Is Bond a Good Investment? Corporate Bonds with Example Explained.
Are you new to bonds, looking to invest in them but wondering if your investments will prove remunerative? While we will answer the question, it is essential to delve into a few aspects of bonds to know if they are a worthwhile investment. Besides, bonds are of various types. So, let’s explore bonds and also look at corporate bonds with examples.
What are Bonds?
At the outset, let’s understand what bonds are. Bonds are essentially debt securities. They are like loans that governments or organizations borrow from investors. In return, the investors receive a fixed period interest and the principal amount upon the bond’s maturity. Thus, a government issues bonds to fund a particular project pertaining to infrastructural development. On the other hand, a company would issue a bond to buy equipment, complete a particular project, expand geographically, etc.
Some types of bonds in India include the following.
Floating-Rate Bonds
Floating rate bonds have a periodically adjustable interest aligned with a reference rate. The floating nature of the interest safeguards investors from interest rate risk as the rates move with the existing market rates. However, you must note that these bonds offer an interest rate subject to market changes and the macro-financial weather.
Fixed-Rate Bonds
As the name suggests, fixed rates provide consistent interest amounts until the bond’s maturity. Thus, as the bondholder, you can earn predictable and guaranteed returns no matter the economic situation or the existing market condition.
Perpetual Bonds
Perpetual bonds do not have a maturity. Hence, the issuer doesn’t repay the principal amount to you as the bondholder. However, you keep getting steady coupon payments until perpetuity. Hence, these bonds are named perpetual bonds.
Convertible Bonds
Convertible bonds allow investors to convert the bond to a predefined number of equity shares in the issuing company at a specific time from the tenure. However, you can also choose to receive the principal repayment at the maturity, should you not wish to exchange it with shares.
Callable Bonds
Callable bonds are high coupon-paying securities. They allow the issuer to call back the bonds at a pre-agreed date and price.
Zero-Coupon
In zero-coupon bonds, you do not receive a regular interest rate until the bond’s maturity. However, you get a fixed return at maturity, which is the difference between the issue price and face value. If you are an investor who wants to lock in a fixed return for a particular period, you may choose to invest in zero-coupon bonds.
What are Corporate Bonds?
A corporate bond is also a debt security but issued by a corporation to raise funds or capital. So, when you buy a corporate bond, you lend money to the company issuing it in exchange for periodic interest payments and repayment of the principal amount at the bond's maturity. Bonds help companies fund various activities like geographical expansion, debt refinancing, equipment purchase, research, and development.
Some features of corporate bonds include the following.
Interest Payments: The company that issues the bond pays interest to the bondholders at a fixed or variable rate periodically.
Principal Amount: It is the bond’s face value the issuer agrees to repay at maturity. In other words, it is also called the par value.
Maturity Date: It is the date on which the bond matures and investors get the principal amount back. The maturity period varies from a few years to decades.
Yield: It is the effective interest rate the bondholder earns, considering the bond's current market price. Factors influencing the yield include the bond’s price, coupon rate, and time remaining to maturity.
Credit Rating: It is the rating that assesses the issuer’s creditworthiness. Bonds with high ratings are low risk. On the other hand, low-rated bonds may have a potentially higher return but also a greater risk associated with them.
Corporate bonds are offered in various types. Some of them include the below.
Investment Grade Bonds
Investment-grade bonds have a credit rating higher than BBB- and graduate to a possible rating of AAA. The issuers of these bonds include companies with a stronger financial muscle and hence, carry a low risk of default.
Junk Corporate Bonds
Junk bonds have a higher default risk. Companies issuing such bonds may not have sufficient cash flow to pay regular interest or repay the principal amount upon maturity. However, one should note that junk corporate bonds have higher yields. That’s because only a high yield can cover the potential risk of default.
Collateral Trust Bonds
Collateral trust bonds resemble a security deposit and have bonds, stocks, or other assets as backing. So, if the issuing company defaults, bondholders can sell the collateral and get their money back.
