Corporate bonds are issued by both—private sector corporations and public sector units—to generate funds. There are several kinds of corporate bonds depending on the period of maturity. They vary from a few months to 15 years. However, a few corporate bonds have no fixed period of maturity and give returns for indefinite period. There are called perpetual bonds.
1. Nature of corporate bonds
Returns of corporate bonds are higher than government bonds but also come with higher risks. The risk-return ratio of a corporate bond depends on the private company which issues the bond and the market situation at that time. The sector and company rating also affect the risk-return ratio of a bond. There are different kinds of corporate bonds available to a buyer. A company/issuer releases these bonds with different specifications—such as maturity and interest rate among others—depending on its needs. To attract investors, issuers get their bonds rated by rating agencies like CRISIL, ICRA, CARE, etc.
- Corporate bonds provide returns that are higher than most government investment products
- You can gauge the quality of the private institute before buying its bonds by checking company ratings generated by trusted rating agencies
- These bonds offer a steady income to bond holders. If a buyer invests in a long-term corporate bond, he can benefit from the high return which the bond offers after its maturity
- From taxation perspective, corporate bonds are not subject to tax deducted at source (TDS) which is one of the best features of this investment option
The main disadvantage of corporate bonds is the risk factors they involve. A government bond, such as a municipal bond, is much safer than a corporate bond. Corporate bonds come with a fixed interest rate for the buyer but the rate of trading may vary according to the market situation. This feature makes the corporate bonds unstable. Corporate bonds generally cost more than public sector bonds and involve the payment of stamp duty too.