Corporate Bonds are issued by public sector undertakings and private corporations for a wide range of tenors but generally up to 15 years. But, some Banks and Companies like Reliance have also issued Perpetual Bonds. Compared to government bonds, corporate bonds usually have a higher risk of default. This risk depends, of course, upon the particular corporation issuing the bond, its rating, the present market conditions and the sector in which the Company is operating. Corporate bond holders are remunerated for this risk by receiving a higher yield than government bonds. A number of corporate bonds have an embedded call option that allows the issuer to redeem the debt previous to its maturity date. Some even carry a put-option for the profit of the investors. Other bonds, known as convertible bonds, permit investors to convert the bond into equity.
Advantages of Corporate Bonds
- Corporate bonds usually offer higher returns than Government Securities, fixed deposits, CD’s & CP’s.
- Corporate bonds are rated by permitted rating agencies e.g. CARE, ICRA, CRISIL, and FITCH.
- Any one can invest in blue-chip corporate with sound credit-quality in a sector of their choice to meet their investment objectives.
- Corporate bonds provide investor with a steady income stream.
- Investor can lock-in high rates for a long period of time.
- Secondary market trading is possible, depending upon demand.
- No TDS deduction as per Budget Announcement for 2008-09.
Dis-advantages of Corporate Bonds
- They are normally unsecured and therefore have an element of credit risk.
- Every Corporate bond is not actively traded.
- They form a very small part of the total debt market.
- While interest rate is usually fixed, all debt securities are subject to market risk, i.e. the price at which they are traded could vary.
- Unlike Gilts where RBI sometimes steps in to put trades, there are no market makers in corporate bonds.
- The minimum lot is usually bigger for corporate bonds compared to retail G-Securities.
- Stamp Duty is to be paid on issue and transfer in some states.