Guaranteed Bonds
As the name suggests, guaranteed bonds are secure bonds to invest. They have a promise of payment from a third party like the government or company if the issuer isn’t in a position to make such a promise.
Debenture Bonds
A debenture bond is a debt instrument unsecured by collateral. Hence, these bonds rely on the issuer’s reputation and creditworthiness for the bondholder’s support. In other words, the investor purely trusts the issuer’s promise to fulfil the commitment.
High-Yield Corporate Bonds
Where there’s high yield, there’s risk. That’s a generic possibility, although it isn’t always true. Nevertheless, high-yield corporate bonds carry a higher risk. They offer a higher interest rate as the company issuing them may need more stability. Thus, as an investor, you may earn more money from such bonds!
Features and Benefits of Corporate Bonds
Investing in a corporate bond can prove advantageous in various ways. Accordingly, let’s look at some benefits of corporate bonds, a few of which also form its features.
Investment Diversification
Corporate bonds allow you to diversify your investments. Thus, instead of investing in individual companies, you can invest in a portfolio of bonds to reduce the default risk.
Fixed Interest Payments
Corporate bonds offer fixed interest rates. Hence, they form a steady and predictable source of income for investors, especially looking for them.
Return of Principal Investment
Upon maturity, you get your principal back. So, you wouldn’t lose your money unless the company defaults or closes its shop due to bankruptcy.
Low Investment Risk
Corporate bonds are usually considered low-risk. It is because they are supported by the issuing company’s creditworthiness and have a lower default risk.
Sale Flexibility
This is another benefit of the feature of corporate bonds. In the bond market in India, corporate bonds can be sold on the secondary market. Thus, investors can sell the bonds before the maturity date if they want to liquidate their investments.
So, let’s look at a few examples of corporate bonds across the Indian bond market.
ICICI Securities Primary Dealership Ltd
ICICI Securities Primary Dealership Ltd is an unsecured bond with an AAA CRISIL rating and a face value of Rs. 10,00,000. It has an issue size of Rs. 50 crore, coupon rate of 9.8 per cent. It is a taxable bond with an annual interest repayment.
Tata Capital Housing Finance Limited
Tata Capital Housing Finance Limited is an unsecured bond with an AAA CRISIL rating. It has a face value of Rs. 10,00,000, a coupon rate of 10.15 per cent, and an issue size of Rs. 48 crores. The bond is taxable with an annual interest repayment frequency.
Manba Finance Limited
Manba Finance Limited is a senior secured bond available from August 16, 2023. It has a BBB+ CRISIL rating. The bond offers a 13 per cent yield and monthly payments.
NeoGrowth
NeoGrowth is a senior secured loan with a 12 per cent yield. It is available from October 4, 2023. The bond pays quarterly and needs a minimum investment of Rs. 80,692.22.
Are Bonds a Reliable Investment?
OK. So now, let’s answer the most critical question, is investing in bonds reliable? Now, the answer is subjective. That’s because whether it is good or not, reliable or not, exciting or not, depends on various factors like the organization in which you invest, its creditworthiness, the type of bond you purchase, and many others. Hence, responding to such questions in a single yes or no won’t be possible, rather won’t prove adequate.
However, yes, bonds are considered a fixed-income investment, providing investors with a steady and predictable income stream. Besides, they have various advantages over conventional FDs (for the sake of comparison). Some include frequent returns, capital gain potential in the case of interest rate reduction or improvement in the issuer credit and an opportunity to personalize the investment portfolio, investment goals, and risk tolerance levels.
On the other hand, though, bonds have some risks as well associated with them. The most significant one is a company
defaulting at the time of principal repayment upon maturity. Nevertheless, making a secure bond investment stemming from extensive research and expert recommendation can serve the investment purpose significantly. Experts can help you make informed decisions based on your risk capacity, investment goals, financial objectives, etc., and handhold you through the investment process.
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Disclaimer: The contents of this article should not be construed as tax or financial advice. Readers should seek advice from their tax or financial advisor before making any investment decision.