Corporate bonds is a type of investment that offers periodic returns to the bond holders while also increasing the financial capital of the company. These bonds are a great way for investors to receive interest without much risk involved. There are numerous corporate bonds and they come with their own advantages and disadvantages.
What is a corporate bond?
A corporate bond is an agreement between the company or the organization and the investor. Through this agreement, the company borrows money from the investor and agrees to return that sum with interest, periodically. Generally the interest is paid annually or semi-annually and the principal amount is paid upon the maturation of the bond. Companies who wish to accommodate more capital, issue corporate bonds.
Here are a few terms related to corporate bonds:
Face value: Face value is the principal amount that the company borrows from the investor. While the company pays the interest regularly, the principal amount is paid after the bond matures.
Coupon rate: Coupon rate refers to the annual interest that the company agrees to pay to the investor.
Coupon payment: Coupon payment is the fixed or variable annual rate of interest that the company pays to the bondholder.
Maturity date: Maturity date is the duration of the bond agreement, it is the date when the company pays the entire bond amount. Maturity dates can range from a few years to many decades as well.
Market price: Market prices usually fluctuate depending upon the market condition, interest rates, company’s financial health etc;
Yield to Maturity: Yield to maturity is the total return an investor expects from the company until the date of maturity.
Different Types of corporate bonds
From investment grade bonds to high yield bonds, there is a broad range of bonds that are classified according to their features such as interest rates and risks involved. Here are the different types of corporate bonds:
Investment grade bonds
Investment grade bonds are often issued by financially well off and successful companies and they have a good credit history. These bonds are generally low risk bonds as the company has the potential to pay off their debts and they also have low rates of interest due to the stability they offer.
High-Yield bonds
High yield bonds are the opposite of investment grade bonds in terms of features. They have a higher risk but better returns as well. These bonds generally attract investors who do not shy away from taking risks. Companies that have comparatively weaker financial health offer high yield bonds.
Convertible bonds
With convertible bonds, bondholders have the opportunity to convert bonds into stock shares. The number of stock shares is predetermined in the bond agreement. These bonds are a good option for the investors who like equity like upside potential as well as fixed income stability.
Non-convertible bonds
Non-convertible bonds are fixed bonds that do not offer bondholders a choice to convert their bonds to stock shares.
Callable bonds
Callable bonds offer the bondholders an opportunity to redeem their bonds before the maturity date. This allows investors to take out their money if they feel that there are risks involved and it also allows companies the opportunity to refinance at lower rates of interest.
Fixed rate bonds
The rate of interest in fixed rate bonds is usually predetermined and it offers bondholders a greater stability and fixed income.
Floating rate bonds
Floating rate bonds, as the name suggests, have a variable interest rate. This is beneficial to the company as it prevents them from falling prey to the interest rate risk while these interest rates can be adjusted periodically.
Types of corporate bonds in India – Quick Summary
- Corporate bonds are a type of investment where the bondholder receives a fixed rate of interest from the company issuing the bond.
- Usually, companies looking to expand their financial realm offer corporate bonds to individuals.
- From fixed rate bonds and floating rate bonds to investment grade bonds and convertible bonds, there are numerous types and one can choose according to their preferences.
- Bonds offer investors a safe investment opportunity but they should be cautious about the financial situation of the company as well as the market situation.
- One can choose a bond depending upon the degree of risk they can deal with.
- To know about more investment opportunities, you can visit the official Alice blue website.
FAQs
What are the different types of corporate bonds?
There are numerous types of corporate bonds, from callable bonds, convertible bonds to investment grade bonds and fixed rate bonds. These have varying features and risk return profiles.
What type of investment is a corporate bond?
A corporate bond can be termed as a debt investment. In this, the investor or the bond holder lends money to the organization and expects periodic returns with interests. In a corporate bond, the duration of the bond is known as maturity date and upon maturation, the organization is expected to return the principal sum besides the interest.
What are the 3 major categories of bond investors?
There are basically three types of bond investors, namely:
- Individual investor
- Institutional investors
- Central banks.
What is an example of corporate bond?
Imagine you buy a bond from XYZ Corporation for ₹1,000. The bond agreement says it matures in 5 years. If it’s a zero coupon bond (no interest), after 5 years, XYZ Corporation pays you ₹1,000. If it’s a bond with interest, they pay you the interest periodically and the ₹1,000 at the end of the 5 years.
Are corporate bonds high risk?
Corporate bonds vary on risk depending upon the type of bond. For example, investment grade bonds are low risk bonds whereas high-yield bonds are high risk bonds.
