For investors looking to expand beyond equities and traditional bank deposits, corporate bonds can offer an intriguing alternative. At their core, corporate bonds are debt securities issued by companies: when you buy one, you’re lending money to the firm in exchange for periodic interest payments (“coupon”) and the promise of principal return at maturity.
In India, for example, the corporate bond segment now stands at around ₹53.6 lakh crores (≈ US $627 billion) and constitutes about 22.5% of the total bond market as of March 2025. This growth reflects increasing corporates tapping bond markets for capital and investors looking for stable income beyond equities.
What Are Corporate Bonds?
Corporate bonds are essentially IOUs from a company to bond investors. The issuer—typically a public or large private company—raises funds by issuing bonds. As an investor you buy that bond, the company agrees to pay interest periodically (fixed or floating) and repay the face value on a predetermined date (maturity). Unlike bank fixed deposits, the credit risk comes from the company’s ability to service its debt.
How Corporate Bonds Work: The Basic Mechanism Explained
When a company needs capital—say for expansion, acquisition, refinancing debt—it can issue bonds instead of going to banks or issuing equity. Suppose Company X issues a ₹10 crore bond, 5-year maturity at 8% interest per annum. You invest ₹1 lakh in that bond. Each year you receive ₹8,000 (8% of ₹1 lakh) in interest. At the end of 5 years, you get your ₹1 lakh principal back (assuming no default) plus one last interest payment. Meanwhile, the bond might trade in the secondary market, meaning you could sell it before maturity at a price that reflects prevailing interest rates, credit risk, and liquidity.
In India, although issuance volumes have grown, the secondary market remains less active. A report noted daily average trading volumes increased from ~₹2,438 crores in FY2014 to ~₹5,722 crores in FY2024, a sign of maturation but also of limited liquidity relative to developed markets.
Types of Corporate Bonds: Secured, Unsecured, Convertible & More
- Secured bonds: backed by specific assets of the company. If the firm defaults, bondholders have claims on those assets.
- Unsecured bonds: no specific collateral; bondholders rely purely on the creditworthiness of the issuer.
- Convertible bonds: allow the investor to convert the bond into a pre-specified number of company shares at a certain time or under certain conditions.
- Floating‐rate bonds: interest payments adjust based on a benchmark rate + spread, offering protection if interest rates rise.
- High-yield (or “junk”) bonds: issued by companies with lower credit ratings; they carry higher risk but offer higher coupon rates.
How Companies Use Corporate Bonds to Raise Capital:
Companies may prefer bonds for several reasons: it avoids dilution of equity (so shareholders retain control); interest payments are tax-deductible; and sometimes a bond issue can be structured more flexibly (e.g., maturity choice, coupon type). In India, the corporate bond market has grown rapidly—with gross issuance jumping from ~₹4.4 trillion in FY2015 to an estimated ~₹11.2 trillion in FY2025 (CAGR ~10%). For investors, this means more opportunities to pick bonds across maturities, sectors, and credit qualities.
Key Features of Corporate Bonds: Coupon Rate, Maturity, Yield
Any corporate bond investment should be evaluated with key parameters in mind:
- Coupon rate: The fixed (or floating) interest rate the issuer pays. Higher risk = higher coupon, generally.
- Maturity: The date when the principal (face value) must be repaid. Longer maturities carry more interest-rate risk.
- Yield: The return you expect (based on price you paid, coupon, time to maturity). If you buy below face value, your yield rises; if above face value, yield falls.
- Credit rating: Bonds are rated (AAA, AA, A, BBB, etc) to indicate risk of default; the rating affects yield demanded by investors.
- Liquidity: How easily you can buy/sell the bond in the secondary market. In India, liquidity for many corporate bonds is still developing.
Corporate Bonds vs Government Bonds: What’s the Difference?
Factor | Corporate Bonds | Government Bonds |
|---|---|---|
Issuer | Private or public companies | Central or state government |
Risk Level | Higher (depends on company’s credit rating) | Lower (sovereign-backed) |
Returns/Yield | Higher yields | Lower yields |
Default Risk | Possible | Very low |
Liquidity | Moderate | High |
Tax Benefits | No special tax benefits | Certain govt bonds offer tax exemptions |
Ideal For | Moderate–high risk investors seeking higher returns | Low-risk investors prioritizing safety |
Use of Funds | Business expansion, operations, refinancing debt | Public spending, infrastructure, deficits |
Risks Involved in Corporate Bonds: Credit Risk, Interest Rate Risk & More
- Credit risk (default risk): The issuer may fail to meet interest payments or repay principal. Lower rated bonds carry higher default risk.
- Interest-rate risk: If market interest rates rise, bond prices fall (and vice-versa). Longer maturity bonds are more exposed.
- Liquidity risk: Difficulty in selling the bond at fair price before maturity. In India, this remains a concern.
- Reinvestment risk: The risk that you will have to reinvest interest payments or principal at lower rates.
- Inflation risk: Fixed interest payments may lose real value if inflation is high.
- Call risk: If bonds are callable, issuer may repay early when interest rates drop, leaving you to reinvest at lower rates.
How to Buy Corporate Bonds in India: Step-by-Step Guide
- Understand your risk profile: Decide how much credit risk and interest-rate risk you’re comfortable with.
