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What are the Pros and Cons of Corporate Bonds?

 
  By : , Delhi, India       4.9.2018         Phone:8448993211          Mail Now
 

If you are planning to invest in fixed-income securities then you might want to look up for corporate bonds, which is considered as a last safe investment option. Due to the financial crisis, many fixed-income securities’ yield has a decline, which left only corporate bonds where we can turn to. It is because of the appealing interest rates which make them one of the best investment options for long-term. But, even corporate bonds have their own advantages and disadvantages.

In order to understand this, we would have to go through different aspects such as returns, liquidity, and risks among others.

Corporate Bonds – Advantages & Disadvantages

Returns

Unlike government bonds and treasury bills, corporate bonds are quite capable of providing strong returns. Thus, people tend to opt for corporate bonds instead of government bonds which have repeatedly plunged to new record lows. Most investors who have low-risk tolerance prefer to choose to invest in corporate bonds instead of direct equity or equity mutual fund in the stock market.

But, you gotta be aware of fluctuation in interest rates as well. If the interest rate rises, the bond prices fall. If the interest rate rises, the value of bonds which are already issued will decrease. But, the opposite can also happen too. In this case, the decrease in interest rate will increase the value of the already issued bond.

Note: The fluctuation in interest rates is caused by the interest rate decisions taken by RBI committee who handles the monetary policies. To get updated on interest rate decisions and other economic indicators, you should follow the live economic calendar to track major and minor economic and financial events/performances.

Widespread Options

Corporate bonds have varieties such as short-term bonds, medium-term bonds, and long-term bonds. Beyond this, corporate bonds do offer many coupon structures and the interest rates for bonds with floating coupon rates are usually based on a benchmark such as Consumer Price Index (CPI). CPI is a quite important benchmark, which explains why India adopted CPI to measure inflation.

But, don’t fall for high-interest rates or coupon structures. Sometimes, many corporate bond issuers give high-bond yields intentionally to compensate the risk of default. In fact, the credit risk and default risk happens a lot in corporate bonds. There is also a risk for the issuer to go out of business and will not be able to stand up to his obligations of paying timely interests and principal amount.

Liquidity

If we leave government bond, then the corporate bonds along with other fixed-income securities have liquidity risk. Corporate bonds trade in the secondary market. Thus, it is difficult to exit the position and to get current pricing. The limited secondary market makes it difficult to sell the bond. But, if the bond has risen in value, one can get benefits from selling bonds or buying after a price decline.

One thing is clear; the corporate bonds also have drawbacks. So, it would be smart to decide whether you should invest in corporate bonds or not. Nevertheless, if you have any query or would like to add something then doesn’t forget to mention in the comment section below.




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