Recently, bond yields have plummeted across different markets in the world. Most of this is due to the global slowdown. Moreover, investors prefer Basel III compliant bank bonds over other bonds, since they offer higher yields. Basel III compliance ensures that banks are maintaining the required quality and quantity of capital, and have lower capital and liquidity risk.
As an investor, you also have an option of investing in corporate bonds.
What are Corporate Bonds?
Corporates need finance for several business purposes. For this, they can either ‘go public’ through IPOs, pledge shares or issue bonds. Corporate bonds are investment products in the debt category. Both private and public corporations can issue corporate bonds.
How do Corporate Bonds work?
When you buy corporate bonds, you lend money to the corporation that has issued the bond. The borrower company promises to pay you your principal (on maturity) and a regular interest on the amount. Even if the corporation becomes bankrupt, it is obliged to pay its bondholders before considering its shareholders. Therefore, these investment products are considered comparatively safer than equities. One can even invest in corporate bonds through mutual funds.
Related read: 4 things that link economy with corporate profits
What are the types of corporate bonds in India?
Corporate bonds in India can be divided on the coupon and maturity period. The following types of corporate bonds exist in India:
Based on coupon
Bonds can be divided into fixed, flexible and zero-coupon based on their coupon. Such a coupon carries an interest rate that remains fixed throughout the tenor or maturity in the fixed coupon bonds. The flexible coupon, on the other hand, offers flexible interest rates. However, the zero-coupon bonds have no intermitted interest payments as such.
Related read: 7 Things to know about Corporate Governance
Based on maturity
Bonds can be divided into short-term, medium-term, long-term and perpetual based at maturity. Here, bonds with less than one-year maturity are short-term. The ones with 1-5 years maturity are medium-term, and with a maturity period of more than five years are long-term. Further, there are bonds with a fixed maturity, are usually issued by banks. The perpetual maturity bonds have no maturity period.
One related number : 10
Recently, India’s Sovereign Bond Yields dipped to a 10-year low. Domestic interest rates have been cut to a nine-year low by 5.4% (110 basis points). The RBI has embarked on this step to tackle economic slowdown.
A few links for further reading
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