What are Corporate Bonds?

Introduction

“Cyberstark Industries” was a large corporation that was growing quickly and required additional funding to support its expansion goals. However, the CEO of Cyberstark didn’t want to dilute the ownership of the current shareholders by issuing more stock. Instead, the CEO decided to issue bonds to raise the needed capital. Cyberstark Industries issued Rs.100 million worth of corporate bonds to a group of investors. These investors became the bondholders of Cyberstark and were entitled to receive a fixed amount of interest, known as the coupon rate, on the bond’s face value annually.

On the maturity date, Cyberstark had to repay the bondholders the full amount of the bonds they had purchased. In exchange for lending the company money, the bondholders received a guaranteed return on their investment in the form of coupon payments. In the end, Cyberstark was able to finance its expansion using the bond proceeds and the bondholders received a steady stream of income from their investment.

This illustrates the concept of what are corporate bonds and how it can be used as a way for companies to raise capital without diluting shareholder ownership.

What are Corporate Bonds?

A corporate bond is a type of debt security issued by a corporation to raise capital. Investors who purchase a corporate bond lend money to the company for a specified period and receive periodic interest payments. At the end of the bond term, the company repays the bond’s principal. As of March 31, 2024, the Indian bond market stands at a staggering $2.59 trillion, with corporate bonds accounting for $567 billion, or 21.90% of the market (Source: CCIL and SEBI). Corporate bonds provide an efficient way for companies to raise capital, fostering economic growth and financial inclusion.

Features of Corporate Bonds

Corporate bonds are debt securities issued by companies to raise capital. Here are some key features:

Fixed Interest Payments: Corporate bonds provide regular interest payments, semi-annually or annually depending upon the issuer or type of bond.

Credit Ratings: Credit ratings are evaluations done by credit rating agencies that show how reliable issuers are at repaying debt. They help investors understand the risk involved in investing in these products.

Maturity Dates: Corporate bonds have specified maturity dates when the principal amount is repaid.

Marketability: These bonds can be bought and sold in the secondary market, offering liquidity to investors.

Risk and Return: Bonds with higher ratings usually offer lower yields, whereas bonds with lower ratings may provide higher returns to offset the increased risk.

How Corporate Bonds Work?

Corporate bonds are issued by companies to raise capital for various purposes, such as funding business operations, financing expansion plans or refinancing existing debt. When a company issues a bond, it is essentially borrowing money from bondholders, who then become creditors of the company. Bondholders receive periodic interest payments, which can be monthly, quarterly or semi-annually based on a fixed interest rate that is specified in the information memorandum. The face value of the bond, also known as the principal amount, is repaid at the bond’s maturity date.

Corporate bonds are typically rated by credit rating agencies such as CRISIL, ICRA, CARE, etc to help investors assess the creditworthiness of the issuer. Higher-rated bonds are considered less risky, while lower-rated bonds carry relative credit risk and may offer higher yields to compensate for the added risk. The price of a corporate bond can fluctuate based on changes in market conditions and the financial health of the issuer. If a company’s financial performance deteriorates, its credit rating may be downgraded, which can cause the price of its bonds to decrease. On the other hand, if the company’s financial performance improves, its credit rating may be upgraded, which can cause the price of its bonds to increase. Overall, investing in corporate bonds can provide a source of fixed income for investors, but it also carries the risk of interest and credit risk. As with any investment, it is important for investors to carefully consider the creditworthiness of the issuer, the terms of the bond and the market conditions before investing in corporate bonds.

How Do Corporate Bonds Make Returns?

Corporate bonds generate returns for investors through:

Coupon payments: Regular interest payments made by the issuer, on a monthly, quarterly, semi-annual, or annual basis.

Capital Gains: If a bond is sold before maturity at a higher price than its purchase price, the investor makes a capital gain.

Reinvestment: Interest payments can be reinvested to earn additional returns.

