Corporate Bonds

Corporate bonds allow companies to borrow money directly from investors. In return, the company pays interest and repays the principal amount when the bond matures.

• Companies may issue bonds to fund expansion, working capital or other business needs.
• Interest may be paid annually, half-yearly or at another stated interval.
• Corporate bonds may offer higher interest than government bonds, but they also carry higher credit risk.
• Bond prices may change when interest rates, credit ratings or market conditions change.
• You may be able to sell a listed bond before maturity, subject to market liquidity.

• Checking the issuer’s credit rating and repayment ability can help you understand the risk.

  
  
  

Corporate bonds are fixed-income securities issued by companies to raise money for business activities. When you invest in one, you may receive regular interest and get the principal amount back when the bond matures.
When a company issues a bond, it borrows money from investors. The amount that must be repaid at maturity is called the face value or par value.
Until maturity, the company generally pays interest at a predetermined rate called the coupon rate. Depending on the bond terms, interest may be paid annually, half-yearly or at another stated interval.
Corporate bonds are usually less volatile than shares, but they are not risk-free. They may be secured by specific assets or issued as unsecured debt. In both cases, repayment depends on the issuing company’s ability to meet its obligations.
Credit rating agencies examine the financial position of the issuer and assign a rating to the bond. A higher rating usually indicates lower credit risk. As a result, higher-rated bonds may offer lower interest than lower-rated bonds.
 

Corporate bonds allow companies to borrow money from investors instead of relying only on banks. When you buy a corporate bond, you lend money to the issuing company for a specified period.

In return, the company pays interest, known as the coupon payment, at fixed intervals. The bond also has a maturity date, when the company is expected to repay the principal amount.

The interest offered on a corporate bond depends on factors such as:

• The issuer’s credit rating
• The company’s financial position
• The bond’s maturity period
• Current market interest rates

• Demand for the bond

  
  

Companies with a higher risk of default usually offer higher interest to attract investors.

Some corporate bonds can be traded in the secondary market. This means you may be able to sell the bond before maturity. However, the selling price may be higher or lower than the face value, and finding a buyer may not always be easy.

SEBI highlights default risk, interest-rate risk, liquidity risk and call risk as important risks associated with bonds.

Corporate bonds may have short, medium or long maturity periods. Short-term bonds may mature within one to five years, while long-term bonds may have maturity periods extending to 30 years or more.

The main types of corporate bonds include:

1. Investment-grade bonds

Investment-grade bonds are issued by companies that have relatively strong credit ratings. They are generally considered to have a lower risk of default than lower-rated corporate bonds.

However, a high credit rating does not remove all risk. Ratings may change if the issuer’s financial position weakens.

2. High-yield bonds

High-yield bonds, also called junk bonds, are issued by companies with lower credit ratings and a higher risk of default.

These bonds usually offer higher interest to compensate investors for the additional credit risk. However, there is greater uncertainty about whether the issuer will make interest and principal payments on time.

3. Convertible bonds

Convertible bonds allow investors to convert their bonds into a specified number of the company’s shares.

The conversion takes place according to the terms and conversion ratio stated when the bonds are issued. These bonds may allow investors to benefit if the company’s share price rises, but they also carry credit and market risks.

4. Callable bonds

Callable bonds allow the issuing company to repay the bonds before their scheduled maturity date.

A company may use this option when market interest rates fall and it can raise fresh money at a lower cost. Early redemption may create reinvestment risk for investors because they may not find another bond offering a similar return.

5. Zero-coupon bonds

Zero-coupon bonds do not pay regular interest. Instead, they are generally issued below their face value.

The investor receives the face value when the bond matures. The difference between the purchase price and maturity value represents the investor’s return, subject to applicable taxes.

Additional read: Stocks vs Bonds 

Corporate bonds have several features that investors should understand before investing.

1. Regular interest payments

Many corporate bonds pay interest at regular intervals. This may provide a predictable income stream, provided the issuer makes payments on time.

The interest rate may be fixed or floating, depending on the bond’s terms.

2. Diversification

Corporate bonds can help diversify a portfolio that already contains shares or other investments.

However, diversification does not remove risk. Investing in bonds issued by different companies and sectors may reduce the effect of a default by one issuer.

3. Different levels of risk

Corporate bonds do not all carry the same level of risk. Risk depends on the company’s financial strength, credit rating, repayment record and the terms of the bond.

Lower-rated bonds generally carry more default risk than higher-rated bonds.

4. Repayment of principal

The issuer is expected to repay the face value when the bond reaches maturity.

However, repayment is not guaranteed. If the company faces financial difficulties or defaults, investors may lose part or all of their principal.

5. Potentially higher interest

Corporate bonds may offer higher interest than government bonds, savings accounts or term deposits.

The higher interest generally reflects additional credit, liquidity or market risk.

6. Ability to sell before maturity

Listed corporate bonds may be sold in the secondary market before maturity.

