Corporate bonds are debt instruments issued by companies to raise capital for business operations, expansion, or other financial needs. Investors who purchase these bonds are essentially lending money to the company in exchange for periodic interest payments (called coupons) and the repayment of the principal amount at the bond's maturity date.
Features of Corporate Bonds:
Fixed Interest Payments (Coupons):
- Corporate bonds pay regular interest to bondholders, typically semi-annually or annually.
- Coupon rates can be fixed, floating, or zero-coupon (no periodic interest; issued at a discount).
Maturity Period:
- Bonds have a defined maturity period ranging from short-term (1–3 years) to long-term (10+ years).
Risk and Return:
- Risk : Corporate bonds carry higher risk than government bonds, as they depend on the company's financial health.
- Return : Higher risk often comes with higher returns (interest rates) compared to safer options like government bonds.
Why Invest in Corporate Bonds?
- Steady Income : Regular interest payments provide a stable income stream.
- Higher Returns : Compared to government bonds or fixed deposits, corporate bonds often offer better returns.
- Portfolio Diversification : Helps reduce overall portfolio risk by balancing equity investments.
- Capital Preservation : Generally safer than equity investments.