Benefits of Investing in Corporate Bonds

1. Relatively stable income: Corporate bonds provide a steady stream of income in the form of regular coupon payments.
   
2. Diversification: Adding corporate bonds to your portfolio can help diversify your investments and reduce overall portfolio risk.
   
3. Potential for higher returns: Corporate bonds can offer higher returns compared to savings accounts or government bonds.
   
4. Credit quality: High-rated corporate bonds are considered to be low-risk investments.
   
5. Liquidity: Corporate bonds are typically traded on major exchanges, providing investors with a high degree of liquidity.
   

How to Buy Corporate Bonds?

By doing the following actions, you can purchase corporate bonds using the IndiaBonds platform:

1. Visit IndiaBonds.com and register to create an account.
   
2. Post-Registration, finish the KYC process in just 3 minutes. It’s paperless, doesn’t require uploads, digitally confirms you, and all you have to do is add your bank and demat details.
   
3. You are now prepared to begin investing in the bonds of your choice, either on the primary market or the secondary market. Even the payment is made online and goes directly to the clearing house of NSE/BSE for settlement, which credits the bond to your demat account.

It’s important to note that bonds are subject to market risk and credit risk, so you should conduct thorough research and consult with a financial advisor before investing in bonds.

Conclusion

The corporate bond market in India provides a platform for companies to raise capital by issuing debt securities in the form of bonds. These bonds are sold to institutional and individual investors and offer fixed returns over a specified period. The primary market for corporate bonds is through private placement, while the secondary market is through exchange platform/OTC. Corporate bonds offer investors fixed returns and diversification opportunities. The Securities and Exchange Board of India (SEBI) regulates the corporate bond market. With the growth of infrastructure financing and non-banking finance companies, the market has seen increased activity in recent years. Overall, the corporate bond market plays a vital role in supporting the growth and development of businesses and providing investment opportunities for individuals and institutions.

FAQs

Q. What is a corporate bond?

A. A corporate bond is a debt security issued by a corporation and sold to investors. It represents a loan made by the investor to the corporation, with the bond serving as evidence of the debt and specifying the terms of the loan, such as the interest rate and maturity date. The corporation promises to repay the principal amount of the bond at maturity and pay interest to the bondholders periodically.

Q. What is a company bond?

A. Corporate bonds are also referred to as company bonds.

Q. Who should ideally invest in corporate bonds?

A. Corporate bonds are typically recommended for investors seeking:

• Portfolio Diversification
• Fixed Regular Interest Income
• Medium to long-term investment
• A higher yield compared to government bonds & bank FDs
• Low volatility in portfolio (unlike equity)

However, it’s important to consider the creditworthiness of the issuing company and the market conditions before investing in corporate bonds.

Q. What is the difference between a corporate bond and a corporate bond fund?

A. A corporate bond is a debt security issued by a corporation, typically paying periodic interest payments and returning the face value of the bond at maturity. A corporate bond fund is a type of mutual fund that invests in a diversified portfolio of corporate bonds, with different maturities providing exposure to the debt of multiple companies. One of the key differences is that a corporate bond provides the bondholder with recurring income in the form of interest payments, whereas a corporate bond fund does not guarantee returns. Returns fluctuate depending on the market price of the underlying bonds.

Q. Why invest in corporate bond?

A. Corporate bonds might be a great option if you want to reduce the risk of capital losses while earning predictable income at regular intervals. Additionally, corporate bonds offer superior yields, liquidity, and portfolio diversification than fixed deposits.

Q. Is corporate bond a good investment?

A. Corporate bonds can be a good investment for those seeking regular income, portfolio diversification and higher returns compared to fixed deposits. However, it’s crucial to consider the issuing company’s creditworthiness and align investments with your financial goals rather than chasing high returns.

Disclaimer: Investments in debt securities/ municipal debt securities/ securitised debt instruments are subject to risks including delay and/ or default in payment. Read all the offer related documents carefully.