However, the ability to sell depends on market liquidity. If there are few buyers, you may have to accept a lower price or wait longer to complete the sale.

7. Tax treatment

Interest and capital gains from corporate bonds are taxed according to applicable income tax rules.

Tax treatment can vary based on the type of bond, how it is held and when it is sold. Municipal bonds and public sector undertaking bonds are not automatically tax-free. A tax exemption applies only when a particular bond issue is specifically notified as tax-free.

Corporate bonds are used by companies to raise money and by investors seeking interest income. Before investing, it is important to understand their structure, returns and risks.

• Issuer and purpose: Companies may issue bonds to fund expansion, refinance existing debt or meet operational expenses.
• Interest payments: A bond may pay fixed or floating interest at regular intervals, depending on its terms.
• Credit risk: The issuer may fail to pay interest or repay the principal. Lower-rated issuers generally carry higher credit risk.
• Maturity period: Corporate bonds may have short, medium or long maturity periods. Longer-term bonds may be more sensitive to changes in interest rates.
• Market price movement: Bond prices may rise or fall because of changes in interest rates, credit ratings and market conditions.
• Taxation: Interest income and capital gains are taxed under the applicable income tax rules.

• Liquidity: Some corporate bonds are actively traded, while others may have few buyers and sellers.

  
  
  

Companies sell corporate bonds to raise funds without issuing new shares. This allows them to borrow money while retaining their existing ownership structure.

The money raised may be used to:

• Finance business expansion
• Purchase equipment
• Refinance existing loans
• Meet working capital needs
• Fund specific projects

• Strengthen the company’s financial position

  
  

Borrowing through bonds may sometimes cost less than raising money through equity. However, the company must make interest payments and repay the principal according to the bond terms.

A company’s creditworthiness affects the interest rate it may need to offer. Companies with strong financial positions may be able to issue bonds at lower interest rates. Companies with weaker financial positions may need to offer higher rates.

Companies needing funds for a shorter period may issue commercial paper. Commercial paper is also a debt instrument, but it normally has a shorter maturity than a corporate bond.

Companies may sell corporate bonds through public issues or private placements.
In a public issue, the bonds are offered to a wider group of investors. In a private placement, the securities are offered to a selected group of investors.
Corporate bonds do not have one standard denomination. The face value and minimum investment depend on the terms of the particular bond issue.
Companies may appoint investment banks, merchant bankers or other intermediaries to manage and market the bond issue.
Investors who buy a corporate bond generally receive interest until maturity. At maturity, the issuer is expected to repay the face value.
Corporate bonds may carry:

• A fixed interest rate
• A floating interest rate
• No periodic interest in the case of zero-coupon bonds
• A call provision that allows early redemption
• A conversion option in the case of convertible bonds

Investors may also sell listed corporate bonds before maturity. The selling price depends on market interest rates, the issuer’s credit position, demand for the bond and the time remaining until maturity.
Bond mutual funds and exchange-traded funds provide another way to invest in a portfolio of bonds without selecting individual securities.
Check the basics of debentures for beginners
 

Corporate bond mutual funds and zero-coupon bonds are different products and may be taxed differently.
From the 2026-27 assessment year, a specified mutual fund generally includes a fund that invests more than 65% of its total proceeds in debt and money market instruments. Gains covered by Section 50AA are treated as short-term capital gains, regardless of how long the units were held.
These gains are generally taxed at the investor’s applicable income tax rate. However, the treatment may depend on the date when the units were purchased and whether the fund meets the legal definition of a specified mutual fund.
Investors should check the current tax rules or consult a tax professional before calculating their tax liability.
 

Let us understand corporate bonds with a simple example.

Investor X opens a Demat account with a stockbroker and finds a bond issued by ABC Pharmaceuticals Ltd. The company is assumed to have a strong financial position and a credit rating indicating a relatively low risk of default.

The bond has the following terms:

• Face value per bond: ₹1,000
• Coupon rate: 7% per year
• Maturity period: Five years
• Number of bonds purchased: 100

• Total investment: ₹1,00,000

  
  

Each bond pays annual interest of ₹70, which is 7% of ₹1,000.

For 100 bonds, Investor X receives annual interest of ₹7,000, provided the company makes all payments on time.

At the end of five years, the company is expected to repay the face value of ₹1,00,000. The amount received may be subject to applicable taxes and the issuer’s ability to meet its payment obligations.

ABC Pharmaceuticals Ltd. is used only as a fictional example.

Corporate bonds allow companies to raise funds without giving up ownership. They may provide regular interest and offer higher yields than some traditional fixed-income options. However, they carry credit, interest-rate and liquidity risks. The issuer may also fail to repay the interest or principal. Before investing, review the company’s credit rating, financial position, bond terms, maturity period and liquidity to understand whether the potential return is suitable for the level of risk involved.