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Understanding Corporate Bonds: A Step-by-Step Approach

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Published Date: 05 Aug 2024Updated Date: 30 Dec 20246 mins readBy MOFSL

Introduction:

In the world of finance, corporate bonds are much sought-after because they offer investors an opportunity to earn fixed income while supporting the growth of the corporation. Understanding these debt securities is needed for investors interested in reaping stable returns, diversifying their portfolios, and engaging with the global economy.

What Are Corporate Bonds?

Corporate bonds are debt instruments issued by corporations to raise funds needed to meet their capital needs and expand their choices. Purchasing a corporate bond means the investor is lending a specific sum to a company for a specific timeframe for which they will be given a periodic interest. When the bond matures, the investor can redeem the principal amount along with the accrued interest. Let's assume a corporate bond is issued at a face value of ₹100 at 10% interest for five years. The company pays the investor ₹10 per year as interest for five years. After five years, the corporate bond can be redeemed for ₹100 plus ₹50 as collective interest earned.

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In India, corporate bonds are issued by private and public companies, including multinational companies incorporated in India. Corporate bonds cannot be issued by any company not incorporated in India.

Why Choose Corporate Bonds?

Regular returns offered by corporate bonds, whether the rate of interest is fixed or floating, makes them attractive investments. If the corporate bond has a fixed rate, the interest rate is set for when the bond is issued, and periodic interest payments or coupon payments are made to investors. However, a floating-rate bond offers interest payments that can vary according to the benchmark rate.

Corporate bonds offer stable returns, making them more secure than equity shares. Investors don't own any equity by investing in these bonds, but their capital is protected from any fluctuation that can rock the stock market. Evaluating corporate bonds is easier due to their credit rating. Credit ratings assigned to corporate bonds are given by agencies after considering the issuer's current debt, financial stability, and growth potential.

Investing in Corporate Bonds in India

Once investors are familiar with the workings of corporate bonds and decide to invest, they must follow the steps below.

  1. A Demat account is needed to invest in corporate bonds in India. Choose a well-reputed and reliable Depository Participant and open a Demat account. The details needed for this include ID and address proof and PAN card details.

  2. Investors can acquire corporate bonds directly from the issuer, using mutual funds, Online Bond Providing Platforms (OBPP), or Exchange Traded Funds (ETFs).
  3. While selecting a corporate bond, investors must consider the issuer's credit score, interest rate, liquidity, and maturity period. Once satisfied, the next step is to simply place an order for the same through the Demat account.

As with any other financial instrument, investors must regularly monitor their investment, have an exit strategy, and consider seeking professional financial help when needed.

Conclusion:

Corporate bonds present a compelling investment opportunity for investors eager to diversify their portfolios and earn steady income via fixed interest payments. However, as with any other financial instrument, investors must carefully consider their financial goals, risk tolerance, and market conditions to make informed decisions.


 

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Disclaimer: The stocks, companies, or financial instruments mentioned in this blog are for informational purposes only and should not be considered as investment recommendations. It is advised to consult with your financial advisor before making any investment decisions. Investment in securities markets are subject to market risks, read all the related documents carefully before investing. Investors are strongly encouraged to carefully read the risk disclosure documents prior to participating in market-related investments or trading activities. Due to the volatile nature of financial markets, no guarantees can be made regarding investment returns. Motilal Oswal Financial Services Ltd. does not offer any assured returns on market-linked securities. Please note that past performance of stocks or indices is not indicative of future results.
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