Motilal Oswal Financial Services Limited

Corporate Bonds are significantly influenced by changes in interest rates. When interest rates fall, the value of existing Corporate Bonds rises. Conversely, when interest rates rise, the value of Corporate Bonds tends to decrease. Because of this inverse relationship new bonds issued at higher interest rates make existing bonds with lower rates less attractive, thus decreasing their market value. Therefore, selling a bond before it matures can result in a price different from the initial purchase price, depending on the prevailing interest rates.

The degree of price volatility is generally higher for bonds with longer maturities. However, if you hold a bond until its maturity date, these price fluctuations become less of a concern as you will receive the bond's par or face value at maturity while reinvestment risk remains.

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The types of Corporate Bonds include:

1. Fixed Rate BondsFixed rate bonds offer fixed interest payments, known as coupon payments. The interest rate is determined at the time of issuance as a percentage of the bond's face value. These bonds can be considered if you are seeking sustained returns and prefer certainty in cash flows, as the interest payments remain constant throughout the bond's life.
2. Floating Rate BondsFloating rate bonds have their interest rates tied to a benchmark rate, such as a government bond yield or MIBOR (Mumbai Interbank Offered Rate). As the benchmark rate changes, the interest rate on the bond adjusts accordingly.
3. Convertible BondsConvertible bonds combine features of both debt securities and equities. You can get regular interest payments like regular bonds. However, you can convert the bond into a predetermined number of equity shares of the issuing company at a predetermined date or under specific conditions.
4. Non-Convertible Debentures (NCDs)NCDs cannot be converted into equity shares and remain purely debt instruments, providing fixed income without the prospect of equity ownership.
5. Secured BondsSecured bonds are backed by the assets of the issuing company. In case the company defaults, bondholders have a claim on these assets. These bonds offer lower risk since they are protected by collateral, providing more security for your investments.
6. Unsecured BondsUnsecured bonds are not backed by any collateral, which means bondholders do not have a claim on the company's assets if they fail to meet their obligations. These bonds carry relatively higher risk compared to secured bonds but may offer higher interest rates to compensate for the additional risk.
7. Callable BondsCallable bonds give the issuing company the right to redeem the bond before its maturity date. This usually happens when interest rates fall, allowing the company to refinance the debt at a lower rate.
8. Puttable BondsPuttable bonds give the investor the option to sell the bond back to the issuer before its maturity date, providing flexibility if market conditions change or the issuer's credit profile weakens. This feature offers additional protection by allowing early exit from the investments.