1. INTRODUCTION-
The modern world is more educated, aware, and financially stable to make financial decisions for their present as well as future life and is active towards gaining knowledge towards how much to save, how to keep such money safe and the manner of such investment either by purchasing stock market securities or opening fixed deposits with banks and financial institutions.
But, what is a corporate bond?
A corporate bond is a type of debt security usually in the form of Non-Convertible debentures (NCDs) that are issued by a firm and sold to investors. It is another way for a company to meet its capital requirements and later making returns to a pre-established number of interest payments at either a fixed or variable interest rate. And finally, once, the bonds reach their “maturity” time-period, the original payments are returned to the investor.
Considering the fact that bank loans could be expensive and may contain higher interest payments along with the same, corporate bonds or debentures come as an economic alternative for them to meet their project/business requirements. Such Corporate bonds could be issued for any reason including for long-term future expansion or growth objective or for short-term requirements like working capital needs. Further, debts do not pose any risk to the company’s shareholders or the company directly, it is widely preferred by entities to raise capital for their operation
2. TYPES OF CORPORATE FUNDS
Corporate bonds/debentures come with their own share of features and characteristics due to variations in the issuance of the bonds. Some of the types of bonds include-
a. Convertible bonds –This is one of the most traditional methods of issue of securities in which the issuer company gives the company an option to later convert the bond into any other security (generally in equity). Thus, the investor who invests in the convertible bond gets bond security along with the interest payment on a regular basis, and the same also gets a right to get the same converted into shares of the company at its face value getting a stake in the company’s total shareholding.
b. Junk bonds – Junk bonds are usually the ones offering higher rates of returns in the security but also come with their fair share of the risk and are more in the nature of a loan for the company. In return, the company offers a higher rate of interest with such an investment amount.
c. Zero-coupon bonds – These bonds are the ones that do not offer any interest in the form of returns but are offered at a discounted rate to the investor and any increased value of returns is received at the time of maturity of the bond/debenture.
d. Strips bonds – Strips bonds are formed by stripping off a coupon and give the investors an option to choose either on the interest rate on the bonds or principal of the bond and are also known as “Treasury Bonds”.
3. CORPORATE BONDS VS. STOCKS
The comparison between a corporate bond and that of the stock of a company is similar to that of an Equity holding to debt holding by an investor. An investor who invests his money into the company’s stock gets a share in the total shareholding of the company which is dependent on the profits and losses earned by the company and the value of his stock rises or falls with the same. The investor can either sell the stock at a higher price in the market or hold it to later receive dividends by the company or can do both.
Whereas an investor who invests in the bonds of the company, the investor is in receipt of a fixed or varied rate of interest. Such investment is only at stake in case the issuer company is on the verge of going bankrupt, still, such bondholder shall be paid in preference to the other stakeholders of the company, and then only could stockholders be paid for their losses.
4. WHO SHOULD INVEST IN CORPORATE BONDS?
As above-mentioned, corporate bonds do involve lesser risk in fall of value and do ensure capital protection and are an ideal option to choose for risk-averse investors with higher return expectations. Such bonds carry a higher rate of returns as they carry higher credit risk as compare to the Government bonds which are considered more safe and such bonds come for an average time-period anywhere between 1-4 years. Such corporate bonds are also an ideal choice for investors who fall under the highest income-tax slabs.
5. BENEFITS OF CORPORATE BOND FUNDS
Following are certain benefits of investing your money in corporate bonds-
i. Higher Earnings – Making investments in corporate bonds comes with the possibility of earning better revenues and higher returns on investments as compared to any other debt instruments in the market.
ii. Better Liquidity- Corporate bonds come with a better option of liquidity as they can allow the investor to sell the same in the market or to the company as and when the need for cash arrives, since these funds are generated to satisfy the short term financing requirements of a business, they too are short term in nature.
iii. Secure Investments as compared to others- Unlike Equity investments whose value relies on the profit or losses made by a company in any particular financial year and are considered risky, the corporate bonds are relatively safe and give secure returns as they are more in the nature of a financial obligation on the company.
iv. Bond Distinctions - Corporate Bonds could be distinguished and diversified on the basis of the time period involved, credit ratings of the companies chosen for the development of the mutual fund portfolio. This distinction accommodates to different needs of different types of investors and their investing patterns in the market in the form of short-, medium- and long-term bonds and perpetual bonds in the market.
6. CONCLUSION
India is slowly growing towards an era of a developed, literate, and financially stable economy in the world. While most of the population is slowly educating and moving towards financial knowledge and awareness of the same, it should move slowly and cautiously when it comes to capital market investments and expecting returns from them. When practiced with care and caution, the financial market may provide for a steady income for the investors in the form of corporate bonds.
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