bonds which offer stable income with less risk. Here are some of the main types:
1. Senior Secured Bonds
These corporate bonds are supported by designated collateral, meaning that if the issuing company defaults, the collateral can be used to repay bondholders. This type of bond also holds priority in the event of the company’s liquidation. If the company files for bankruptcy, secured bondholders are paid before other bondholders.
2. Senior Unsecured Bonds
Unsecured bonds are not backed by a collateral. Instead, these bonds rely on the general creditworthiness and reputation of the company. If the company fails to pay, bondholders are repaid using the company’s general assets. However, they come after secured bondholders. Because unsecured bonds carry a higher risk, they usually offer higher interest rates to attract investors.
3. Convertible Bonds
Convertible bonds are a mix of both debt and equity. These bonds can be converted into a specific number issuer’s shares at a later date, usually at the bondholder’s wish. This gives the bondholder the option to benefit from any potential increase in the share price of the company. Convertible bonds usually offer lower interest rates than non-convertible bonds, as investors are willing to accept a lower return rate in exchange for the opportunity to convert their bonds into shares if the company performs well.
4. Non-Convertible Bonds
Non-convertible bonds are the opposite of convertible bonds. They cannot be converted into shares of the company’s stock, and they remain as debt instruments throughout their life. These bonds offer better interest rates compared to convertible bonds. Investors in non-convertible bonds earn returns through regular interest payments.
5. Callable Bonds
Callable bonds allow the issuing company to pay back the bond before its maturity date. This can happen if the company wants to refinance its debt at a lower interest rate or if it has extra money available. For investors, callable bonds carry some risk because the company might choose to repay the bond early, especially if interest rates fall. To compensate for this risk, callable bonds usually offer higher interest rates.
How Corporate Bonds Are Sold?
Corporate bonds in India can be sold through several channels, including brokerage firms, online bond trading platforms, and stock exchanges. Investors may sell bonds in the primary market during the initial public offering or in the secondary market after listing, where bonds are traded between investors. The sale process typically involves logging into a trading platform, checking the current market value of the bond, and placing a sell order—either at market price or a set limit price. Once the order is executed, the transaction is settled electronically, with the bond transferred from the seller’s demat account to the buyer’s account, usually on a T+1 or T+2 basis. Selling through online platforms and brokers ensures transparency, efficient pricing, and secure settlement.
Why Corporations Sell Bonds?
Corporations issue bonds to raise capital for business needs such as expansion, new projects, or refinancing existing debt. Selling bonds allows companies to access large sums of money from investors without diluting ownership, as happens with issuing shares. Bonds are attractive for companies because they often carry lower interest rates than bank loans and provide flexibility in repayment terms. Issuing bonds also helps corporations diversify their funding sources, manage cash flow efficiently, and strengthen their financial stability by locking in long-term funds at predictable costs.
Advantages of Corporate Bonds
Corporate bonds provide several advantages, which is why many Indian investors are exploring this option. Here are some key benefits:
1. Higher Returns Than FDs
Corporate bonds generally offer better interest rates compared to traditional fixed deposits. If you’re looking to beat inflation, they can be a smart choice.
2. Regular Income
Most corporate bonds pay interest semi-annually or annually, providing a stable source of income, especially useful for retirees or passive income seekers.
3. Diversification
Adding bonds to your investment portfolio helps balance the risk, especially if most of your investments are in equities or mutual funds.
4. Lower Risk Than Stocks
Unlike stocks, which can rise and fall based on company performance, corporate bonds tend to be less volatile. While there is still some risk (especially with lower-rated bonds), they are generally safer than investing in the company’s shares.
5. Lower Minimum Investment
Corporate bonds may allow you to invest with smaller amounts compared to other types of investments, such as shares in big companies. This accessibility makes them a good option for small investors or beginners who want to start building wealth.
Conclusion
Corporate bonds serve as a great way to earn steady returns with lower risk than equity investments. While they are not entirely risk-free, especially unsecured or low-rated ones, they offer a good balance between safety and return. If you’re looking to diversify your portfolio or grow your wealth, corporate bonds are definitely worth considering.
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