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Corporate bonds, as the name suggests, are a type of debt securities sold to investors by corporations looking to raise finances for their companies. Whenever an investor buys a bond, what they're essentially doing is lending money to the company. In return, they get a fixed specified interest rate with the principal amount after a specific period of time. Corporate bonds are thus considered to be a good return on investment. This article will teach you how to buy corporate bonds in India.
Corporate bonds are issued by companies that are looking to raise additional cash. You can buy corporate bonds easily from the primary market through a broker, a brokerage firm, a bank, or a bond trader.
Corporate bonds have become a reliable source of income these days and can be extremely rewarding. But, before you invest your precious money anywhere, it is essential to know the basics or key characteristics regarding your investments.
Bond ratings are crucial before investing in corporate bonds. These ratings are calculated based on various factors, such as the company's current debt, financial stability, and growth potential. Bond rating agencies give the ratings and assign them a grade, ranging from BBB to AAA or AAa. Corporate bonds are safer and more stable investments because they are less likely to be at risk of default.
Note: When a company goes bankrupt, investors are at the topmost priority to claim their money against the company's assets and cash.
Bond prices come in many newspapers and publications. The prices listed for the bonds are usually from the previous year. But prices keep fluctuating and market conditions keep changing quickly.
When the prices of bonds go down, the rate of interest increases. This is because now, the bond costs less, while the rate of interest remains the same as the initial offering.
On the other hand, when the prices of bonds go up, the yield declines.
A company's profitability and financial stability may keep changing over a longer term and may not stay the same as at the time of issuance. Bonds with a longer maturity pay a high-interest rate to deal with this risk.
You can invest in these bonds in India through a broker or ETF, an exchange-traded fund where all the corporate bonds are listed and are available for investment. The maximum limit for corporate bonds is Rs. 2 lakh. These bonds help create passive income for the investor through the steps below.
Companies issue these bonds at par value or face value, following a standard payment structure for coupons;
Then they list their respective bonds with taking help from an investment bank, which ultimately sells to the investors;
These bonds make cyclic interest payments until they mature. The rate of interest can be fixed or floating, which is predetermined and very with market indicators;
Once these bonds mature, investors can redeem their bonds at par value or face value.
Sometimes, there is a call provision to these bonds. The call provision allows early repayment provided the rate of interest changes rapidly.
Inventors can trade these company bonds in the secondary market, but the price of the bond in this market will be decided by the number of installments that are still due before the bond matures. In such a case, investors may receive less than the bond's par value.
Note: Besides investing directly, investors can invest in corporate bonds through mutual funds and ETFs, exchange-traded funds.
Corporate bonds are known to be a low-risk investment and great if you're looking for a short to medium-term investment. The returns on these corporate bonds are higher as compared to government bonds. Hence, weigh all the risks before investing.
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