What Are Corporate Bonds and How Are They Bought And Sold?

Corporate bonds, also referred to as corp bonds, are debt securities issued by corporations to raise funds for various purposes, such as financing operations, expansion projects, or refinancing existing debt. Corporate bonds play a crucial role in the fixed-income market and provide investors with an opportunity to earn fixed-interest income while lending capital to companies.

Investing in corp bonds offers several potential advantages for investors seeking fixed-income securities with relatively stable returns and diversification opportunities. However, understanding key considerations such as types of corporate bonds, credit quality, yield and maturity is essential for investors planning to invest in corp bonds.

• Table of contents

1. Types of corporate bonds
2. Key things to know about corp bonds
3. How to invest in corporate bonds?

Types of corporate bonds

Corp bonds can be divided into three types:

• Secured bonds: Secured corporate bonds are backed by specific collateral or assets of the issuing company, providing investors with a relatively higher level of security in case of default.
• Unsecured bonds: These corp bonds are also known as debentures. They are not backed by specific assets and rely solely on the creditworthiness of the issuing company. They may offer a higher yield potential to compensate for the increased risk.
• Convertible bonds: Some corp bonds may have a convertible feature, allowing investors to convert their bonds into equity shares of the issuing company at a predetermined conversion price and ratio.

Another broad classification of corporate bonds is:

• Type 1: Invest in high-rated companies such as Public Sector Undertaking (PSU) companies and banks.
• Type 2: Invest in slightly lower rated companies with ratings of AA- and below.

Key things to know about corp bonds

If you are looking for corporate bonds to buy, here are 3 things you must know about them:

• Coupon rate: Corp bonds pay periodic interest payments, known as coupon payments, to bondholders. The coupon rate is fixed at the time of issuance and is typically paid semi-annually or annually. Bondholders receive these interest payments as income for lending their capital to the issuing company.
• Maturity date: Corporate bonds have a specified maturity date, at which the issuing company repays the principal amount to bondholders. Maturity periods can range from short-term (e.g., one year) to long-term (e.g., 10 years or more). At maturity, bondholders also receive the final coupon payment.
• Yield to Maturity (YTM): The total anticipated return that you can expect from your investments if the bond is held to maturity and all proceeds are reinvested.
• Credit rating: Corp bonds are assigned credit ratings by credit rating agencies based on the creditworthiness of the issuing company. These ratings assess the likelihood of default and help investors evaluate the risk associated with investing in corporate bonds. Corporate bonds with a higher rating are considered relatively safer investments with lower default risk.

How to invest in corporate bonds?

Investors can invest in corporate bonds through various channels. Each of these avenues offers different opportunities and considerations for investors seeking exposure to fixed-income securities. Here are 4 channels to invest in corporate bonds in India:

• Primary market: Investors can participate in primary market offerings of corp bonds when companies issue new bonds. This typically involves purchasing bonds directly from the issuing company or through underwriters during the initial offering period.
• Secondary market: Investors can buy and sell existing corp bonds from other investors through stock exchanges or Over-the-Counter (OTC) markets.
• Mutual funds: Investors can gain exposure to corp bonds through mutual funds that specialize in fixed-income securities.
• Exchange-Traded Funds (ETFs): Investors can also invest in corp bonds through ETFs that track bond market indices or specific segments of the fixed-income market.

Conclusion

In summary, corp bonds offer investors an opportunity to receive regular income paid semi-annually or annually based on the coupon rate, and return of principal on the specified maturity date. The bond-issuing companies, in turn, raise capital through investments. Investors with a low-to-medium risk appetite can invest in corp bonds based on their investment objectives and market preferences to diversify their portfolio.

FAQs:

Corp bonds vs. Fixed Deposits: Which one is better?
If you want to compare corporate bonds with FDs solely based on the return potential, then you are likely to see a better return potential from your investment in corp bonds, albeit at a slightly higher associated risk.

For how long should I invest in corporate bonds?
While you must align your investment horizon with your investment goals, it is recommended to stay invested in corp bonds for at least 2 to 3 years.

Where can I buy and sell corp bonds?
You can buy and sell corporate bonds through brokerage firms, online trading platforms, bond funds, primary market offerings, over-the-counter markets, and bond auctions.

How are the corporate bond prices determined?
Plenty of factors play an important role in determining the corporate bond prices such as prevailing interest rates, the credit quality of the issuing company, the maturity period of the bond, supply and demand in the bond market, macroeconomic conditions, and special features of the bond.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.
This document should not be treated as endorsement of the views/opinions or as investment advice. This document should not be construed as a research report or a recommendation to buy or sell any security. This document is for information purpose only and should not be construed as a promise on minimum returns or safeguard of capital. This document alone is not sufficient and should not be used for the development or implementation of an investment strategy. The recipient should note and understand that the information provided above may not contain all the material aspects relevant for making an investment decision. Investors are advised to consult their own investment advisor before making any investment decision in light of their risk appetite, investment goals and horizon. This information is subject to change without any prior notice.