Corporate Bonds

A debt security issued by a corporation and sold to investors, known as corporate bonds. It is an essential tool for market borrowing. This is the type of tape, a company would issue to raise funds to expand its business. In most cases, the company should use its physical assets as collateral for bail.

These debt instruments usually have a maturity date of at least a year after their issue. Corporate bonds with a shorter maturity date are called Commercial papers.

Investing in the debt market is a little more complex than investing in stocks. Bonds are generally traded in a market full of experts and insiders. This means that the bond market is not an easy market for small investors.

The corporate bond market has two distinct levels- the primary and secondary market. The primary market represents newly issued securities. When a corporation first decides to sell bonds in order to raise capital, it will negotiate deals with investments bankers and other institutional investors to place the bonds in the market.

The pricing of the issues are comparable to Initial Public Offerings of stock. The price of the new issue is known as the 'offering price'. However for a small investor to obtain a primary bond offering is quite difficult unless he has insider information.

The secondary market is where the bonds are traded after the initial offering. This market is open to small investors. Trades are mostly conducted on closed bond-trading systems or on the phone. A small investor can participate in this market via a broker.

When buying corporate bonds on the secondary market, the small investor must make sure to conduct all possible research into the price of the bond. This is because the price of bonds are not as easy to track or understand. The investor should take into account the "mark up" or "spread" of the bond by looking at recent sales of bonds.

The "mark up" or "spread" is the difference between what the bond broker paid for the bond and the selling price. It is built into the price of the bond which is why it is difficult to tell how much the bond salesman is profiting from the sale. Recently however SEBI has introduced guidelines to make the trade of corporate bonds easier.

There are a number of benefits to buying Corporate bonds. They offer higher yields as compared to government bonds of the same maturity. They also offer the investor a steady income while preserving the principal.

Corporate Bonds allow the investor the opportunity to diversify his portfolio by investing in a variety of investments. The Market for corporate bonds is very large and also very liquid hence bonds can be traded fairly easily. This makes them more marketable.