What are Corporate Bonds?

A multi-national company named Cyber Stark is looking to go through rapid scaling in order to meet its financial and scaling goals. Cyberstark’s wanted to maintain ownership by issuing additional stock. Instead, the CEO decided to issue a motor to raise capital. Cyber Stark Industries sold Rs.100,000,000 worth of corporate bonds. These investors became bondholders and received a fixed interest rate on the bond’s face value.

Cyberstark was required to pay the total amount for the board purchased at maturity. The company promised guaranteed returns to the respective bondholders. However, Cyber Stark aims to disburse returns using a coupon payment system. Cyber Stark used the proceeds from the bonds to finance the company’s expansion. As a result, the bondholders also received a regular income stream.

What are Corporate Bonds?

A corporate bond is an issue of debt securities by a company to raise capital. In other words, bondholders are technically lending money to a company at a fixed rate for the long term. The company pays back the principal at the end of a bond term.

By March 31, 2024, the Indian bond market will be worth $2.59 trillion. Corporate bonds, which account for $567 billion or 21.9% of the market, will make up $567 billion. (Source – CCIL & SEBI). Corporate bonds are an effective way for companies and the economy as a whole to raise capital.

Corporate Bonds – Features

Corporate bonds can be called debt securities that companies issue to raise capital. Here are some of the most notable features.

• Fixed Interest Payments – Corporate bonds provide regular interest payments semi-annually, annually, and annually, depending on the issuer and type of bond.
• Credit Ratings – These are ratings that rating agencies use to show issuers’ reliability in repaying their debt. Investors can use them to understand the roof of investing in certain products. Corporate bonds have specific maturity dates for when the principal is repaid.
• Marketability – These bonds are available on the secondary market and offer liquidity to investors. Bonds with higher ratings usually have lower yields. Bonds with lower ratings, however, may offer higher returns to compensate for the higher risk.

How do Corporate Bonds Work?

Companies issue corporate bonds to raise capital. This can be for various purposes, such as financing business operations, expanding plans, or refinancing debt. A company that issues a corporation borrowing money from the bondholders, who become creditors.

The bondholders are paid periodic interest. This payment could be monthly, quarterly, or semi-annually. This is based on the interest rate specified in an information memorandum.

Credit rating agencies, such as CRISIL ICRA CARE, etc., rate corporate bonds to help investors evaluate their creditworthiness. Bonds with higher ratings are considered to be less risky. Lower-rated bonds, however, carry a greater credit risk.

They may also offer higher salaries to compensate. Prices of corporate bonds can change based on market conditions or the financial health and strength of the issuer.

If the financial performance of a company declines, the credit score suffers as well. This could cause its bond price to drop. If the company’s performance improves, the credit rating can be upgraded. This could lead to an increase in the cost of bonds.

Investors can earn a fixed income by investing in corporate bonds; they also face the risks of interest and credit. Investors should carefully examine corporate bonds’ creditworthiness, terms, terms, and market conditions before making any investments.

How do Corporate Bonds make Returns?

Investors can earn returns on corporate bonds in a myriad of different ways. Here are some of the most popular and reliable means of earning returns.

• Coupon Payments: These are regular interest payments by the issuer on a monthly, quarterly, or semi-annual basis.
• Capital Gains – An investor will profit if he sells a bond before its maturity date at a price higher than the original purchase price.
• Reinvestment – Interest can be reinvested to generate additional returns.

Benefits of Corporate Bonds

Corporate bonds are simply amazing. However, just saying that they are amazing is never enough. Therefore, in this section, we would like to list some of the most important and noticeable benefits of corporate bonds so that you can better approach the subject.

• Income is Relatively Stable – The regular coupon payments of corporate bonds ensure a steady income stream.
• Diversification – By adding corporate bonds to your investment portfolio, you can diversify and reduce the overall risk of your portfolio.
• ROI: Bonds issued by corporations can provide higher returns than savings accounts and government bonds.
• Credit Quality – Bonds with high ratings are low-risk investments.
• Liquidity – Most corporate bonds are traded on the major exchanges. This provides investors with high liquidity.

Drawbacks of Corporate Bonds

We have already studied the benefits and features of corporate bonds extensively. However, you cannot base your decision on the benefits. You need to study the drawbacks as well. Otherwise, you might make the wrong choice in the long run. Therefore, here are some of the most prominent drawbacks of corporate bonds:

• Fixed Payment: Unlike other bonds, corporate bonds come with a fixed interest rate. This is a double-edged sword. This means that the interest rate will never go below the initial rate. However, it also means that the interest rate will not grow.
• Riskier: Corporate companies are limited to major scaling. As a result, there is always the risk of stock tanking. Therefore, corporate bondholders always have latent anxiety about bonds tanking in the market.
• Low Capital Appreciation: Unlike stocks, bonds produce weaker maturity results. This means your bond’s worth will remain the same even if a company grows. This can frustrate people who want to use their bonds to grow financially.

Conclusion

The corporate bond market in India allows companies to raise capital through debt securities. These bonds offer fixed returns to institutional and individual investors over a specific period. The primary market for corporate bonds is private placement.

The secondary market is the exchange platform/OTC. Investors can diversify their portfolios and earn fixed returns with corporate bonds. The Securities and Exchange Board of India regulates the market for corporate bonds.

The market has been booming in recent years, thanks to the increase of non-bank and infrastructure financing companies. The corporate bond market is vital to the growth of businesses and provides investment opportunities for individuals and institutions.

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