Decision for investing in corporate bonds depends on risk taking ability of an investor. Some investors believe that corporate bonds have little or no risk. They range from investment grade to junk grade depending on the issuing companies. The main risk is that the company issuing the bonds might become insolvent. This means you could lose some or all of your money because the company is not able to pay its creditors due to lack of funds and or if it goes into liquidation. Corporate bonds are also subject to other investment risks like interest rate risk, liquidity risk and prepayment risk. It is always advisable to go through the prospectus of the bond issue to understand the issuer and all other factors associated with the bond issue.
For example, bonds issued by companies like Infosys, Wipro and L&T are considered very safe considering their goodwill and sustainability in the market. Corporate bonds come under the ‘Debt’ category and it is the company’s borrowings. Therefore, it is generally less riskier than investing in shares of the company. Bonds have different features or characteristics depending on the specific issuing organizations or institutions. The two major types of Corporate Bonds are as follows:
Secured Bonds – These are also known as asset covered bonds. Bonds are backed by any collateral security or mortgaging any asset of the company. So, there is a safety that in case company becomes insolvent, assets can be sold and the principal amount will be repaid.
Unsecured Bonds - Also known as debenture bonds, they are backed solely by the general credit-worthiness of the issuer. Regular corporate bonds are an example of unsecured bonds. They are not so safe mode of investment.
Here is a brief look at what to consider when evaluating corporate bonds:
Coupon- Coupon rate on bond may be fixed or fluctuating. A fixed rate bond is a type bond with a fixed Coupon (interest) rate, as opposed to floating bonds. A fixed rate bond is a long term debt paper that carries a predetermined interest rate which is payable at specified dates before bond maturity. Remember that corporate bonds are not generally designed to maximize your wealth (that is, the bonds you buy are unlikely to increase in value during the time you have the investment).
Duration- If you are not a long term investor than you cannot block your money on bonds with higher duration of time say 10-15 years. Invest in corporate bonds after considering your financial goals and your investment time horizon.
Convertibility- These bonds can be exchanged for some specified amount of common or preferred stock in the issuing company. At the time of issue, the terms of conversion will be outlined, including the times, prices, and conditions under which it can occur.
If you are willing and able to make a riskier deal invest in Corporate Bonds as they have higher returns than fixed deposits.
In a nutshell, here are the features of Corporate Bonds: