Corporate bonds are debt securities issued by companies to raise capital from the interested investors. As an investor if you buy corporate bonds of a company, then it means you are lending money to that company.
For lending your hard earned money, the company will pay you interest on the principal amount invested and when the period ends, they will return the principal.
Are corporate bonds safer than stocks?
As a shareholder, you own equity in the company. You have the right to receive a dividend if declared by the company.
Buying corporate bonds, you are not the owner of the company. You will receive periodical interest and principal at the time of maturity.
When the profit of the company increases, corporate bond holders have no right to ask for more interest. However, in case of loss or less profit, the company will be under legal obligation to pay interest and principal amount in time.
In case of bankruptcy, corporate bond holders will get priority in receiving their money back than the equity shareholder. In fact, equity shareholders will be at the end of the list.
Corporate bonds are considered as a safe bet compared to stocks as these are backed by company’s assets and cash flows.
In addition to corporate bonds, we also have treasury bonds, Sovereign Gold Bond (SGB) and various other bonds issued by government.
Why did the company issue bonds?
The main purpose of issuing corporate bonds is to invest in the company’s own business. The company may use corporate bonds for following purpose;
- Buying new equipment or plant;
- Investing in research and development;
- Growing the business
- Refinancing high interest debt; and
- Financing mergers and acquisitions.
We have two types of corporate bonds based on maturity periods.
Short-term corporate bonds with maturity of 1-to-5 years and long term bonds which can have maturity to 30 years or more.
Here are five different types of corporate bonds issued in the financial market.
Zero-coupon bonds: These debt securities are issued at a discount to their face value. It will grow over the tenure to reach the face value at maturity.
High yield bonds: These debt securities carry higher interest rates in comparison to market rates due to poor financial health of the issuing company. Lower credit rated companies issue these types of bonds to attract investors.
Investment grade bonds: Debt securities issued by financially stable and reliable companies with high credit rating are known as investment grade bonds. These companies offer lower interest rates as many investors will be interested to participate. Possibility of default is very less as these companies are financially very stable.
Convertible bonds: Investors have the option to convert their bond holdings into common shares at a previously decided conversion ratio.
Callable Bonds: Investors have the option to redeem their bonds before the scheduled maturity date.
How can a beginner invest in bonds?
With a demat account, you can invest in corporate bonds.
Interest will be credited to the investors bank account mapped with the Demat account. At the end of the tenure, the principal amount will also get credited to the mapped bank account.
We suggest you to consult a financial advisor before taking any trading or investing decision as they can help you to select the right portfolio based on your risk profile.
Are corporate bonds safe?
Corporate bonds have a risk of default. It all depends on the issuing company’s financial health and credit rating. However, it’s considered safer than company’s own stock as it’s backed by the company’s assets and cash flows.
However, in order to have a more diversified portfolio to avoid various risks associated with the financial market, we suggest taking help of a financial advisor before investing in any bonds, stocks or other financial securities.
Disclaimer: In addition to the disclaimer below, please note, this article is not intended to provide investing or trading advice. Trading in the stock market and in other securities entails varying degrees of risk, and can result in loss of capital. Most investors and traders lose money. Readers seeking to engage in trading and/or investing should seek out extensive education on the topic and help of professionals.
