Corporate Bonds: Where To Buy And What Factors To Consider In 2023

Published on
Jul 07, 2023
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    Investing in bonds is a promising way to make money with reduced risk. Corporate Bonds, in particular, offer higher returns than other types of bonds. They provide a conservative option for diversifying investments and offsetting riskier ventures like stocks. This article explores Corporate Bonds, including what they are, factors to consider when purchasing them, where to buy them, and their significance as a diversification tool.

    Understanding Corporate Bonds

    Corporate Bonds refer to investment instruments issued by corporates and other institutions to raise capital to run operations or for capital investment. In exchange for capital, the investor receives a pre-determined number of interest payments at a fixed rate. Once the Corporate Bonds mature, the investor will be paid back their principal. Unlike equity ownership, Corporate Bonds ownership does not imply ownership in the bond-issuing company.

    The bond's backing stems from the company's capacity to repay, hinting at its future revenues and profitability. In certain instances, the company may utilize its tangible assets as security.

    Although some Corporate Bonds can be redeemed or have a call feature affecting maturity date, most are categorized into short-term, medium-term, and long-term notes. Maturity ranges from one year for short-term bonds to twelve years for long-term bonds.

    The company's creditworthiness influences the categorization of Corporate Bonds. A company with a low credit rating tends to pay higher interest rates on the bonds they issue and vice versa. It is worth noting that Corporate Bonds have a higher risk relative to government-issued bonds. As a result, their interest rates are higher even for companies having good credit ratings.

    Factors To Consider When Buying Corporate Bonds

    Risk Capacity

    Among the most important aspects to consider when purchasing corporate bonds is the default risk involved which refers to the risk of the company defaulting on principal payments and interest, thus defaulting on its corporate bonds.

    The good news is that most investment-grade Corporate Bonds are from companies that are unlikely to default. Also, High Yield Corporate Bonds, tend to offer high returns but are riskier and considered speculative.

    Whether Corporate Bonds Are Secured

    Another important consideration when investing in Corporate Bonds is checking whether they are secured or unsecured. Unsecured Corporate Bonds are bonds only backed by the corporation's creditworthiness, meaning bondholders rely on the issuer's promise to receive interest payments on time. On the other hand, secured Corporate Bonds are backed by collateral, thus minimizing risk to investors. Collateral can be in the form of equipment, property, or other company assets. This factor determines the likelihood of recouping your invested funds in case of a company default or insolvency declaration.

    Buyback Option

    Corporate Bonds also offer a distinctive feature known as the buyback option, which certain issuers incorporate into the bond investment terms. This provision enables the issuer to repurchase the bonds before maturity, often in response to declining interest rates or market conditions. When selecting investment bonds, investors need to assess this aspect before deciding.

    Maturity Date

    The maturity date is an important aspect to consider when buying Corporate Bonds. Remember the investment horizon or the period one expects to hold the investment. As indicated before, there are short-term bonds (1-5 years), medium-term bonds (4-10 years), and long-term bonds (10-year + bonds) that one can consider. Therefore it is important to compare maturity dates before making a decision.

    Interest Payment

    An investor should ensure that the interest rate offered by an issuer is competitive. While slight variances are likely, the interest rate should align with prevailing market rates. It's important to note that Corporate Bonds with interest lower than the market rate are usually available at a discounted price.

    Interest payments can be categorized into four categories. The most common is a fixed rate, implying that the investor will receive a fixed monthly or quarterly payment. There are also floating-rate bonds, whereby there is a periodic reset of payments based on the market interest rate, and zero-coupon bonds until maturity. Lastly, investors can purchase convertible bonds, which can turn into shares at maturity.

    Where To Buy Corporate Bonds

    Corporate Bonds are available in the primary and secondary markets. Securities are usually created in the primary market and traded among investors in the secondary market. Investors can buy new bonds in the primary market when floated for the first time. Corporate Bonds investors get the first opportunity to contribute capital to the bond issuers in the primary market.

    Also, Corporate Bonds can be sold in the secondary market, common as the stock market, such as the National Stock Exchange of India. Within the realm of debt markets, bonds assure their holders of receiving the complete par value upon maturity. However, this maturity date is often distant in the future. Alternatively, bondholders can sell their bonds in the secondary market at a potential profit, particularly if interest rates have declined since the bond's initial issuance.

    Benefits Of Corporate Bonds

    Diversification: Building a portfolio with a balanced mix of shares, bonds, and other asset classes can help achieve a well-diversified investment strategy. Corporate Bonds and stock often exhibit an inverse relationship, meaning that bonds tend to become more appealing when the stock market experiences a decline. By diversifying across different asset classes, investors can enhance portfolio resilience and seek returns across various market environments.

    Generating income: Corporate Bonds have the potential to generate income through regular interest payments, making them an attractive option for investors seeking a predictable income stream. This is particularly beneficial for individuals in or nearing retirement or those looking for fixed-income investments.

    Preserving capital: Capital preservation refers to safeguarding the initial investment value by choosing assets that ensure a return on capital. Compared to stocks, CorporateBonds generally carry lower risk, making them a suitable choice for investors with a lower risk appetite 

    Tips For Buying Corporate Bonds

    • It is important to take note of bond maturity dates, as it determines when the investment will be reimbursed. Before committing funds, understand the investment duration will be locked in the bond.
    • Please take note of the bond's rating since it indicates its creditworthiness. A lower rating indicates a higher risk of default, potentially resulting in an investment loss. In India, bond rating ranges between AAA and D, with bonds rated AAA being the highest rated and D the least rated, denoting default risk by the issuer.
    • Conduct a thorough investigation into the bond issuer's historical performance. Understanding the company's background can aid in deciding the credibility of the issuer.
    • Evaluate your risk tolerance. Bonds with lower credit ratings typically offer higher yields to compensate for increased risk. Assess risk tolerance carefully and avoid making investment decisions solely based on yield.
    • Consider macroeconomic risks. Bonds can lose value when interest rates rise, which is known as interest rate risk. However, attempting to time the market is challenging in the same ways predicting interest rate movements is uncertain. Instead, focus on your long-term investment objectives.

    Bottom Line

    Corporate Bonds offer investors an option to invest in instruments that assure regular coupon payments and payment of their principal at the maturity of the bonds. It is important to note that there are various aspects to consider, such as maturity duration, interest payment, and risk when buying Corporate Bonds.

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    Disclaimer: This communication does not constitute advice relating to investing or otherwise dealing in securities and is not an offer or solicitation for the purchase or sale of any securities. Grip Invest Technologies Private Limited ("Grip", formerly known as Grip Invest Advisors Private Limited) is not registered with SEBI in any capacity and does not advise, encourage, or discourage its users to invest or not invest in any securities. Grip is solely an execution-only platform and does not guarantee or assure any return on investments made by you in any opportunities sourced by Grip and accepts no liability for consequences of any actions taken based on the information provided. Your investment is solely based on your judgement. Investments in debt securities are subject to risks. Read all the offer-related documents carefully.

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