Explained: Corporate Bond Market

Corporate bonds are debt securities issued by private and public companies in the market to raise funds from investors. These bonds provide fixed payments of interest and these bonds are less risky investments compared to stocks. The bond market is the collective name given to all trades and issues of debt securities and includes corporate, government, and municipal bonds.

Investors have various options when it comes to corporate bonds. Some are short-term maturities from one year to five years. While long-term maturities may extend to 30 years or more. Additionally, there are different types of corporate bonds such as Investment grade bonds and High yield bonds (junk bonds).  The investment-grade bonds are issued by financially stable and reliable companies with high credit ratings. These bonds offer lower interest rates compared to riskier high-yield bonds (junk bonds) issued by companies with lower credit ratings. They offer a higher rate of interest rates. However, in this case, investors may face the risk of possible default.

Bonds also differ according to the type of interest payments they offer. Many bonds pay a fixed rate of interest throughout their term. Interest payments are called coupon payments, and the interest rate is called the coupon rate. With a fixed coupon rate, the coupon payments stay the same regardless of changes in market interest rates. However, some bonds do not have a fixed coupon rate as it fluctuates based on several predetermined benchmarks and adjusts their interest payments to changes in market interest rates such as every six months. Benchmarks are market instruments that influence the overall market. For example, based on a bond index or Repo rate announced by the MPC of RBI, etc. can be a benchmark for floating rates.

The Indian Primary market in corporate bonds is a private placement market with most of the corporate bond issues being privately placed among the wholesale investors, i.e., the Banks, Financial Institutions, Mutual Funds, Large-Corporates & other large investors. The proportion of public issues in the total quantum of debt capital issued annually has decreased in the last few years.

The Secondary Market for Corporate Debt can be accessed through the electronic order-matching platform offered by the Exchanges through the automatic BOLT system (BSE’s Online Trading System) or NEAT (National Exchange for Automated Trading) platform of NSE. Based on the type of issuer, the instruments traded in the debt market can be classified into Government securities, Public sector bonds private sector bonds segments, etc.

To learn more read: WHAT ARE BONDS, COUPONS AND YIELD TO MATURITY?

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