Understanding corporate bonds

Corporate bonds are emerging as an investment tool, which offers a comparatively higher rate than fixed deposits (FDs). For instance, corporate bonds pay a return of 7-14% as compared to interest in FDs, which is usually 3.26-5.3% annually. 

Corporate bonds are issued by a private firm or public company to raise capital for its operations. It is a debt commitment for the issuer to pay certain interest on the principal to an investor at specific intervals, which could be monthly, quarterly, half-yearly, or yearly.

 A few of the different types of bonds include plain vanilla bonds, tax-free AAA-rated public sector undertaking (PSU) bonds, and perpetual bonds. Generally, bonds are available across credit quality, having a rating of AAA to D, across maturities (short to long maturity), and offering a range of returns.

For those looking forward to generating an additional source of income, corporate bonds provide fixed and periodic returns. A minimum amount of Rs 1,000 is what it takes to invest in bonds.

 Besides diversifying the portfolio in terms of reducing risks, corporate bonds improve long-term portfolio performance, while smoothening out returns. In terms of risk, corporate bonds remain lower when compared with investments in stocks. The benefit of capital gains can also be achieved with corporate bonds.

 Corporate bonds could be bought in the primary market through a broker, brokerage firm, bond trader, or bank. A few of the corporate bonds are also traded over-the-counter (OTC) market. Alternatively, one can choose to buy corporate bonds online.  A demat account and a trading account created on any of the online bond platforms are necessary.

Along with rewards, corporate bonds also carry certain risks such as credit or default risk, call risk and interest or inflation risk.

A few of the factors to consider before investing in a corporate bond is to check whether it is secured or unsecured, the creditworthiness of the bond issuer, coupon rate, maturity, callability, tax factor, liquidity and exit options.