Corporate Bonds
Corporate Bonds are debt securities used by public and private corporations to raise money. Corporations issue Corporate Bonds to raise funds for various purposes such as for expansion and acquisition purposes. When you buy a Corporate Bond, you lend funds to the issuer i.e. the corporation that issued the bonds. In return, the corporation promises to return this money on maturity. Till the date of maturity the lenders are paid interest. The interest is usually paid semiannually.
Let’s take an example. You buy a Corporate Bond that has a face value of INR 2000 and the rate of interest is 5% per year. This means that you are entitled to receive INR 100 per year, as an interest. Issuers usually pay interest semi annually, which means that you will receive INR 50 every six months, as the interest.
Bond Value
There is an inverse relationship between the interest rates and the value of the bonds. The value of the Corporate Bonds rise as the interest rates fall and it declines as the interest rates rise. The lender can be less worried about the market risks by holding a Corporate Bond till maturity, as on maturity the lender is entitled to get the face value of the bond.
Bonds vs Shares
There is a difference between owning a Corporate Bond and owning a share. The interest of the bond holders is not the ownership, unlike that of the shareholders. Bondholders do not have the voting rights but debt is ranked senior to the equity. This simply means that at the time of the liquidation of the corporation, bondholders are supposed to be repaid before the shareholders. Hence, Corporate Bonds are seen as a safer option than shares as bonds provide a higher level of security to the lenders.