- Check available issues: Bonds may be available via primary market (new issue) or secondary market via exchanges or online bond platforms. In India, retail access has improved with online bond platform providers and lower entry thresholds.
- Evaluate rating & issuer: Look at the credit rating (AAA, AA+, etc) and the company’s financial health.
- Choose maturity & coupon: Decide short-term vs long-term, fixed vs floating coupon. Shorter maturities often carry less interest-rate risk.
- Purchase through broker or platform: Many brokers now allow bond trading. Minimal lot size may vary (often ₹10,000 or more in retail platforms).
- Monitor holdings: Keep track of the company’s financials, credit rating, interest-rate movements, and if necessary consider selling before maturity if conditions change.
- Tax and paperwork: Interest earned from corporate bonds is taxable as income; read disclosures and bond indenture carefully.
How Corporate Bond Ratings Work: Understanding AAA to Junk Bonds
Credit rating agencies assign ratings reflecting the issuer’s ability to meet its obligations. Typically:
- AAA/AA: Highest quality, lowest risk of default, lower yields.
- A/BBB: Medium quality, higher risk, higher yields.
- Below BBB (BB, B, etc): High yield / high risk (“junk bonds”). India’s corporate bond market is still concentrated in higher rating categories: about 92% of issuances are in the top two rating categories (AAA and AA) as of March 2024.
Ratings affect the yield investors demand: lower rating → higher coupon → higher yield to compensate for risk.
Pros & Cons:
Who Should Buy Corporate Bonds?
Investors who should consider buying corporate bonds include:
- Those wanting predictable income: Ideal for investors who prefer steady interest payouts instead of market-dependent returns.
- Moderate-risk investors: Suitable for people who can handle a bit more risk than fixed deposits but less volatility than stocks.
- Portfolio diversifiers: Investors looking to balance their equity-heavy portfolios with stable fixed-income assets.
- Long-term planners: Anyone with a medium to long-term horizon (3–10 years) who wants consistent returns.
- Retirees with caution: Retirees who want higher yields than bank FDs but still prefer relatively stable investments — preferably in high-rated (AAA/AA) bonds.
- Investors seeking better-than-FD returns: Corporate bonds often offer higher yields than fixed deposits, making them attractive for conservative return seekers.
- Those comfortable evaluating credit ratings: Investors who understand (or can learn) how ratings like AAA, AA, A, BBB influence risk and returns.
Who Should Avoid Corporate Bonds?
Investors who should avoid or be extremely cautious with corporate bonds include:
- Those with zero risk tolerance: If the thought of losing even a small portion of your principal makes you uncomfortable, corporate bonds—especially lower-rated ones—are not suitable.
- Short-term investors: Investors who may need money within a few months should avoid corporate bonds, as selling them early can lead to losses due to low liquidity.
- People relying on guaranteed returns: Unlike bank FDs, corporate bonds come with credit risk, and interest payments are not guaranteed if the company defaults.
- New investors who don’t understand credit ratings: If you’re unfamiliar with how ratings (AAA to junk) work, you may unintentionally buy higher-risk bonds.
- Investors who need high liquidity: Many corporate bonds in India have limited secondary market trading, making it harder to exit when needed.
- Those uncomfortable with long lock-in periods: Longer-term bonds expose investors to interest-rate risk, which can cause price drops if rates rise.
- Ultra-conservative retirees: Retired individuals depending solely on stable monthly income should avoid lower-rated or high-yield corporate bonds.
FAQs – Corporate Bonds
Q1: Can retail investors in India buy corporate bonds?
👉Yes. The Indian bond market has been opening up for retail investors; according to reports, the bond market size is growing and retail participation is improving thanks to online platforms.
Q2: Is buying a corporate bond safer than investing in stocks?
👉Safer in one dimension: you are lending, not owning equity, so you have a legal claim for interest and principal (subject to issuer’s health). But the risk is not zero — credit risk, liquidity risk, and interest-rate risk still apply. Equity returns may be higher but volatility is also higher.
Q3: What happens if the company defaults?
👉In a default, the bondholder may not receive interest payments or principal. In some cases, restructuring or recovery procedures apply. Secured bonds may give bondholders some claims on assets; unsecured bonds rank lower in the repayment hierarchy.
Q4: How do I compare bond yields?
👉Look at current coupon, time to maturity, the price you pay (below/above face value), the credit rating, and relative spreads vs comparable government bonds. Higher yield may mean higher risk.
Q5: Should I invest only in high-rated (AAA) corporate bonds?
👉High-rated bonds are lower risk, but yield might be modest. If you are comfortable with some added risk and want higher yield, you might explore slightly lower rated bonds—but do your homework.
Conclusion:
Corporate bonds offer investors a structured way to earn fixed income by lending to companies rather than relying solely on banks or equities. They bridge the gap between government securities and equity investments, providing a path to diversify and potentially enhance yields. For India’s evolving market, the size and depth of corporate bonds are expanding, which means growing opportunity—but also growing responsibility for the investor to understand risks like credit quality, interest-rate risk and liquidity. If you’re an investor wanting to know “What Are Corporate Bonds and How Do They Work? Complete Beginner Guide,” this overview gives you the key building blocks.
Are you ready to explore adding corporate bonds to your portfolio?
