Investments in the bond market are a far safer bet for investors, who are wary of the risks associated with investing in the stock market. Bond investments are an excellent source of investment that helps you achieve your financial goal without the risk of big losses.

In this article, we will discuss Corporate Bonds, its features and how you can choose your bond to build a strong portfolio.

Issuing bonds is similar to borrowing money, only the investor is the lender and the borrower is either the government or a company;also called as the issuer. Now, why do the government or companies issue bonds? It is simply a way of raising money for a particular project/ acquisitions like building a new factory, purchasing equipment or just to grow their business. For an investor of bonds, there are various ways in which he/she could make money by investing in bonds.

What are Corporate Bonds?

Corporate Bonds are a debt instrument that is issued by a company to raise money. The company(bond issuer) gets the money it requires through investors(bondholders) who invest in the bond and in return the issuer pays annual or periodical payments at a fixed or variable rate of interest called coupon payments.

For eg: If you invest Rs1,000 in a 10-year bond paying 5% fixed interest, the company will pay Rs 50 per year as coupon payments and give back the principal amount i.e Rs 1000 after the bond matures i.e in 10 years.

Types of Corporate Bonds available in India

Corporate bonds are demarcated by their maturity and Coupon payments in India.

On the basis of coupon payments, bonds are divided into fixed, flexible and Zero-coupon bonds. In the case of a fixed coupon bond, as the name suggests the interest rate offered remains fixed through the entire tenure of the bond till its maturity, while a bond having flexible coupon payments has a flexible rate of interest over its tenure. Zero-Coupon bonds have no coupon payments, but the entire principal amount along with the interest is paid at the end of maturity of the bond.

Based on Maturity, bonds are divided into short-term, medium-term, long-term and perpetual bonds. In a short-term bond, the bond has a maturity period of less than a year, while in the medium and long-term bonds, the maturity period is 1-5 years and 5 years and above respectively. Perpetual bonds are different in the sense that they don't have a designated maturity period

Why are Corporate Bonds safer than equities?

When you buy Corporate bonds, you lend money to the Company that has issued the bond. In return the Company promises you to pay you your principal amount at the time of maturity along with regular interest payments made annually/ periodically. Now, in a situation where the company goes bankrupt, it will still be obliged to pay the bondholders back even before itsstockholders. Therefore for this reason, investments in bonds are considered to be a far safer option for investors who don't have the risk appetite for the volatility of the stock markets.

How to buy corporate bonds

Corporate bonds trade in dealer-based, over-the-counter markets. In over-the-counter (OTC) trading, dealers act as intermediaries between buyers and sellers. Corporate bonds are sometimes listed on exchanges (these are called “listed” bonds) and electronic communication networks. However, the vast majority of trading volume happens over-the-counter.

Corporate bonds can be bought through a full-service or discount broker, a commercial bank or other financial intermediaries. The best time to buy a corporate bond is when interest rates are relatively high.